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

CRS Report for Congress
Prepared for Members and Committees of Congress
Changes to the Residential Mortgage Market:
Legislation, Demographics, and Other Drivers
N. Eric Weiss
Specialist in Financial Economics
April 16, 2013
Congressional Research Service
Changes to the Residential Mortgage Market
Congressional Research Service
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
uses credit scores and computer systems 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.
Changes to the Residential Mortgage Market
Congressional Research Service
• 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.
This report will be updated as warranted.
Changes to the Residential Mortgage Market
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Changes in the Residential Mortgage Market .................................................................................. 1
Legislative Changes ................................................................................................................... 1
New Regulations ....................................................................................................................... 3
Demographics and Other Drivers of Change ............................................................................ 4
Overview of Residential Mortgage Markets .................................................................................... 5
Risk ............................................................................................................................................ 5
Funding Sources ........................................................................................................................ 6
Homeownership and House Price Changes ..................................................................................... 9
Homeownership Rates ............................................................................................................... 9
Cost of Homeownership .......................................................................................................... 10
Changing Home Prices ............................................................................................................ 12
Changes in Mortgage Characteristics ............................................................................................ 12
Detailed Trends in Funding Residential Mortgages ....................................................................... 14
Growth of Securitization ......................................................................................................... 19
Figure 1. Growth of Mortgage Securitization Outstanding ............................................................. 8
Figure 2. Homeownership Rate ..................................................................................................... 10
Figure 3. Real and Nominal Home Price Index, 1890-2012 .......................................................... 11
Figure 4.Major Direct Sources of Residential Mortgage Funds .................................................... 16
Figure 5. Major Holders of Mortgage-Backed Securities .............................................................. 18
Appendix A. Government Support of Homeownership ................................................................. 21
Appendix B. A Brief History of Government-Sponsored Enterprises and Housing ...................... 25
Author Contact Information........................................................................................................... 28
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Changes in the Residential Mortgage Market
For many years, homeownership has been promoted as part of the American dream. Over the past
50 years, the homeownership rate has been in the range of 62% to 66%. Since 2008, however, the
residential mortgage market has experienced historically high default and foreclosure rates, credit
losses, liquidity problems, and tighter mortgage standards. In addition, Fannie Mae and Freddie
Mac, two congressionally chartered government-sponsored enterprises (GSEs) formed to provide
liquidity and access to the mortgage market, have been placed in conservatorship and have
received various types of financial support from the U.S. Department of the Treasury and the
Federal Reserve.1 In the first nine months of 2012, Fannie Mae and Freddie Mac together owned
or securitized 77% of new mortgage-backed securities (MBS), and Ginnie Mae, which is part of
the Department of Housing and Urban Development (HUD), guaranteed the other 23%.2 Some
have questioned the solvency of the mortgage insurance program of the Federal Housing
Administration (FHA).
For some households, the financial risk implied by the experience of nationwide house price
declines may make renting more attractive relative to owning a home. It is not clear that today’s
most popular type of mortgage, the 30-year fixed rate, will continue as the most popular or even
In coming years, the residential mortgage market is likely to change in response to legislation,
regulatory actions, demographic changes, and continuing problems in the mortgage market.3
These changes may be of interest to Congress because of the impact on current and future
homeowners, the real estate and home building industries, and the financial system.
Changes to the mortgage market can be organized into three categories: legislative, regulatory,
and demographic.
Legislative Changes
In the 112th Congress there were many bills introduced that would have changed the residential
mortgage market.
1 For more on this financial support for Fannie Mae and Freddie Mac, see CRS Report R42760, Fannie Mae’s and
Freddie Mac’s Financial Status: Frequently Asked Questions, by N. Eric Weiss. The Federal Home Loan Banks form
a third collective housing GSE and Ginnie Mae (officially, the Government National Mortgage Association) is a
government agency and part of the Department of Housing and Urban Development. Neither would be directly affected
by the legislation discussed in this report, and they are discussed only in passing. Reflecting congressional emphasis on
Fannie Mae and Freddie Mac, this report uses the term GSEs to refer to Fannie Mae and Freddie Mac, not the Federal
Home Loan Banks or Ginnie Mae.
2 U.S. Federal Housing Finance Agency, Conservator’s Report on the Enterprises’ Financial Performance: Third
Quarter of 2012, at'sReport3Q2012F.pdf.
3 See CRS Report R40800, GSEs and the Government’s Role in Housing Finance: Issues for the 113th Congress, by N.
Eric Weiss; CRS Report R41719, The Obama Administration’s Report on “Reforming America’s Housing Finance
Market”: Implications for Fannie Mae and Freddie Mac, by N. Eric Weiss; and Board of Governors, Federal Reserve
System, The U.S. Housing Market: Current Conditions and Policy Considerations, January 4, 2012, at
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• Fannie Mae and Freddie Mac could have been affected by more than 45 bills that
were introduced. These bills would have required various changes to the GSEs,
including winding them down, executive compensation, decreasing risk in their
investment portfolios, reducing their issuance of new bonds, modifying
affordable housing goals, prohibiting new products, restricting the payment of
legal fees, requiring the sale of assets, and removing their exemption from certain
state and local taxes. These changes would have reduced or eliminated the GSEs’
role in supplying mortgage funds, but it is likely that other private sector lenders
would have replaced at least some of the funding that Fannie Mae and Freddie
Mac provided. Legislation was introduced to change the home mortgage market
in the areas of refinancing, foreclosures, fraud prevention, and mortgage
• H.R. 940, the United States Covered Bond Act of 2011, which would have
encouraged issuing a competitive type of securitization, covered bonds, was
introduced in the 112th Congress by Representative Scott Garrett.5 A covered
bond is a type of bond issued by a company that contracts to make scheduled
interest payments. Specific mortgages are set aside as collateral for the bonds in
the event that the issuer does not make the interest payments.
• Other bills (e.g., S. 1963) introduced in the 112th Congress would have created a
temporary government agency to replace the GSEs with a full faith and credit
guarantee of timely payment of principal and interest to holders of mortgagebacked
securities (MBSs). This new agency would have replaced Fannie Mae’s
and Freddie Mac’s similar corporate guarantees and at least partially offset the
reduction in the supply of mortgage funds.
• To increase tax revenues, the National Commission on Fiscal Responsibility and
Reform (sometimes called Bowles-Simpson) proposed reducing the tax
deduction for mortgage interest paid on principal and second residences.6 In
isolation, these proposals could reduce the demand for mortgages and
homeownership, the price per square foot of homes, the overall price of homes,
and the size of new homes.7
The maximum unpaid balance on mortgages purchased by Fannie Mae or Freddie Mac, or
guaranteed by the FHA and Ginnie Mae (part of the HUD) with the full faith and credit of the
U.S. government, has been changed by legislation six times since 2008. Higher limits increase the
supply of low-risk mortgage funding, reducing the interest rate on mortgages affected, and
tending to increase the prices of homes affected.8 Five bills introduced in the 112th Congress
(H.R. 408, S. 178, H.R. 1182, S. 693, and H.R. 1859) would have changed to the loan limit.
4 CRS Report R41822, Proposals to Reform Fannie Mae and Freddie Mac in the 112th Congress, by N. Eric Weiss.
5 For more information on covered bonds, see CRS Report RS22925, Covered Bonds: An Alternative to Securitization
for Funding Mortgages, by Edward V. Murphy and CRS Report R41322, Covered Bonds: Issues in the 112th Congress,
by Edward V. Murphy.
6 National Commission on Fiscal Responsibility and Reform, The Moment of Truth: Report of the National
Commission on Fiscal Responsibility and Reform, December 2010, p. 31,
7 CRS Report R41596, The Mortgage Interest and Property Tax Deductions: Analysis and Options, by Mark P.
8 CRS Report RS22172, The Conforming Loan Limit, by N. Eric Weiss and Sean M. Hoskins.
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• In February 2011, the Obama Administration issued a report9 with three general
proposals to reform the housing finance system, including FHA, Fannie Mae, and
Freddie Mac. These proposals would reduce the government’s support for the
mortgage markets. Some who purchase MBSs because of the government’s
support would be likely to switch from the enterprises’ MBSs to safer
investments, and other classes of investors could be attracted to the higher risk
associated with higher mortgage market returns. It is not clear what the net effect
on mortgage markets might be.
• There are similar proposals to reform FHA’s mortgage guarantee program.
New Regulations
Government agencies are developing new regulations that will affect the mortgage market.
• The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act; P.L. 111-203) requires the Consumer Finance Protection Board (CFPB) to
adopt regulations to implement “qualified residential mortgages” (QRMs)10 and
financial regulators to implement “qualified mortgages” (QMs),11 which would
affect risk retention, underwriting, pooling, and selling the mortgages as MBSs.
The CFPB published the QM rule on January 30, 2013.12
• The Consumer Financial Protection Bureau is developing procedures to review
lenders’ mortgage servicing procedures and to establish uniform rules concerning
record keeping and minimum notice of interest rate increases.13
• The Federal Housing Finance Agency (FHFA), the Federal Reserve (Fed), and
Federal Deposit Insurance Corporation (FDIC) have proposed regulations
affecting the capital (reserves) that insured depositories must hold against
mortgages,14 and using covered bonds15 to finance mortgages. The Fed wrote to
the House and Senate committees with jurisdiction over housing finance
9 U.S. Department of Treasury, and U.S. Department of Housing and Urban Development, Reforming America’s
Housing Finance Market: A Report to Congress, February 2011,
10 CRS Report R42056, Ability to Repay, Risk-Retention Standards, and Mortgage Credit Access, by Darryl E. Getter
and U.S. Federal Housing Finance Agency, Qualified Residential Mortgages, Mortgage Market Note 11-02, April 11,
2011, at
11 Federal Reserve System, “Regulation Z; Truth in Lending,” 76 Federal Register 27930-27506, May 11, 2011.
12 Consumer Finance Protection Bureau, “Ability-to-Repay and Qualified Mortgage Standards under the Truth in
Lending Act (Regulation Z); Final Rule,” 78 Federal Register 6408-6620, January 30, 2013.
13 U.S. Consumer Financial Protection Bureau, Examination Report, at
themes/cfpb_theme/supervision-manual/PartIIICFPBsupervisionmanual.pdf. See also Ashley Gordon, U.S. CFPB,
“What the Proposed Mortgage Servicing Rules Could Mean for You,” April 10, 2012,
14 U.S. Federal Deposit Insurance Corporation, “Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital
Maintenance; Capital-Residential Mortgage Loans Modified Pursuant to the Home Affordable Mortgage Program,” 74
Federal Register 60137, November 20, 2009.
15 Covered bonds are an alternative to MBS for raising large amounts of money to fund mortgages. For more details,
see CRS Report R41322, Covered Bonds: Issues in the 112th Congress, by Edward V. Murphy. Also, Federal Deposit
Insurance Corporation, “Covered Bond Policy Statement,” 73 Federal Register 43754, July 28, 2008.
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suggesting additional government interventions in the housing finance system to
provide new support for the sector.16
Demographics and Other Drivers of Change
Demographics and related factors are changing demand for housing and thus mortgage markets.
• Based on past relationships, the demographics of a maturing population suggest
an increase in the homeownership rate,17 but other factors such as movement to
assisted living facilities might offset this.18 Immigration increases the demand for
housing, but the impact on homeownership rates could vary depending on the
immigrants’ income, planned length of stay in the United States, and their
attitude toward home owning.19
• Tighter mortgage qualification standards could reduce the homeownership rate
compared with what it otherwise could be.20
• The ability and desire to own a home may have declined for many who have lost
their homes due to foreclosure or faced the threat of foreclosure, and this could
change historical patterns of homeownership. Other households could also
reassess the risks of foreclosure and may decide not to purchase a home.
• Additional, unpredictable factors affecting homeownership rates include the state
of the economy, interest rates, inflation, and expectations for the future (including
home price expectations). If these change, homeownership rates could change. In
particular, rates for 30-year fixed-rate mortgages have been around 4% while
inflation has been 1.5% to 3.0%, making real (inflation-adjusted) mortgage rates
1% to 2.5%. Although real mortgage rates have been low by historical standards,
if the economy weakens, and house prices continue to decline, households may
continue to defer home purchases.
The net result on homeownership rates is unclear: they could rise or fall.
16 Board of Governors of the Federal Reserve System, The U.S. Housing Market: Current Conditions and Policy
Considerations, January 4, 2012, at
17 The homeownership rate is the percentage of households that own their homes. This includes homes owned subject
to a mortgage.
18 People occupying a room without cooking facilities are not considered to be a household.
19 Carlos Garriga, William T. Gavin, and Don Schlagenhauf, “Recent Trends in Homeownership,” Federal Reserve of
St. Louis Review, September/October 2006, pp. 397-412.
Garriga.pdf, also Mark Doms and Meryl Motika, “The Rise in Homeownership,” FRBSF Economic Letter, Number
2006-30, November 2006,
20 Board of Governors of the Federal Reserve, Senior Loan Officer Opinion Survey on Bank Lending Practices, April
2012, pp. 33-49, and Kate Berry,
“Capital One Still Not Accepting FHA Loans with Low Credit Scores,” American Banker On Line, February 16, 2012.
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Overview of Residential Mortgage Markets
A home is an infrequent consumer purchase that combines consumption, investment, and a
variety of risks. Financing the purchase of a home with a mortgage adds a level of financial
complexity and risk, but allows a purchaser to better match the flow of housing services with the
flow of paying for the capital that provides the services. Homes are most frequently financed with
30-year fixed-rate mortgages that historically have been paid off in 7-10 years usually by
refinancing the mortgage or by selling the home.
The demand for owner-occupied homes and associated mortgages depends on a wide variety of
factors: home prices, household credit history, cost of renting housing, mortgage interest rates,
mortgage characteristics, household formation, household income, and age, to name some of the
most important. Expected changes in house prices, income, household size, and government
incentives are important. The supply of owner-occupied homes and mortgages depends on many
factors: the price of existing housing; the cost of land, labor, and materials; interest rates; and the
characteristics of alternative investments. Mortgages are characterized by their interest rate, their
term (life), the allocation of payments to principal and interest, the frequency of payments, and
adjustments, if any, to the interest rate.
As a financial instrument, a mortgage is characterized by a flow of interest payments, repayment
of principal, and various types of risk. There are many ways to categorize risk. This report
concentrates on three types of risk: credit, prepayment, and interest rate. Credit risk is the risk that
the borrower will not make the payments specified in the mortgage. In general terms, the credit
risk of a mortgage to the borrower and to the lender depends on the probability of delinquency,
the probability of going to foreclosure following delinquency, possible losses from foreclosure
sales, and possible recovery from other assets of the borrower. Federal programs to encourage
homeownership over renting have reduced the cost of homeownership by allowing homeowners
tax deductions that renters cannot take.21 Also, government and private-sector programs offer
insurance and loan guarantees that limit the loss to lenders in the event of foreclosure.
Prepayment risk is the risk that borrowers will pay off the mortgage before the full term (e.g., 30
years). This manifests itself in unanticipated prepayments when interest rates decline and
borrowers take advantage of the savings from refinancing. Lenders anticipate a certain
prepayment speed and seek an interest rate to compensate, but long-term forecasts of future
interest rates are notoriously inaccurate. When the prepayment rate is greater than expected, the
lender must find replacement investments at lower interest rates. Conversely, when interest rates
increase, prepayment speeds decline, and lenders find their funds tied up in mortgages for longer
than anticipated.
Interest rate risk is incurred by lenders that finance long-term fixed interest rate mortgages by
repeatedly borrowing for short periods of time at fluctuating interest rates. Lenders typically
borrow some or all of the funds used to make a mortgage. As a simple example, a bank might
finance a 30-year mortgage loan through shorter-term certificates of deposit (CDs). The
21 Arguably, renters benefit from the ability of owners of rental property to deduct the costs of operating the property,
including interest on mortgages and taxes.
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difference, or spread, between the short-term interest rate on the CDs and the rate on the
mortgages covers the cost of the mortgage and provides the lender with profits. If short-term
interest rates on the CDs increase, the profit declines and may become a loss.
Funding Sources
Home mortgages have changed significantly since 1934 when the National Housing Act (P.L. 73-
479) created the Federal Housing Administration (FHA) to insure home mortgages. At that time,
there were many restrictions on mortgage lending that have since been abolished. For example,
banks could not lend on property more than 50 miles from the one office they were allowed. A
homeowner usually would apply to a lender, which would use its own standards to decide
whether to make the loan. Although some loans were sold to other financial institutions, the
lender usually held it and serviced it until it was paid off.
Today, homeowners seeking a mortgage apply to a mortgage originator, which may or may not be
part of a larger financial organization. The originator reviews (underwrites) the mortgage
application and approves it, frequently according to criteria established by government agencies,
such as FHA, or quasi-government agencies, such as Fannie Mae, Freddie Mac, and the Federal
Home Loan Banks. The originator typically sells the mortgage to a securitizer, which pools them
into MBSs that are in turn sold to institutional investors, including trusts, pension funds, and
sovereign wealth funds. Sometimes an originator or a securitizer will keep mortgages in its
investment portfolio.
Securitization has potential benefits and costs. Among the benefits is that it has made financial
markets more efficient. There appear to be many economies of scale in these operations. The
originator specializes in marketing to consumers and underwriting. Another organization can
specialize in servicing loans by collecting and recording payments, and forwarding the funds to
investors. A standardized security can be traded more easily than one that is unique. This in turn
opens financial markets to funding by institutional investors who have no desire to develop the
capability to perform all of these functions.
Among the costs of securitization are potential conflicts of interest among originators, investors,
and servicers. Renegotiating the terms of a mortgage can be complicated depending on the
contracts between the servicer, securitizer, and investors. If renegotiation is considered “active”
management, the favorable treatment of MBSs as untaxed pass-throughs can be lost.
Prior to the recent financial crisis, mortgage securitization was done by one of three types of
organizations: Ginnie Mae, Fannie Mae/Freddie Mac, and so-called private-label securitizers.
• Ginnie Mae,22 which is part of HUD, authorizes the securitization of mortgages
in its name and guarantees mortgages that already are guaranteed by the federal
government (i.e., the FHA, the Department of Veterans’ Agency [VA], or the
Department of Agriculture’s Rural Housing program). Both the mortgage
guarantees to lenders and the MBS guarantee to investors are backed by the full
faith and credit of the federal government. Technically, Ginnie Mae never owns
the mortgages or the MBSs. The mortgages are purchased and securitized by
authorized investment banks.
22 Officially, Ginnie Mae is the Government National Mortgage Association.
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• Fannie Mae and Freddie Mac,23 congressionally chartered, stockholder-owned GSEs,
purchase and securitize mortgages that meet their standards and certain legal
requirements. They either hold the MBSs as an investment or sell them to others. The
GSEs cannot purchase mortgages that are larger than the conforming loan limit24 and
must state that their MBSs and bonds are not guaranteed by the federal government.25
• Private label securities (PLS) have no guarantees (government or otherwise). Typically, to
the extent that these mortgages have been securitized, this is done by investment banks
because the mortgages exceed the conforming loan limit, or do not meet other credit
requirements of Ginnie Mae or the GSEs. Although PLS were popular in the years
preceding the 2008 financial crisis, there has been very little PLS activity since then.26
Figure 1 graphs the financing of outstanding mortgages and shows the increasing role of MBSs
and the GSEs since the data were first collected in 1951. Initially, this was all done by Fannie
Mae, which was a government agency at the time. The first private-label securitizations occurred
in 1984, and volume peaked in 2007. Since 2007, the volume of PLS outstanding has declined,
reflecting virtually no new PLS issues. The figure shows that while there is a virtual lack of new
PLS, there are still PLS outstanding.
23 Officially, Fannie Mae is the Federal National Mortgage Association and Freddie Mac is the Federal Home Loan
Mortgage Corporation.
24 CRS Report RS22172, The Conforming Loan Limit, by N. Eric Weiss and Sean M. Hoskins.
25 A third housing GSE, the Federal Home Loan Bank System, makes loans backed by eligible collateral (primarily
mortgages) to member depositories. For more information on the system, see CRS Report RL32815, Federal Home
Loan Bank System: Policy Issues, by Edward V. Murphy.
26 Al Yoon, “Rare Residential Mortgage Bond Tests Dormant Market,” The Wall Street Journal, January 12, 2012, On
Line, WSJ Blogs, Developments,
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Figure 1. Growth of Mortgage Securitization Outstanding
Source: Federal Reserve, Flow of Funds: Historical Data, Data Download Program, April 2, 2013, at
seriescolumn and CRS calculations.
Note: Given the available data, CRS cannot separate MBSs issued by Ginnie Mae from those issued by Fannie
Mae and Freddie Mac.
Government involvement in the mortgage market is increasing. Fannie Mae and Freddie Mac,
which own or guarantee approximately half of all mortgages outstanding, are in federal
conservatorship and have received more than $187 billion in support from the U.S. Treasury.27
The Fed and Treasury have purchased more than $1,347 billion of MBSs issued by Fannie and
Freddie. The Fed currently is using repayment of mortgages to purchase additional MBSs
whereas Treasury has sold the $225 billion of MBSs that it purchased in 2008 and 2009.28 The
Fed has purchased more than $34 billion of debt issued by Fannie Mae and Freddie Mac.
In oversight hearings, the House Committee on Financial Services29 and the Senate Committee on
Banking, Housing, and Urban Affairs30 have held hearings on the potential cost of the
27 U.S. Federal Housing Finance Agency, Data as of March 29, 2013 on Treasury and Federal Reserve Purchase
Programs for GSE and Mortgage-Related Securities. This is updated quarterly and a link to the latest version is at
28 U.S. Treasury, “Chart of the Day: Treasury Completes MBS Portfolio Wind Down, Generates $25 Billion Positive
Return for Taxpayers,” press release, March 19, 2012,
29 U.S. Congress, House Committee on Financial Services, Subcommittee on Oversight and Investigations, Oversight
of the Federal Housing Finance Agency, 112th Cong., 1st sess., December 1, 2011.
30 U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Subcommittee on Housing,
Transportation and Community Development, Strengthening the Housing Market and Minimizing Losses to Taxpayers,
112th Cong., 2nd sess., March 15, 2012.
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government’s intervention in the mortgage market, conservatorship, and other issues related to the
Congressional interest is not limited to Fannie Mae and Freddie Mac. In the 113th Congress, both
the House Committee on Financial Services and the Senate Banking, Housing, and Urban Affairs
Committees have held hearings to examine the role for and the financial risks presented by the
Federal Housing Administration’s single-family insurance program.31
Homeownership and House Price Changes
Changes to the supply and demand for housing and mortgages may be driven by many factors,
such as the age distribution of households, the household formation rate, interest rates, and how
rents affect the supply and demand for homeownership. The net effects will be observable
through the movements of prices and quantities—house prices and the ownership of homes. This
section examines the evolution of house prices and how these trend against other measures that
have been of interest to policy makers.
Homeownership Rates
In the period between 1900 and 1940, the homeownership rate varied between 44% and 48%. In
1950, the first data available after World War II, the rate increased to 55%.32 Figure 2 plots the
homeownership rate on a quarterly basis since 1965 when the first quarterly data was collected.
The homeownership rate increased until the third quarter of 1979 and the third quarter of 1980
when it reached 65.8%. The rate declined until 1980, when it began to increase and reached
69.2%, a record high in the second quarter of 2004 that was equaled in the fourth quarter of 2004.
In 2012, the homeownership rate was 65.4%-65.5%.
31 U.S. House of Representatives, Committee on Financial Services, Hearing entitled “Examining the Proper Role of
the Federal Housing Administration in our Mortgage Insurance Market.” Testimony and archived webcast of the
hearing are available at U.S. House of
Representatives, Committee on Financial Services, Hearing entitled “Bailout, Bust, or Much Ado About Nothing?: A
Look at the Federal Housing Administration’s 2012 Actuarial Report.” Testimony and archived webcast of the hearing
are available at U.S. Senate, Committee
on Banking, Housing, and Urban Affairs, “Addressing FHA’s Financial Condition and Program Challenges, Part II.”
Testimony and archived webcast of the hearing are available at
32 Census Bureau, “Historical Census of Housing Tables: Homeownership,” press release,
www/housing/census/historic/owner.html, October 31, 2011.
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Figure 2. Homeownership Rate
Homeownership Rate
Source: U.S. Census Bureau, “Housing Vacancies and Homeownership (CPS/HVS), “Table 14. Homeownership
Rates for the U.S. and Regions: 1965-Present,”
Cost of Homeownership
The net cost of homeownership is the cost of interest, taxes, depreciation, maintenance expenses,
and any price appreciation.33 In making the decision whether to own or rent a home, the flow of
these costs can be compared with the expect flow of benefits from homeownership, the cost of
renting, and the benefits of renting. Because of the transaction costs associated with moving,
buying a home, and selling it, households adjust slowly to housing market changes.
From the household’s point of view, rising house prices created capital gains, which reduced the
cost of homeownership, in some cases making the cost negative. Prior to the 2007-2009 financial
crisis, nationwide nominal house prices had risen with minor exceptions since 1942, encouraging
the formation of the expectation that national house prices could not decline. This arguably led to
overestimations of the profitability of homeownership.34
33 James Poterba and Todd Sinai, “Tax Expenditures for Owner-Occupied Housing: Deductions for Property Taxes and
Mortgage Interest and the Exclusion of Imputed Rental Income,” American Economic Review, vol. 98, no. 2 (May
2008), pp. 84-89.
34 Between the end of the Depression and the current housing market decline, some state and regional house prices
declined, including in farm and industrial states (early 1980s), and in energy states (mid-1980s). See David C.
Wheelock, “What Happens to Banks When House Prices Fall? U.S. Regional Housing Busts of the 1980s and 1990s,”
Federal Reserve Bank of St. Louis Review, September/October 2006, 88(5), pp. 413-29. For more collected data on
house price declines see Federal Reserve Bank of New York, Synopses of Selected Research on Housing, Mortgages,
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Figure 3 shows the nominal and real Case-Shiller home price indices, which correct for changes
in the quality of homes.35 An examination of the real home prices (the solid, dark blue line) shows
numerous price declines, that is, periods when house prices did not keep up with inflation. On
average across the entire United States, housing has not always protected homeowners from
inflation. Real home prices show a relatively small upward trend prior to 2000.
Although nominal home prices (the dotted, red line) show a stronger upward trend, there have
been years when they declined. Between 1890 and 1945, there were a total of 21 years when
nominal house prices declined. More recently, between 1945 and 1960, there were five years with
declines. The next annual, nationwide nominal price decline was in 1990. Except for the first and
second quarters of 2010, the price index has declined quarterly between the third quarter of 2006
and the end of 2011. There was an inconsistent increase in house prices in 2012.
Figure 3. Real and Nominal Home Price Index, 1890-2012
1890 = 100
Source: Robert Shiller, Irrational Exuberance, Second ed. (Princeton, NJ: Broadway Books, 2005) at Numbers updated by the author.
and Foreclosures, September 1, 2008,
35 Data are reported annually between 1891 and 1952, and quarterly since 1953. The changes in this discussion are
annual (i.e., quarterly data is analyzed compared to the same quarter a year earlier).
Changes to the Residential Mortgage Market
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Changing Home Prices
Easing credit standards can increase the demand for homeownership and increase home prices.
Households that otherwise would be unable to borrow can become homeowners. Households that
would have qualified to purchase under tighter lending standards can buy more expensive
housing. In the extreme case, rapidly rising prices make it difficult or impossible for some firsttime
homebuyers to accumulate sufficient savings for a downpayment, and income may not
increase fast enough to keep up with the monthly mortgage payments required for increasingly
expensive homes.
From the lender’s point of view, rising nominal house prices can be good because the value of the
individual home, which serves as the collateral for the mortgage, increases. This reduces both the
likelihood and severity of any losses in the event of foreclosure. A foreclosure is less likely when
a home is worth more than the mortgage(s) on it, because a delinquent homeowner can sell the
house, pay off the mortgage(s), walk away with cash, and avoid foreclosure. If a foreclosure does
occur, losses are likely to be less because of the price increase.
Rising home prices allow homeowners to borrow against their increased equity (the difference
between the value of a home and the debt on it) through second mortgages (mortgages that have a
claim on the home as collateral that is secondary to the original mortgage) and home equity lines
of credit (HELOCs). This borrowing can allow for increased consumer spending, which boosts
the macro economy.
When nominal house price appreciation slows or begins to decline, the economics of
homeownership are reversed.
Changes in Mortgage Characteristics
Since the Depression of the 1930s, mortgages have been characterized by long terms (20 to 30
years), fixed interest rates, prepayment of mortgages without penalty, decreased downpayment
requirements, increased standardization, and some type of government insurance for lenders.
Although the 30-year fixed-rate mortgage (FRM) currently is the most popular mortgage (84% of
all first mortgages),36 borrowers have many alternatives. In 1982, the Garn-St. Germain Act37 preempted
state laws to permit adjustable-rate mortgages (ARMs), which are tied to various interest
rates and with various limits on annual and lifetime interest rate changes.38 FRMs and ARMs
usually have loan terms of 15 to 40 years. Today, downpayments typically range from 3% to more
than 40%, and credit standards are higher compared with before the recent recession.
36 U.S. Census Bureau, “Table 3-15, Mortgage Characteristics,” American Housing Survey: 2009, at and CRS calculations.
37 P.L. 97-320, Title VIII, Alternative Mortgage Transactions Parity Act of 1982.
38 An ARM is sometimes identified differently than a fixed-rate mortgage (FRM). For example, a five year ARM
usually is a 30-year mortgage with a fixed rate for the first five years and adjustable rates for the remaining life of the
Changes to the Residential Mortgage Market
Congressional Research Service 13
ARMs are not very common. At the end of 2012, approximate 4% of new home mortgages
outstanding were reported to have adjustable rates.39 The last time the ARMs’ market share was
10% or more was in May 2008. Economic research has suggested that the reason for ARMs’ lack
of acceptance is that consumers find that the initial lower rate on ARMs compared to FRMs does
not compensate for the risk that the ARM rate could exceed the FRM rate in the future and that
this reflects the interest rate differences on short- and long-term Treasury bonds,40 that is, shortterm
interest rates are not sufficiently lower than long-term rates to make the ARMs attractive.
The greater complexity of ARMs may encourage many homeowners to select the simpler FRM.
Despite the low market share for ARMs, they can be advantageous under certain circumstances.
One such instance is when the interest rate on ARMs is sufficiently lower than the rate on FRMs.
This can occur when there is great uncertainty over future inflation or mortgage rate volatility.
The household can benefit from the initial lower interest rate. If rates decline, the household’s
mortgage rate will decline without having to refinance. Sometimes personal circumstances can
make ARMs attractive. For example, an ARM with a low rate that is locked for five years could
be attractive to a household planning to move in four years.
In recent years in the United States, the delinquency rate on ARMs has usually been higher than
the rate on similar FRMs.41
Shared-appreciation mortgages (SAMs) offer a reduced interest rate in return for a share of the
appreciation of the house value.42 Recently, there has been congressional interest in encouraging
lenders to offer SAMs in return for principal writedowns for homeowners who owe more than
their homes are worth (the so-called underwater houses). One issue with these mortgages is that it
is not clear how improvements are reflected in the profit sharing. The sharing may also reduce the
homeowner’s financial incentive to maintain the property. On the other hand, shared appreciation
offers lenders a hedge against inflation and lower interest rates for the borrower.
In any case, SAMs have never been very popular. Neither Fannie Mae nor Freddie Mac currently
purchases SAMs. It appears that to purchase SAMs, Fannie Mae or Freddie Mac would have to
request new program approval from FHFA, which has not approved the purchase of any new
types of mortgages since the GSEs entered conservatorship. The Census Bureau does not publish
statistics on the number of SAMs.
There have been proposals to have payments increase according to a standard schedule (the
graduated payment mortgage) or to have payments vary according to the rate of inflation (the
price level adjusted mortgage).
39 Freddie Mac, “Refi and ARM Share Data,” Weekly Market Survey, March 2013,
40 For example, James Vickery, “Interest Rates and Consumer Choice in the Residential Mortgage Market,” presented
at the American Economic Association Meetings, January 2007, at
41 See Freddie Mac, “Monthly Volume Summaries,”, Fannie Mae,
“Monthly Summary,”, and
Mortgage Bankers Association, “MBA’s Quarterly National Delinquency Survey,”
42 Daniel J. Larkins, “Recent Developments in Mortgage Markets,” Survey of Current Business, vol. 62, no. 2
(February 1982), pp. 19-36,
Changes to the Residential Mortgage Market
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Detailed Trends in Funding Residential Mortgages
In looking broadly at more than 100 years of data on mortgage funding, there have been many
changes in funding sources. Arguably, some of these changes were directly due to external forces
such as federal legislation limiting or increasing the ability of banks to make mortgages; other
changes were the result of lenders identifying profit opportunities. For more than 100 years, some
financial entities have specialized in the originate-to-distribute (OTD) model: they lend money to
homeowners and subsequently sell the mortgage to investors such as other banks. This sale can be
done as a whole mortgage or as a part of a securitization, such as an MBS.
Economic historians have traced mortgage securitization to 1870 at least.43 There are limited
mortgage securitization data prior to 1951, and none of them are consistent with more modern
data. Financial markets (including the mortgage market) continuously evolve, making
comparisons of these markets over long periods more difficult.44 Between 1900 and 1952,
financial institutions45 increased their share of direct funding of residential mortgages from
slightly less than 50% to nearly 85%.46 During this period, the average loan term ranged from 1.8
years (1921, commercial banks) to 22.1 years (1944, life insurance companies).47
Over time, the OTD model evolved. In the 1950s, mortgage companies typically sold their
loans to insurance companies, which kept them on portfolio as whole loans. Starting in the
1970s, this framework gave way to mortgage-backed securities (MBS), which were largely
guaranteed by Ginnie Mae. The other government-sponsored housing agencies, Fannie Mae
and Freddie Mac, became dominant players in the early 1980s. This period also saw the
emergence of the private-label securities market, and in the 2000s, the private-label market
grew at the expense of the agency market. However, the institutional framework of the OTD
model remained more or less identical to what it was in the 1950s. Lenders originated loans
and sold them to other institutions. Typically the loans were then serviced by the originating
lender, but other servicing arrangements were also possible.48
Since 1951, the Federal Reserve has provided data on direct sources of funds as well as the
indirect sources of funds that are channeled through securitization (Figure 4). The securitization
data include only GSE and government agency MBSs. In 1951, the major sources of direct
funding of mortgages were commercial banks, households lending to each other, savings
institutions such as savings and loans, and life insurance companies. Direct sources of funds
43 Kenneth A. Snowden, “Mortgage Securitization in the United States: Twentieth Century Developments in Historical
Perspective,” in Anglo-American Financial Systems: Institutions and Markets in the Twentieth Century, ed. Michael D.
Bordo and Richard Sylla (New York: Irwin, 1955), pp. 261-298.
44 One source of data and analysis of earlier mortgage4 financing sources is Leo Grebler, David M. Blank, and Louis
Winnick, Capital Formation in Residential Real Estate: Trends and Prospects, (Princeton, NJ: Princeton University
Press, 1956), pp. 190-208.
45 This is drawn from Grebler, Bland, and Winnick, who define financial institutions to include commercial banks,
mutual savings banks, savings and loans, life insurance companies, other insurance companies, mortgage companies,
installment investment companies and two government agencies: the Home Owners’ Loan Corporation (now defunct),
and the Federal National Mortgage Association (at the time a government agency).
46 Grebler, Bland, and Winnick.
47 J. E. Morton, Urban Mortgage Lending: Comparative Markets and Experience (Princeton University Press, 1956),
pp. 174-175,
48 Christopher L. Foote, Kristopher S. Gerardi, and Kristopher S. Gerardi, Why Did So Many People Make So Many Ex
Post Bad Decisions? The Causes of the Foreclosure Crisis, Federal Reserve Bank of Boston, Public Policy Discussion
Pater, No. 12-2, May 2, 2012, p. 23,
Changes to the Residential Mortgage Market
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increased in current dollars from $52 billion in 1951 to $9.9 trillion in 2012. U.S.-chartered
commercial banks increased their holdings of mortgages from $10 billion in 1951 to $2.2 trillion.
Figure 4 has been arranged to show insured depositories (commercial banks and savings
institutions) at the bottom of the graph. Their combined shares reached a maximum of 75% of
direct funding in 1973, and they provided over 50% of direct funding between 1951 and 1985.
Starting in 1951, households and nonprofits became less important over time, but did provide
about 5% each year between 1980 and 1988, as did life insurance companies.
Changes to the Residential Mortgage Market
Figure 4.Major Direct Sources of Residential Mortgage Funds
Source: Federal Reserve, Flow of Funds: Historical Data, Data Download Program, April 2, 2013, at
series=1d663b0d4b6d0f0ba3cb6dea7b2fb408&lastObs=7&from=&to=&filetype=spreadsheetml&label=include&layout=seriescolumn and CRS calculations.
Note: Sources with a market share of 5% or less are included in the “other” category.
Changes to the Residential Mortgage Market
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Savings institutions, including savings and loans, lost market share after 1978. The first signs of
the savings and loan crisis occurred in 1984-1986.49 Resolving failed savings and loans continued
until the mid-1990s.50
Meanwhile, the GSEs first provided 5% or more of direct funding in 1970 and in general their
market share grew until recently. Between 2005 and 2009, the GSEs’ market share fell below
50%, but since 2009 their share has been greater than 50%. Since the mid-1990s, PLS (privatelabel
securitizations, also called issuers of asset-backed securities by the Fed) have been
significant, but much smaller than the GSEs and government agencies.
Commercial banks have supplied 10%-20% of direct funding over the 1951-2012 time period.
Figure 5 summarizes Federal Reserve data showing who holds 5% or more of the outstanding
bonds, and MBSs of government and GSEs. The MBSs are backed by single- and multifamily
housing, farm homes, and commercial real estate. Single-family homes represent most of the
MBSs, but they are not separated out by the Fed. The current dollar value of the securities grew
from $2.3 billion in 195151 to $7.5 trillion at the end of 2012, so while the market share for U.S.-
chartered commercial banks declined from 77% to 20%, their holdings increased from $1.8
billion52 to $1.5 trillion.
49 Federal Deposit Insurance Corporation, The S&L Crisis: A Chrono-Bibliography,
50 Timothy Curry and Lynn Shibut, “The Cost of the Savings and Loan Crisis: Truth and Consequences,” FDIC
Banking Review, 2000, pp. 26-35,
51 $20.3 billion in 2012 dollars according to the Bureau of Labor Statistic’s Consumer Price Index calculator at
52 $15.9 billion in 2012 dollars.
Changes to the Residential Mortgage Market
Figure 5. Major Holders of Mortgage-Backed Securities
Source: Source: Federal Reserve, Flow of Funds: Historical Data, Data Download Program, April 2, 2013, at
rel=Z1&series=5710bd24dfc87fad4318dbb9318a1325&filetype=spreadsheetml&label=include&layout=seriescolumn&lastObs=100 and CRS Calculations.
Notes: Includes bonds and MBSs for government agencies and GSEs. MBSs securitize single family residences, multifamily housing, commercial real estate and farm housing.
Sources with a market share of 5% or less are included in the other category.
Changes to the Residential Mortgage Market
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In 1951, the major holders of mortgage securities were state and local governments (19%) and
U.S.-chartered commercial banks (77%). In 2012, major holders of these mortgage securities
included foreigners (rest of world, 14%), the Fed (monetary authority, 13%), U.S.-chartered
commercial banks (20%), and mutual funds (14%). The “other” category grew from 4% in 1951
to 39% in 2012. Looking over the 60 years of data in 10-year intervals, only commercial banks
have been consistently important. The rest of the world had become major holders by 2001. GSEs
were major holders 1996-2009. State and local governments were important until 1991. Savings
institutions (such as savings and loans) were important 1957-1991.
Additional research could analyze why each of these financial sectors became important and then
lost importance, but these data suggest that the sources of funding mortgages has fluctuated over
the past 60 years. Given this history, it seems likely that even without the 2008 financial crisis,
funding sources would continue to change over the next 60 years.
Growth of Securitization
Since Ginnie Mae issued the first residential MBSs in 1970, loan securitization has replaced
deposits to fund commercial mortgages, small business loans, automobile loans, credit card debt,
student loans, and loans that qualify for Community Reinvestment Act (P.L. 95-128) credit.53
These non-mortgage securitizations have become known as asset-backed securitizations (ABSs).
Like MBS proceeds, the proceeds from selling the ABSs can be used to fund loans, which are
packaged into additional ABSs. Servicing the underlying loans can remain with the original
lender or can be sold. When the original lender retains the servicing rights, the borrower has no
indication who owns the loan.
The main advantages to consumers of securitization come from indirect access to the world’s
financial markets: more available credit and lower interest rates. The main disadvantages are the
possibilities that not everyone’s incentives are aligned, and the cost of securitization.
Securitization enables lenders to make more loans than their balance sheets would otherwise
justify if the loans were retained. Many lenders have found the “originate-to-distribute” model
more profitable than the “originate-to-hold” model. Originators earn fees from creating the loan;
they can make a profit selling the loan; they can earn fees from servicing the loan; and because
the loan is no longer on their balance sheet, they have reduced their capital requirements. The
efficiency of the originate-to-distribute model depends on the originators accurately
characterizing the risk and return of the assets.
ABSs must conform to various securities laws and regulations, and compliance can be costly. As
a result, ABS issues are typically for millions or even billions of dollars, and each issue is sold to
many institutional investors. These investors are not experts in making, underwriting, or servicing
the underlying loans. Instead, the investors depend on specialists. The underwriting (credit
evaluation) is sometimes supplemented by securing additional guarantees to reduce the investor’s
exposure to credit risk.
53 The securitization of commercial real estate was common in the 1920s and some residential mortgages were pooled
into guaranteed mortgage participation certificates issued by title and insurance companies. See William N. Goetzmann
and Frank Newman, Securitization in the 1920s, National Bureau of Economic Research, Working Paper 15650,
January 2010,
Changes to the Residential Mortgage Market
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In the area of securitization, Fannie Mae’s and Freddie Mac’s charters provide three competitive
advantages compared to private-label securitizers. First, they are exempt from the requirement
that they register all their securities with the Securities and Exchange Commission (SEC).54 This
makes issuing MBSs less expensive, and it allows them to lock mortgage rates before mortgages
are closed.55 Second, even before the GSEs were placed in conservatorship, it was widely
perceived that the federal government implicitly guaranteed their MBSs. Third, the relatively
small capital requirements in their charters allowed Fannie Mae and Freddie Mac to charge less
for a better guarantee than non-GSE competitors could offer.
Many lenders “swap” their mortgages with Fannie or Freddie for MBSs backed exclusively by
those mortgages which the lender originated. Lenders pay the GSEs a guarantee fee for the
transaction. In return, the lenders have the mortgages that they know because they originated
them, can sell the MBSs if desired, and carry no credit risk.
One result of these features is that there is a liquid market for many ABSs and MBSs, which
means that investors are able to buy and sell these securities quickly with little effect on price. An
institution can purchase MBSs backed by 30-year fixed rate mortgages and sell the MBSs at the
market price at any time in the future. Both Fannie Mae and Freddie Mac maintain active trading
desks to enhance the liquidity of their MBSs.56 This liquidity further reduces the interest rate
sought by investors.
The FHA/Ginnie Mae combination places the credit risk with the U.S. government by providing
the full faith and credit of the federal government as a guarantee of timely payment.
Private label securitizations use the ratings of the nationally recognized statistical ratings
organizations (NRSROs), such as Moody’s, Standard & Poor's, and Fitch, as third party due
diligence and assurance that the underlying loans are sound. Private label ABSs can use
additional credit enhancement techniques such as third party guarantees (financial backing by
independent companies that charge a fee for the service), over-collateralizations (pledging more
collateral than the value of the security), and letters of credit (commitments to loan funds to the
issuer of the security) to reduce the risk to the investor and thereby reduce the interest rate
required by the investor.
In summary, government-related MBSs have been a model for the securitization of other types of
consumer loans. MBSs have broadened the source of funding and made mortgages more available
than they would be without international institutional investors. The private sector has devoted
more funding to ABSs, which Fannie Mae, Freddie Mac, and Ginnie Mae do not issue.
54 Fannie Mae: 12 U.S.C. 1723c; Freddie Mac: 12 U.S.C. 1455(d).
55 Non-GSEs must register their MBS with the SEC. This requires being able to identify the mortgages being
securitized. Fannie Mae and Freddie Mac specify certain minimum standards for the mortgages that will be securitized
and investors bid on the assumption that all of the mortgages will be at the minimum levels.
56 This liquidity makes the MBS more valuable (and more profitable to the Enterprises), and the trading desks are
Changes to the Residential Mortgage Market
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Appendix A. Government Support of
This appendix draws on previous research to list government programs that support
homeownership, after which it provides a summary of the major policy arguments in favor and
against these programs.57
Government Programs
Federal, state, and local governments intervene to support housing markets in a number of ways.
Interest on most home mortgages is deductible from federal and most state individual income
taxes for homeowners who itemize deductions. Individuals who itemize can also deduct state and
local property taxes paid on homes. The government has created Fannie Mae, Freddie Mac, the
Federal Home Loan Bank System, FHA, Ginnie Mae, USDA Rural Housing, and the Department
of Veterans’ Affairs to encourage homeownership by providing guarantees to reduce the risk to
lenders and expand mortgage lending.
The Housing Inspectors General (IGs of HUD, U.S. Department of Agriculture, U.S. Department
of Veterans’ Affairs, and FHFA) have compiled a report summarizing the federal government’s
single-family mortgage programs. The Housing IGs list the following HUD programs:
• One- to Four-Family Home Mortgage Insurance
• Single Family Disposition Program
• Mortgage Insurance for Disaster Victims
• Rehabilitation Loan Insurance
• Energy Efficient Mortgage Insurance
• Good Neighbor Next Door
• Graduated Payment Mortgage
• FHA Home Affordable Modification Program (HAMP)
• Loss Mitigation
• Manufactured Homes Loan Insurance (Title I)
• Property Improvement Loan Insurance (Title I)
• Home Equity Conversion Mortgage
• HOPE for Homeowners
• Insured Mortgages on Hawaiian Home Lands
57 Summaries of federal support for homeownership include U.S. Congressional Budget Office, An Overview of
Federal Support for Housing, November 3, 2009,
HousingPrograms.pdf, and U.S. Federal Housing Inspectors General, Compendium of Federal Single Family Mortgage
Programs and Related Activities, November 2011,
Changes to the Residential Mortgage Market
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• FHA Insured Mortgages on Indian Land
• Neighborhood Stabilization Program 1
• Neighborhood Stabilization Program 2
• Neighborhood Stabilization Program 3
• Emergency Homeowners’ Loan Program
• Ginnie Mae Mortgage-Backed Securities (MBSs)
The Housing IGs list two USDA programs:
• Single Family Housing Guaranteed Loan Program (GLP)
• Single Family Housing Direct Loan Program (DLP)
They list one VA program:
• VA Home Loan Program
At FHFA, they list programs run by Fannie Mae, Freddie Mac, and the Federal Home Loan
• Making Home Affordable Programs
• Mortgage-Backed Securities Program
• Mortgage Purchasing and Retained Portfolio
• Mortgage Servicing Program
• Real Estate Owned Purchasing and Financing Program
• Acquired Member Asset (AMA) Program
• Advances, Letters of Credit, and Lines of Credit
• Affordable Housing Program (AHP) and Community Investment Program (CIP)
• Office of Finance Debt Issuance
• Private-Label Mortgage Purchases Program
Provisions in the tax code that reduce the tax liabilities of individual income taxpayers for
activities related to homeownership include the following:58
• Deduction for Mortgage Interest on Owner-Occupied Residences
• Deduction for Property Taxes on Owner-Occupied Residences
• Increased Standard Deduction of Real Property Taxes on Owner-Occupied
58 U.S. Congress, Senate Committee on the Budget, Tax Expenditures: Compendium of Background Material on
Individual Provisions, committee print, prepared by Congressional Research Service, 111th Cong., 2nd sess., December
2010, S.Rept. 111-58 (Washington: GPO, 2010), pp. 335-374.
59 Taxpayers that do not itemize and pay property taxes may take a deduction in addition to the standard deduction,
Changes to the Residential Mortgage Market
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• Deduction for Premiums for Qualified Mortgage Insurance
• Exclusion of Capital Gains on Sales of Principal Residences
• Exclusion of Interest on State and Local Government Bonds for Owner-Occupied
• First-Time Homebuyer Tax Credit
• Exclusion of Income Attributable to the Discharge of Principal Residence
Acquisition Indebtedness
Policy Reasons Advanced For and Against Government Support
Economists and policy analysts usually begin their analysis of proposed or actual government
interventions by asking, “What is the market failure?” In other words, what prevents competition
in the marketplace from delivering the desired amount of a good or service in the most efficient
manner with the lowest price?
Local governments intervene with building codes and inspections to increase information and
standardization with local building codes inspections to prevent hiding information about defects
and substandard construction techniques.
Some supporters of government programs that promote homeownership argue that
homeownership benefits society in general, not just the specific homeowner. In economic terms,
owner-occupied housing is argued to generate positive externalities. According to this analysis,
unless there is some way for the homeowner to capture the externalities, the homeowner will buy
less housing. One way to correct for the externalities and to encourage the optimal level of owneroccupied
housing is to subsidize homeownership. In the United States, tax deductions can
accomplish this.
The rationale and effectiveness of various tax incentives for homeownership is discussed in CRS
Report R41596, The Mortgage Interest and Property Tax Deductions: Analysis and Options, by
Mark P. Keightley.
Research has found that compared to otherwise identical renters, homeowners have more political
knowledge, are more active politically, maintain their homes better, and have children who do
better in school.60 On the other hand, correlations do not prove causation, and individuals who are
politically active and motivated to maintain their residence are more likely to become
homeowners. There could be other unobserved factors at work here.
ibid., p. 341.
60 Two articles that summarize this research are N. Edward Coulson, “Housing Policy and the Social Benefits of
Homeownership,” Federal Reserve Bank of Philadelphia, Business Review, Second Quarter 2002, pp. 7-10, and William G. Gale,
Jonathan Gruber, and Seth Stephens-Davidowitz, “Encouraging Homeownership Through the Tax Code,” Tax Notes,
June 18, 2007, pp. 1171-1189.
Changes to the Residential Mortgage Market
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Another argument in favor of support for homeownership is that this subsidization balances the
subsidies provided for renting, such as Section 8 vouchers.61 Counterarguments to this include
that subsidies to rental housing could be cut and that the rental subsidies go mostly to lowerincome
households and the homeownership subsidies to middle- and upper-income households.
Robert J. Shiller has argued that encouraging homeownership “has a great deal to do with culture,
and little to do with financial wisdom.”62 He also has argued that homeownership results in
households having investment portfolios that contain relatively too much exposure to real estate
relative to other assets and are not diversified.
Peter J. Wallison, co-director of the American Enterprise Institute’s program on financial policy
studies, has identified, and rejected, four other reasons for government support of housing
finance.63 First, he examines whether government backing is necessary to have a 30-year fixedrate
mortgage, and he points to the jumbo mortgage market as proof that this is not necessary.
Second, he suggests that government support might be necessary to keep a steady flow of funds
to home building, but notes that other industries survive without such government backing.
Third, he proposes and rejects the idea that investors require a federal guarantee if they are to
purchase mortgages or MBSs. He argues that current investors such as central banks, U.S.-
chartered commercial banks, savings and loans, and government pension plans value safety very
highly when making investment decisions; they would be replaced by other institutional investors
if mortgage underwriting were sound and mortgage rates higher.
In addition, he argues that even if there is a policy purpose to subsidizing homeownership for
low-income households, it should be more narrowly targeted.
61 For details on the Section 8 program, see CRS Report RL32284, An Overview of the Section 8 Housing Programs:
Housing Choice Vouchers and Project-Based Rental Assistance, by Maggie McCarty. For information on rental
assistance programs in general, see CRS Report RL34591, Overview of Federal Housing Assistance Programs and
Policy, by Maggie McCarty et al.
62 Robert J. Shiller, “Mom, Apple Pie and Mortgages,” New York Times, March 7, 2010, Business Section, p. 8, Late
Edition - Final.
63 Peter J. Wallison, A New Housing Finance System for the United States, at
Changes to the Residential Mortgage Market
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Appendix B. A Brief History of Government-
Sponsored Enterprises and Housing
In 1932, the Federal Home Loan Banks (FHLBanks) were created to provide direct support to
savings and loan associations and savings banks, which in turn supported the mortgage market. In
1938, Fannie Mae was created to provide mortgage liquidity to lenders. In 1970, Freddie Mac
was created as a part of the FHLBank System to compete with Fannie Mae and to provide
liquidity to savings and loan associations and to savings banks, which at the time were important
mortgage lenders. At the time, interstate banking was prohibited, encouraging the existence of
many local financial markets instead of one national market.
The Federal Home Loan Banks
The Federal Home Loan Bank Act of 1932 created the FHLBank System as “mixed-ownership
government corporations.”64 The intent was to increase mortgage availability during banking
contractions and to provide a source of funds for members to use to smooth over deposit
withdrawals or to respond to mortgage applications and renewals beyond what their deposits
would allow. Savings and loan associations were required to become members and to purchase
non-public stock of the appropriate regional bank.65 The regional banks made loans (called
“advances”) secured by mortgages to members. Initially, advances were limited to homes worth
no more than $20,000; presently the nationwide limit is $417,000 (and up to $625,500 in highcost
The act provided for the establishment of 8 to 12 regional banks (similar to the Federal Reserve’s
regional banks), to enhance the mortgage industry’s liquidity. The FHLBanks obtained the money
that they lent to their members by selling non-public stock to the Treasury and to their members,
and by selling bonds to the public. The 12 FHLBanks redeemed the Treasury’s stock by 1951,
making the banks privately owned by the FHLBank members.
Each regional bank is federally chartered with its own board of directors. System members are
subject to Federal Home Loan Bank Board regulation. The FHLBanks are jointly and severally
liable for each others’ debt, leading some observers to call the banks a collective or cooperative
Initially oversight of the FHLBanks was vested in a board of five directors appointed by the
President with Senate confirmation.67 In later years, minor changes were made to the structure of
the FHLBank Board, including changing its name to the Federal Housing Finance Board, which
the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289) replaced with the
Federal Housing Finance Agency (FHFA) in 2008.
64 P.L. 72-304.
65 The Financial Institutions Recover, Reform and Enforcement Act of 1989 (FIRREA), P.L. 101-73, made
membership optional and allowed a broader range of financial institutions to join.
66 For more information about the current conforming loan limits, see CRS Report RS22172, The Conforming Loan
Limit, by N. Eric Weiss and Sean M. Hoskins.
67 Federal Home Loan Bank Act of 1932, P.L. 72-304, § 17.
Changes to the Residential Mortgage Market
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Federal National Mortgage Association
Fannie Mae traces its creation to the 1935 RFC (Reconstruction Finance Corporation) Mortgage
Company, which authorized the chartering of companies to purchase existing home mortgages.68
There were no private sector applications, and in 1938, the Federal Housing Administration
(FHA) chartered the National Mortgage Association as a subsidiary of the RFC Mortgage
Company to create a market to buy FHA-insured mortgages. Later that year the National
Mortgage Association changed its name to the Federal National Mortgage Association, which still
is Fannie Mae’s legal name.69 When Fannie Mae was created, the maximum mortgage size that it
could purchase was $16,000.
Originally, Fannie Mae provided subsidized mortgages (called special housing assistance) for
government programs and purchased only FHA-insured mortgages, but in 1946 it was authorized
to purchase Veterans Administration (VA)-guaranteed mortgages. Until 1981, Fannie Mae held its
mortgage purchases in portfolio and financed its purchases by selling bonds.
In 1946, Fannie Mae obtained additional financing to purchase more mortgages by selling
preferred stock to the Treasury.70 In 1954, Fannie Mae sold non-voting common stock to those
selling it mortgages and purchased additional mortgages.71
In 1950, Fannie Mae was transferred to the Housing and Home Finance Agency (HHFA).
In 1965, HHFA (including Fannie Mae) became part of the newly created Department of Housing
and Urban Development (HUD). While part of HUD, Fannie Mae’s board of directors consisted
of the Secretary of HUD as chair and four other government employees. In addition, Congress or
the President could ask Fannie Mae to provide “special assistance” in the mortgage market in the
form of subsidized housing, and the management and liquidation of certain mortgages.
The Housing and Urban Development Act of 1968 (P.L. 90-448) divided Fannie Mae into two
parts: (1) a government corporation, the Government National Mortgage Association or Ginnie
Mae, and (2) a GSE, Fannie Mae.72 Ginnie Mae assumed the special housing assistance functions
and the management functions of the old Fannie Mae. The new Fannie Mae was to provide access
to the secondary mortgage market for FHA and VA mortgages. The federal government sold its
Fannie Mae shares, and Fannie Mae sold additional shares to the public.
In 1970, when Freddie Mac was created to deal in conventional mortgages, Fannie Mae was
authorized to purchase conventional loans on moderate-income housing. Also in 1970, Ginnie
Mae began to guarantee FHA/VA mortgage-backed securities.
68 Federal National Mortgage Association, U.S. Department of Housing and Urban Development, Background and
History of the Federal National Mortgage Association (1966).
69 National Housing Act of 1938, Title III. This is P.L. 75-424.
70 Treasury could at some later date sell the preferred stock back to Fannie Mae.
71 National Housing Act of 1954, P.L. 83-50.
72 Housing and Urban Development Act of 1968, P.L. 90-448, Title VIII, § 801.
Changes to the Residential Mortgage Market
Congressional Research Service 27
Fannie Mae’s stock traded on the NYSE with the symbol FNM until June 16, 2010, when FHFA
ordered them to be delisted rather than attempt to continue to meet the NYSE’s $1.00 minimum
share price rule. Fannie Mae now trades over-the-counter with the symbol FNMA.73
Federal Home Loan Mortgage Corporation
In 1970, Congress chartered the Freddie Mac as part of the FHLBank System to provide
competition to Fannie Mae and to provide additional liquidity for conventional mortgages.
Freddie Mac was to provide access to the secondary mortgage market for FHLBank System
Freddie Mac raised its initial capital by selling stock to the regional FHLBanks.
In 1971, Freddie Mac followed Ginnie Mae’s lead and offered its first mortgage-backed security
(MBS), which Freddie Mac called a Participation Certificate (PC). These MBSs, which pool
mortgages into large securities, direct funds from institutional investors to the U.S. mortgage
market. Freddie Mac gave FHLBank members the option of either selling mortgages to its
regional FHLBank, which would sell them to Freddie Mac, or using the mortgage as collateral for
an advance.
Freddie Mac would pool the mortgages into an MBS, guarantee that investors would receive
timely payment of principal and interest, sell the MBS to an investor, and use the proceeds to
purchase additional mortgages. The regional FHLBank could purchase more mortgages from
members, who could in turn make more mortgages.
From its creation until the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA)74 made it stockholder owned in 1990, Freddie Mac’s board of directors had the same
three members as the FHLBank Board’s. Freddie Mac’s stock traded on the New York Stock
Exchange (NYSE) with the symbol FRE until June 16, 2010, when FHFA ordered them to be
delisted rather than attempt to continue to meet the NYSE’s $1.00 minimum share price rule.
Freddie Mac now trades over-the-counter with the symbol FMCC.75
Government Oversight
At their start, Fannie Mae and the FHLBanks were subject to government oversight as federal
agencies. When they first became GSEs, Fannie Mae (1977) and Freddie Mac (1988) were
overseen by the Department of Housing and Urban Development (HUD). The Federal Home
Loan Bank Act of 1932 created the Federal Home Loan Bank Board to oversee the FHLBanks.
Savings and loans and savings banks became members of the Federal Home Loan Bank System,
and the board regulated the savings and loan industry, including Freddie Mac.
73 U.S. Federal Housing Finance Agency, “FHFA Directs Delisting of Fannie Mae and Freddie Mac Stock from New
York Stock Exchange,” press release, June 16, 2010,
74 P.L. 101-73.
75 U.S. Federal Housing Finance Agency, “FHFA Directs Delisting of Fannie Mae and Freddie Mac Stock from New
York Stock Exchange,” press release, June 16, 2010,
Changes to the Residential Mortgage Market
Congressional Research Service 28
In part in response to the savings and loan crisis, the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA; P.L. 101-73) separated Freddie Mac from the FHLBank
system and made it a publicly traded company with HUD as its regulator. FIRREA create the
Federal Housing Finance Board as a replacement for Federal Home Loan Bank Board to oversee
the FHLBanks. The Office of Thrift Supervision (OTS) took over regulation of savings and loan
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (FHEFSSA; P.L.
102-550) created OFHEO as an independent agency within HUD as the safety and soundness
regulator for Fannie Mae and Freddie Mac. OFHEO was authorized to set capital requirements,
conduct annual risk-based examinations, and generally enforce compliance with safety and
soundness standards to make sure that Fannie Mae and Freddie Mac did not take advantage of
their implicit guarantees by increasing profits by taking excessive risks. OFHEO was generally
considered a weak regulator, in part because it was funded by appropriations instead of
assessments on Fannie Mae and Freddie Mac.
HUD itself was assigned the task of setting housing goals for central cities, rural areas, and other
underserved areas, low- and moderate-income census tracts, minority census tracts, low- and
moderate income, and special affordable housing goals for Fannie Mae and Freddie Mac.
The Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289) consolidated all
regulatory oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks in the
Federal Housing Finance Agency, which is independent of other agencies. In September 2008,
Fannie Mae and Freddie Mac agreed to be placed in conservatorship under FHFA. This means
that FHFA has the right to run the two GSEs.

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