Resolving the Federal Role in Housing Finance
The expanded federal role in housing finance began during the 2007–2009 financial crisis and has substantially increased the government’s fiscal exposure. Because objectives for the future role have not been established, we designated resolving the federal role in housing finance as a high-risk area in 2013.
In recent years, the federal government has supported more than two-thirds of the value of new home mortgages. FHFA placed the enterprises into conservatorships in 2008 due to concern that their deteriorating financial condition threatened economic stability. As of September 2018, the enterprises had received $191.4 billion in capital support from the Department of the Treasury (Treasury) and paid dividends to Treasury exceeding that amount. If they were to incur major additional losses, they would draw required amounts from their remaining $254.1 billion in Treasury commitments.
The federal government also supports mortgages through insurance and guarantee programs. FHA has an insured portfolio that exceeds $1.2 trillion and that required about $1.7 billion in supplemental funds in 2013. Ginnie Mae guarantees the performance of almost $2 trillion in securities backed by mortgages with FHA or other federal agency support.
Our ratings for the five criteria remain unchanged from our 2017 High-Risk Report. Actions are needed by housing and regulatory agencies and by Congress to address this high-risk area.
Leadership commitment: partially met. Housing and regulatory agencies have demonstrated some leadership commitment. For example, in January 2013 and December 2014, respectively, agencies finalized “qualified mortgage” and “qualified residential mortgage” regulations designed to prevent a recurrence of risky practices in originating and securitizing mortgages that contributed to the financial crisis.
Resolving the federal role in housing finance will require statutory changes. Congress held hearings and developed legislative proposals on housing finance reform since our 2017 High-Risk Report. However, it has not enacted legislation establishing objectives for the future federal role in housing finance or a transition plan that enables the enterprises—the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac)—to exit federal conservatorship. Also, some prior proposals have not had a system-wide focus. For example, some proposals address the enterprises but do not consider other entities such as the Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae).
Capacity: partially met. Under the Federal Housing Finance Agency’s (FHFA) conservatorship, the enterprises—which guarantee more than $5 trillion in mortgage-backed securities—generally have operated profitably since 2012. FHFA also has taken actions to assess the financial capacity of the enterprises and mitigate some of their risks by overseeing annual stress tests and directing them to take actions that have transferred increasing amounts of credit risk to private market entities.
However, FHFA lacks statutory authority to examine nonbank mortgage servicers (nondepository institutions that collect loan payments, among other functions) and other third parties who do business with and pose potential risks to the enterprises. Also, prolonged conservatorships could create uncertainties for market participants and hinder the development of the broader mortgage securities market.
FHA has enhanced its risk-management practices in response to our recommendations, and while the agency’s Mutual Mortgage Insurance Fund did not meet its statutory minimum capital requirement in fiscal years 2009–2014, it has met the requirement each subsequent year. FHA’s capital requirement, however, is not based on a specified risk threshold, such as the economic conditions the fund would be expected to withstand.
A severe economic downturn could strain the capacity of FHA and the enterprises, and require taxpayer funds to cover actual or expected losses, as occurred during the financial crisis and associated housing market crash.
Action plan: partially met. Although fundamental changes to the housing finance system have yet to be enacted, federal agencies have taken some planning steps to facilitate the transition to a future federal role. For example, FHFA has continued efforts to create a common securitization platform for the enterprises, with the ultimate goal of building an infrastructure that could be used by other market participants in the future. Additionally, in July 2016, the Department of the Treasury, FHFA, and the Department of Housing and Urban Development (of which FHA is a component) issued a report with guiding principles for future efforts to mitigate mortgage losses, based on lessons from the financial crisis.
If Congress enacts changes to the housing finance system, relevant federal agencies will need to develop action plans to effectively implement the changes.
Monitoring: partially met. Federal agencies have taken some steps to provide the types of monitoring that may aid assessment of the effects of changes to the housing finance system. For example, FHFA and the Consumer Financial Protection Bureau monitor different aspects of the mortgage market, including emerging risks and consumer challenges, through activities such as examinations of regulated entities and analysis of consumer complaints.
FHFA and the Consumer Financial Protection Bureau also have continued a joint initiative—the National Mortgage Database Program—that could be useful for examining the effect of mortgage market reforms. One component is developing a representative database of loan-level information on the terms and performance of mortgages, as well as characteristics of the associated borrowers and properties. Another component is a quarterly national survey of a representative sample of recent borrowers about their experiences in obtaining a mortgage. But housing and regulatory agencies have not taken all necessary steps, including specifying metrics and methods, to assess the effects of key mortgage regulations implemented in response to the last housing crisis.
Demonstrated progress: not met. Overall progress on resolving the federal role in housing finance will be difficult to achieve until Congress provides further direction by enacting changes to the housing finance system. Assessing progress against specific goals is not yet possible because Congress has not provided an overall blueprint for the future federal role in housing finance or determined the specific roles federal agencies will play.
Housing and regulatory agencies should implement our previous recommendations designed to help manage mortgage-related risks and assess the effects of mortgage reforms already in place:
- The Department of Housing and Urban Development should develop a plan that identifies the metrics, baselines, and analytical methods needed to conduct retrospective reviews of its qualified mortgage regulations (i.e., analyze how well the regulations work in practice), consistent with Executive Orders and Office of Management and Budget guidance.
- Agencies responsible for the qualified residential mortgage regulations—including the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and Department of Housing and Urban Development—should develop plans that identify the metrics, baselines, and analytical methods to be used for retrospective reviews.
Over the years since we added this area to the High-Risk List, we have made numerous recommendations related to this high-risk issue, two of which were made since the last high-risk update in February 2017. As of December 2018, six recommendations are open.
Congressional Actions Needed
Congressional actions we have previously recommended will be needed to help resolve the federal role in housing finance and manage federal fiscal exposure to the mortgage market.
Specifically, Congress should consider housing finance reform legislation that
- establishes objectives for the future federal role in housing finance, including the role and structure of the enterprises within the housing finance system,
- provides a transition plan to a reformed system that enables the enterprises to exit federal conservatorship, and
- considers all relevant federal entities, including FHA and Ginnie Mae.
Congress also should consider other actions we have previously recommended to help manage mortgage risks, such as
- granting FHFA explicit authority to examine nonbank servicers and other third parties that do business with the enterprises, and
- specifying the economic conditions that FHA’s Mutual Mortgage Insurance Fund would be expected to withstand without substantial risk of drawing on supplemental funds, and require FHA to specify and comply with a capital ratio consistent with these conditions.
GAO-19-239: Published: Jan 18, 2019. Publicly Released: Jan 18, 2019.
Housing Finance: Prolonged Conservatorships of Fannie Mae and Freddie Mac Prompt Need for Reform Fannie Mae and Freddie Mac issue mortgage-backed securities, which let lenders use investor cash for mortgage loans. When people default on the mortgages backing these securities—as many did in the 2007–2009 financial crisis—these issuers can take a hit. So, in 2008, the federal government took...
GAO-18-92: Published: Nov 9, 2017. Publicly Released: Dec 11, 2017.
The Federal Housing Administration's (FHA) budgetary reviews of the Mutual Mortgage Insurance Fund (MMI Fund) assess whether it needs more budget authority to cover expected future costs, and independent actuarial reviews provide complementary information on the fund's finances. FHA uses the actuarial reviews to assess whether the MMI Fund's capital ratio (economic value divided by insurance oblig...
GAO-17-92: Published: Nov 17, 2016. Publicly Released: Nov 17, 2016.
The Federal Housing Finance Agency (FHFA) issued a new strategic plan for the conservatorships of Fannie Mae and Freddie Mac (the enterprises) in 2014 with reformulated goals and supporting actions that reflect a shift in priorities and changing market conditions. While the three goals in the 2014 strategic plan are broadly similar to those in the previous plan issued in 2012, FHFA changed the wei...
GAO-16-278: Published: Mar 10, 2016. Publicly Released: Apr 11, 2016.
The share of home mortgages serviced by nonbanks increased from approximately 6.8 percent in 2012 to approximately 24.2 percent in 2015 (as measured by unpaid principal balance). However, banks continued to service the remainder (about 75.8 percent). Some market participants GAO interviewed said nonbank servicers' growth increased the capacity for servicing delinquent loans, but they also noted ch...
GAO-15-185: Published: Jun 25, 2015. Publicly Released: Jul 27, 2015.
Federal agency officials, market participants, and observers estimated that the qualified mortgage (QM) and qualified residential mortgage (QRM) regulations would have limited initial effects because most loans originated in recent years largely conformed with QM criteria.The QM regulations, which address lenders' responsibilities to determine a borrower's ability to repay a loan, set forth standa...
GAO-15-131: Published: Oct 7, 2014. Publicly Released: Oct 7, 2014.
Developments in the single-family housing finance market from 2000-2013 led to changes in the federal government's role in the housing finance system and ultimately to a significant increase in that role. For example,Before the 2007-2009 financial crisis, the market share of nonprime mortgages—loans often made to borrowers with high-risk characteristics and funded by mortgage backed securities (...