February 5, 2015
Introduction to Financial Services: The Housing Finance System
This In Focus provides a summary of the U.S. single-family
housing finance system and several related policy issues of
importance to Congress.
The Mortgage Market
A loan that uses real estate as collateral is typically referred
to as a mortgage. The U.S. mortgage market is one of the
largest markets in the world with approximately $10 trillion
in debt outstanding. The mortgage market can be thought of
as having two major components—the primary market in
which mortgages are originated and the secondary market
in which existing mortgages are bought and sold.
Primary Market. A potential borrower applies for a
mortgage from a lender (a mortgage originator) in the
primary market. The lender underwrites, or evaluates, the
borrower and decides whether and under what terms to
extend a loan. Different types of lenders make home loans,
including banks, credit unions, and finance companies
(institutions that lend money but do not accept deposits).
The lender usually requires some additional assurance that,
in the event the borrower does not repay the mortgage, it
will be able to sell the home for enough to recoup the
amount it is owed. Typically, lenders receive such
assurance through a down payment, mortgage insurance, or
a combination of the two. Mortgage insurance can be
provided privately or through a government agency, such as
the Federal Housing Administration (FHA). FHA provides
mortgage insurance on loans that meet its requirements
(including a minimum down payment and a maximum
mortgage amount) in exchange for fees, or premiums, paid
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
investor). If the borrower does not repay the mortgage as
promised, the servicer can attempt to keep the borrower in
the home through a work out option (such as reducing the
mortgage interest rate) or can repossess the property
through a process known as foreclosure.
Secondary Market. The secondary market is the market
for buying and selling mortgages. If a mortgage originator
sells the mortgage in the secondary market, the purchaser of
the mortgage could choose to hold the mortgage itself or to
securitize it. When a mortgage is securitized, it is pooled
with other mortgages to create a mortgage-backed security
(MBS), and the payment streams associated with the
mortgages are sold to investors.
Mortgages can be securitized through different channels:
• Fannie Mae and Freddie Mac, two government-
sponsored enterprises (GSEs), securitize mortgages that
conform to their standards (conforming mortgages). To
be a conforming mortgage, the mortgage must meet
certain creditworthiness thresholds (such as a minimum
credit score) and be below the conforming loan limit, a
cap on the principal balance of the mortgage. The GSEs
guarantee that the investors in their MBS will receive
timely payment of principal and interest even if the
borrower becomes delinquent.
• Ginnie Mae, a government agency in the Department of
Housing and Urban Development, guarantees MBS
issued by private entities but made up exclusively of
mortgages guaranteed by the federal government (such
as by FHA). Ginnie Mae’s guarantee is backed by the
full faith and credit of the U.S. government.
• Private financial institutions also issue MBS, known as
private-label securities (PLS). PLS can be composed of
any type of mortgage but often contain non-conforming
mortgages that either exceed the conforming loan limit
(jumbo mortgages) or do not meet Fannie Mae’s or
Freddie Mac’s creditworthiness standards (non-prime or
subprime mortgages). PLS do not have an implicit or
explicit government guarantee.
Figure 1. MBS Issuance Volume
Source: Freddie Mac, Freddie Mac Update, December 2014, p. 10,
Note: Year-To-Date 2014 includes data as of November 30, 2014.
MBS are generally divided into two broad categories:
agency MBS, which includes GSE and Ginnie Mae MBS,
and non-agency MBS, which is only PLS. Investors that
purchase mortgages and MBS are an important source of
funding for mortgages originated in the primary market.
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
hedge funds. Investors choose which type of MBS to
purchase based on the type and amount of risk they wish to
bear and on the expected return from their investment.
Another key supplier of financing for mortgages is the
Federal Home Loan Bank (FHLB) System, another GSE.
The FHLB System is composed of 12 regional banks that
are owned by their members, which include banks and other
financial institutions involved in housing finance. These
regional banks extend credit to their members, primarily to
support mortgage lending.
Government Regulation of the Mortgage
A full description of the government’s role in regulating the
housing finance system is beyond the scope of this In
Focus, but several important functions performed by the
government are described below.
The Federal Housing Finance Agency (FHFA) is the
regulator and conservator of Fannie Mae and Freddie Mac
and the regulator of the FHLB System.
The federal banking regulators—the Federal Reserve, the
Office of the Comptroller of the Currency (OCC), the
Federal Deposit Insurance Corporation (FDIC), and the
National Credit Union Administration (NCUA)—influence
the mortgage market through their oversight of banks. For
example, regulators influence the underwriting standards
that banks use and set capital standards that apply to
mortgages and MBS held by banks.
The Securities and Exchange Commission (SEC) oversees,
among other things, the selling of securities to the public.
The SEC has disclosure and registration standards that, in
some cases, apply to MBS.
The Consumer Financial Protection Bureau (CFPB) was
directed by the Dodd-Frank Act (P.L. 111-203) to regulate
certain bank and nonbank participants in the mortgage
market and to issue specific rules to protect consumers.
Those rules include requirements that lenders verify a
borrower’s ability to repay the mortgage prior to offering
the mortgage and standards that reform mortgage servicing.
The CFPB also has authority under additional federal
consumer laws to regulate parts of the mortgage market.
The states play an important role in the regulation of the
housing and mortgage markets. For example, the
foreclosure process is governed by state law.
were placed in voluntary conservatorship in September
2008 by their regulator, FHFA. Fannie Mae and Freddie
Mac, both of which remain in conservatorship, have
received approximately $187 billion in assistance from the
government and have made dividend payments to the
government in excess of the assistance received since
entering conservatorship. FHA has also been under
financial stress in recent years and received $1.7 billion
from Treasury at the end of FY2013 to ensure that it had
enough funds on hand to pay for all of its expected future
costs. Although additional financial support for FHA and
the GSEs are not currently anticipated, Congress may
continue to conduct oversight of the GSEs and FHA.
Housing Finance Reform. Some have questioned whether
the pre-crisis structure of the housing finance system is
appropriate for the future. Congressional interest has also
concentrated on determining the future role of the federal
government in housing finance. Many of the proposals in
recent Congresses have suggested eliminating Fannie Mae
and Freddie Mac. Some plans would rely predominantly on
the private sector to replace the GSEs, whereas others
would have an explicit government guarantee to
supplement private capital under certain circumstances.
Mortgage Market Rulemakings. Financial regulators are
continuing to implement several mortgage-related
rulemakings that were required by the Dodd-Frank Act.
While each of the rules is different, several policy issues are
common across the rules, including concerns about the
compliance costs for financial institutions, questions about
how the rules affect credit availability for creditworthy
borrowers, and whether revisiting the new mortgage market
rules could lead to changes that may harm consumers.
Access to Credit. In recent years, many lenders tightened
their underwriting standards, making it more difficult for
some borrowers to receive mortgages. In addition, some
claim that recent rulemakings and other factors, including
higher costs for FHA and GSE loans, have led to a
contraction in the credit available to potential homeowners
and increased the cost of credit. Congress may consider
proposals to ensure that creditworthy borrowers have access
to affordable financing.
CRS Report R42995, An Overview of the Housing Finance
System in the United States, by Sean M. Hoskins, Katie
Jones, and N. Eric Weiss
Issues Before Congress: Housing Finance Reform
Issues Before Congress: Homeownership Assistance
The bursting of the housing bubble in 2007 and the multiyear downturn in the housing and mortgage markets have
raised several issues for Congress, some of which are
Sean M. Hoskins, email@example.com, 7-8958
Katie Jones, firstname.lastname@example.org, 7-4162
N. Eric Weiss, email@example.com, 7-6209
Financial Status of the GSEs and FHA. Fannie Mae and
Freddie Mac experienced significant financial losses and
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