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Wednesday, May 8, 2013

Changes to the Residential Mortgage Market: Legislation, Demographics, and Other Drivers

N. Eric Weiss
Specialist in Financial Economics

This report provides an overview of the changing residential mortgage market, focusing on trends in housing prices, homeownership, mortgage characteristics, and financing. It also examines legislation and regulations designed to promote the efficient functioning of the mortgage market. 

Congressional Concern About Mortgages 

Congressional interest in residential mortgage markets has increased following the collapse of the housing bubble, government financial support to the mortgage market, and housing’s perceived importance to the broader economic recovery. Since 2008, the residential mortgage market has experienced some of the highest default and foreclosure rates since the Great Depression. The future of Fannie Mae and Freddie Mac, two congressionally chartered government-sponsored enterprises (GSEs) that have long been central pillars of the mortgage market, is also the subject of congressional debate. Both GSEs are currently in conservatorship and have received financial support from the U.S. Department of the Treasury. There is also concern over the financial conditions of the Federal Housing Administration’s (FHA’s) mortgage guarantee program. 

How Mortgages Are Funded 

Today and in the foreseeable future, home mortgages are indirectly financed by financial institutions, such as pension funds, college endowments, central banks, and sovereign wealth funds. A household seeking a mortgage typically applies directly to an organization (or part of a larger organization) that specializes in the mortgage origination process. This mortgage originator applies computer algorithms to the applicant’s credit scores, earnings history, savings information, and other data to underwrite (evaluate) the mortgage application. The originator may “hold the mortgage in portfolio” as an investment or sell it within days of being issued. In the latter case, the mortgage might be sold again, and typically ends up pooled with other mortgages in a mortgage-backed security (MBS) that is guaranteed by Fannie Mae, Freddie Mac, or by the federal government through Ginnie Mae, which is part of the Department of Housing and Urban Development (HUD). The MBS frequently is sold to an institutional investor. In many cases servicing is contracted out and the homeowner does not know who actually owns the mortgage. 

Possible Changes to the Residential Mortgage Market 

Change is expected on a variety of fronts.

  • More than 45 bills were introduced in the 112th Congress to enhance the accountability of Fannie Mae and Freddie Mac. Some of the bills sought to reduce the cost to the government, while others sought to change the enterprises’ charters if or when they leave conservatorship. 
  • Previously enacted legislation requires regulations for full implementation. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203) requires new regulations affecting risk retention and mandating that mortgages be “suitable” for borrowers. 
  • The maximum size of mortgages that can be purchased by Fannie Mae or Freddie Mac, or included in MBSs guaranteed by Ginnie Mae (part of the FHA) with the full faith and credit of the U.S. government, has been changed by legislation six times since 2008.
  • Demographics, the recent recession, and the experience of the housing bubble each are likely to result in changes to household formation and homeownership preferences regardless of any legislation enacted into law.

Date of Report: April 24, 2013
Number of Pages: 32
Order Number: R42571
Price: $29.95

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