February 5, 2015
Introduction to Financial Services: The Housing Finance System
This In Focus provides a summary of the U.S. single-family
securitize it. When a mortgage is securitized, it is pooled
housing finance system and several related policy issues of
with other mortgages to create a mortgage-backed security
importance to Congress.
(MBS), and the payment streams associated with the
mortgages are sold to investors.
The Mortgage Market
Mortgages can be securitized through different channels:
A loan that uses real estate as collateral is typically referred
• Fannie Mae and Freddie Mac, two government-
to as a mortgage. The U.S. mortgage market is one of the
sponsored enterprises (GSEs), securitize mortgages that
largest markets in the world with approximately $10 trillion
conform to their standards (conforming mortgages). To
in debt outstanding. The mortgage market can be thought of
be a conforming mortgage, the mortgage must meet
as having two major components—the primary market in
certain creditworthiness thresholds (such as a minimum
which mortgages are originated and the secondary market
credit score) and be below the conforming loan limit, a
in which existing mortgages are bought and sold.
cap on the principal balance of the mortgage. The GSEs
guarantee that the investors in their MBS will receive
Primary Market. A potential borrower applies for a
timely payment of principal and interest even if the
mortgage from a lender (a mortgage originator) in the
borrower becomes delinquent.
primary market. The lender underwrites, or evaluates, the
borrower and decides whether and under what terms to
• Ginnie Mae, a government agency in the Department of
extend a loan. Different types of lenders make home loans,
Housing and Urban Development, guarantees MBS
including banks, credit unions, and finance companies
issued by private entities but made up exclusively of
(institutions that lend money but do not accept deposits).
mortgages guaranteed by the federal government (such
as by FHA). Ginnie Mae’s guarantee is backed by the
The lender usually requires some additional assurance that,
full faith and credit of the U.S. government.
in the event the borrower does not repay the mortgage, it
• Private financial institutions also issue MBS, known as
will be able to sell the home for enough to recoup the
private-label securities (PLS). PLS can be composed of
amount it is owed. Typically, lenders receive such
any type of mortgage but often contain non-conforming
assurance through a down payment, mortgage insurance, or
mortgages that either exceed the conforming loan limit
a combination of the two. Mortgage insurance can be
(jumbo mortgages) or do not meet Fannie Mae’s or
provided privately or through a government agency, such as
Freddie Mac’s creditworthiness standards (non-prime or
the Federal Housing Administration (FHA). FHA provides
subprime mortgages). PLS do not have an implicit or
mortgage insurance on loans that meet its requirements
explicit government guarantee.
(including a minimum down payment and a maximum
mortgage amount) in exchange for fees, or premiums, paid
Figure 1. MBS Issuance Volume
by borrowers. If a borrower defaults on an FHA-insured
mortgage, FHA repays the lender the remaining principal
amount it is owed. FHA is the largest provider of
government mortgage insurance, but the government also
provides access to the mortgage market through programs
offered by the Department of Veterans Affairs (VA) and the
U.S. Department of Agriculture (USDA).
If a mortgage is made, the borrower sends the required
scheduled payments to a mortgage servicer, which then
remits the payments to the mortgage holder (which could

be the original lender or, if the mortgage is sold, an
Source: Freddie Mac, Freddie Mac Update, December 2014, p. 10,
investor). If the borrower does not repay the mortgage as
http://www.freddiemac.com/investors/pdffiles/investor-
promised, the servicer can attempt to keep the borrower in
presentation.pdf.
the home through a work out option (such as reducing the
Note: Year-To-Date 2014 includes data as of November 30, 2014.
mortgage interest rate) or can repossess the property
through a process known as foreclosure.
MBS are generally divided into two broad categories:
agency MBS, which includes GSE and Ginnie Mae MBS,
Secondary Market. The secondary market is the market
and non-agency MBS, which is only PLS. Investors that
for buying and selling mortgages. If a mortgage originator
purchase mortgages and MBS are an important source of
sells the mortgage in the secondary market, the purchaser of
funding for mortgages originated in the primary market.
the mortgage could choose to hold the mortgage itself or to
Investors in MBS are typically large institutional investors,
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Introduction to Financial Services: The Housing Finance System
such as pension funds, domestic banks, foreign banks, and
were placed in voluntary conservatorship in September
hedge funds. Investors choose which type of MBS to
2008 by their regulator, FHFA. Fannie Mae and Freddie
purchase based on the type and amount of risk they wish to
Mac, both of which remain in conservatorship, have
bear and on the expected return from their investment.
received approximately $187 billion in assistance from the
government and have made dividend payments to the
Another key supplier of financing for mortgages is the
government in excess of the assistance received since
Federal Home Loan Bank (FHLB) System, another GSE.
entering conservatorship. FHA has also been under
The FHLB System is composed of 12 regional banks that
financial stress in recent years and received $1.7 billion
are owned by their members, which include banks and other
from Treasury at the end of FY2013 to ensure that it had
financial institutions involved in housing finance. These
enough funds on hand to pay for all of its expected future
regional banks extend credit to their members, primarily to
costs. Although additional financial support for FHA and
support mortgage lending.
the GSEs are not currently anticipated, Congress may
continue to conduct oversight of the GSEs and FHA.
Government Regulation of the Mortgage
Market
Housing Finance Reform. Some have questioned whether
the pre-crisis structure of the housing finance system is
A full description of the government’s role in regulating the
appropriate for the future. Congressional interest has also
housing finance system is beyond the scope of this In
concentrated on determining the future role of the federal
Focus, but several important functions performed by the
government in housing finance. Many of the proposals in
government are described below.
recent Congresses have suggested eliminating Fannie Mae
and Freddie Mac. Some plans would rely predominantly on
The Federal Housing Finance Agency (FHFA) is the
the private sector to replace the GSEs, whereas others
regulator and conservator of Fannie Mae and Freddie Mac
would have an explicit government guarantee to
and the regulator of the FHLB System.
supplement private capital under certain circumstances.
The federal banking regulators—the Federal Reserve, the
Mortgage Market Rulemakings. Financial regulators are
Office of the Comptroller of the Currency (OCC), the
continuing to implement several mortgage-related
Federal Deposit Insurance Corporation (FDIC), and the
rulemakings that were required by the Dodd-Frank Act.
National Credit Union Administration (NCUA)—influence
While each of the rules is different, several policy issues are
the mortgage market through their oversight of banks. For
common across the rules, including concerns about the
example, regulators influence the underwriting standards
compliance costs for financial institutions, questions about
that banks use and set capital standards that apply to
how the rules affect credit availability for creditworthy
mortgages and MBS held by banks.
borrowers, and whether revisiting the new mortgage market
rules could lead to changes that may harm consumers.
The Securities and Exchange Commission (SEC) oversees,
among other things, the selling of securities to the public.
Access to Credit. In recent years, many lenders tightened
The SEC has disclosure and registration standards that, in
their underwriting standards, making it more difficult for
some cases, apply to MBS.
some borrowers to receive mortgages. In addition, some
claim that recent rulemakings and other factors, including
The Consumer Financial Protection Bureau (CFPB) was
higher costs for FHA and GSE loans, have led to a
directed by the Dodd-Frank Act (P.L. 111-203) to regulate
contraction in the credit available to potential homeowners
certain bank and nonbank participants in the mortgage
and increased the cost of credit. Congress may consider
market and to issue specific rules to protect consumers.
proposals to ensure that creditworthy borrowers have access
Those rules include requirements that lenders verify a
to affordable financing.
borrower’s ability to repay the mortgage prior to offering
the mortgage and standards that reform mortgage servicing.
CRS Resources
The CFPB also has authority under additional federal
consumer laws to regulate parts of the mortgage market.
CRS Report R42995, An Overview of the Housing Finance
System in the United States, by Sean M. Hoskins, Katie
The states play an important role in the regulation of the
Jones, and N. Eric Weiss
housing and mortgage markets. For example, the
foreclosure process is governed by state law.
Issues Before Congress: Housing Finance Reform
Policy Issues
Issues Before Congress: Homeownership Assistance
The bursting of the housing bubble in 2007 and the multi-
Sean M. Hoskins, shoskins@crs.loc.gov, 7-8958
year downturn in the housing and mortgage markets have
Katie Jones, kmjones@crs.loc.gov, 7-4162
raised several issues for Congress, some of which are
N. Eric Weiss, eweiss@crs.loc.gov, 7-6209
discussed below.

Financial Status of the GSEs and FHA. Fannie Mae and
IF10126
Freddie Mac experienced significant financial losses and
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