Future Reforms Should Consider Past Plans and Vulnerabilities Highlighted by Pandemic (GAO-22-104284)
Summary
A GAO report to congressional addressees, GAO-22-104284, dated January 2022, on the housing finance system. It notes that since 2013 GAO has designated the federal role in housing finance as a high-risk area because of the significant risks the current role poses, and that in September 2019 Treasury and HUD began implementing housing finance reform plans. GAO finds that the COVID-19 pandemic highlighted three vulnerabilities in the system, including federal fiscal exposure to potential mortgage credit losses, which have so far been mitigated by federal actions and market conditions. Its title states that future reforms should consider past plans and these vulnerabilities.
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United States Government Accountability Office
Report to Congressional Addressees
HOUSING FINANCE
January 2022
SYSTEM
Future Reforms
Should Consider Past
Plans and
Vulnerabilities
Highlighted by
Pandemic
GAO-22-104284
January 2022
HOUSING FINANCE SYSTEM
Future Reforms Should Consider Past Plans and
Vulnerabilities Highlighted by Pandemic
Highlights of GAO-22-104284, a report to
congressional addressees
Why GAO Did This Study What GAO Found
Since 2013, GAO has designated the The COVID-19 pandemic highlighted three vulnerabilities in the housing finance
federal role in housing finance as a high- system—although thus far mitigated by federal actions and market conditions—
risk area because of the significant risks that remain relevant to the debate about future system reforms.
the current role poses. In September
2019, Treasury and HUD began • Federal fiscal exposure. Exposure to potential mortgage credit losses during
implementing housing finance reform an economic crisis is substantial. The government directly or indirectly backs
plans, which included steps to transition $8 trillion in single-family mortgages, in part due to the ongoing federal
the enterprises from federal conservatorships of Fannie Mae and Freddie Mac (enterprises).
conservatorship. But pandemic-related
strains on the housing finance system • Nonbank liquidity risks. Nonbanks, which service more than 50 percent of
and the transition to a new administration federally backed mortgages, faced significant liquidity risk—that they would be
have increased uncertainty about the unable to meet their financial obligations—at the onset of the pandemic
future of reform.
because they were not receiving loan payments but had to continue paying
The CARES Act includes a provision for mortgage investors. Failures of nonbanks could constrain mortgage credit.
GAO to monitor federal efforts related to
COVID-19. Congress also included a • Market instability. In March 2020, the pandemic’s economic shock temporarily
provision in statute for GAO to annually disrupted the mortgage-backed securities (MBS) market by causing many
review financial services regulations. investors to sell assets. This overwhelmed market intermediaries and created
This report examines (1) vulnerabilities in conditions where MBS could not be sold. Continued market dysfunction could
the housing finance system highlighted have limited mortgage availability and caused other credit markets to freeze.
by the pandemic, and (2) the nature and
status of recommendations in the 2019 GAO analysis of the 2019 housing finance reform plans issued by the Department
reform plans and the extent to which they of the Treasury and Department of Housing and Urban Development (HUD)
align with system vulnerabilities and identified recommendations that align with these vulnerabilities and GAO’s 2014
GAO’s housing finance reform housing finance reform framework. The plans made 81 administrative
framework (GAO-15-131). recommendations to agencies and 35 legislative recommendations to Congress.
GAO reviewed housing finance system
research and regulations and agency
• The plans contained 34 recommendations focused on federal fiscal exposure,
documents on system reforms and three related to nonbank liquidity risks, and one related to MBS market
pandemic responses. GAO aligned stability. Regarding fiscal exposure, the recommendations included steps to
recommendations in the 2019 plans with help ensure the enterprises and the Federal Housing Administration’s (FHA)
system vulnerabilities and its 2014 mortgage insurance programs are financially sound. Some steps, such as
framework elements. GAO also analyzed strengthening the enterprises’ capital framework, were implemented. Others,
information on the status of the plan including certain recommendations to improve the financial viability of FHA’s
recommendations and interviewed program for reverse mortgages (a loan against home equity), were not.
agency and industry representatives.
• Each of the plans’ recommendations aligned with an element of GAO’s
framework, and the recommendations collectively addressed all the elements
What GAO Recommends to some degree (see figure below). The elements include control of fiscal
GAO recommends that as Treasury and exposure, alignment of policies with goals, capacity to manage risks, and
HUD develop future plans, they consider borrower protections and access to mortgages. As of January 2021—the latest
recommendations from the 2019 plans point at which Treasury and HUD systematically tracked implementation—
that could help address system agencies implemented or took partial action on 57 of 81 administrative
vulnerabilities and ensure future plans recommendations, focusing primarily on framework elements for control of
address all GAO framework elements. fiscal exposure and capacity to manage risks. For example, FHA substantially
Treasury and HUD accepted GAO’s implemented a recommendation to develop and integrate automated tools for
recommendations. managing mortgage origination risks. As of September 2021, Congress had not
enacted legislation to implement any of the 35 legislative recommendations.
View GAO-22-104284. For more information,
contact Daniel Garcia-Diaz at (202) 512-8678
or garciadiazd@gao.gov.
United States Government Accountability Office
Highlights of GAO-22-104284 (Continued)
Alignment and Status of Recommendations in 2019 Housing Finance Reform Plans, by GAO Framework Element (Administrative Actions as
of January 20, 2021, and Legislative Actions as of September 30, 2021)
While the current administration has stated its interest in helping shape future reforms, it has not issued its own plans, or
performed an analysis similar to GAO’s. GAO’s analysis showed that the 2019 reform plans are relevant to future planning
efforts.
• Although the plans were issued shortly before the pandemic, they contain implemented and unimplemented
recommendations relevant to vulnerabilities the pandemic highlighted. While mitigated by federal actions and market
conditions thus far, the vulnerabilities remain relevant for risk assessments that may support future Treasury and HUD
planning efforts. Considering recommendations from the 2019 plans could help agencies identify options for mitigating
the vulnerabilities and aid assessment of steps already taken.
• The plans also contain recommendations related to each element of GAO’s framework. Attention to each framework
element is important for establishing an effective housing finance system. While future housing reforms may
emphasize different policy goals, considering the prior plans in the context of the framework could help identify actions
that would cover all the framework elements.
As Treasury and HUD develop future reform plans, considering the recommendations in the 2019 plans and addressing
all GAO framework elements could help ensure the plans address key risks, are comprehensive, and account for prior
actions that complement or diverge from current policy priorities.
Contents
Letter 1
Background 4
Federal Actions and Market Conditions Mitigated Risks
Highlighted by the Pandemic, but Vulnerabilities Remain 13
2019 Plan Recommendations That Align with System
Vulnerabilities and GAO’s Framework Could Inform Future
Planning 34
Conclusions 45
Recommendations for Executive Action 46
Agency Comments and Our Evaluation 46
Appendix I Objectives, Scope, and Methodology 52
Appendix II The Pandemic’s Effect on Renters and Small Landlords 59
Appendix III Analysis of Recommendations in 2019 Housing Finance Reform
Plans 65
Appendix IV Comments from the Department of the Treasury 77
Appendix V Comments from the Department of Housing and Urban Development 78
Appendix VI GAO Contact and Staff Acknowledgments 81
Table
Table 1: Elements of GAO’s Framework for Assessing Potential
Changes to the Housing Finance System 11
Page i GAO-22-104284 Housing Finance System
Figures
Figure 1: Overview of Primary and Secondary Mortgage Markets 5
Figure 2: Type and Number of Recommendations in 2019 HUD
and Treasury Housing Reform Plans 10
Figure 3: Share of Single-Family Mortgage Servicing Outstanding
by Market Segment, as of June 30, 2021 18
Figure 4: Combined Capital of Fannie Mae and Freddie Mac
Compared to Estimated Amount Required under 2018
Proposed Capital Rule and 2020 Final Capital Rule 23
Figure 5: Share of Agency Mortgages Serviced by Nonbanks,
2015–2021 by Quarter (Q) 25
Figure 6: Spread between Agency Mortgage-Backed Securities
(MBS) and U.S. Treasury Securities, 2020 30
Figure 7: Distribution of 2019 Housing Reform Plan
Recommendations across Elements of GAO’s
Framework for Assessing Potential Changes to the
Housing Finance System 41
Figure 8: Status of Administrative Recommendations in 2019
Housing Finance Reform Plans, by GAO Framework
Element (Agency Actions as of January 20, 2021) 44
Figure 9: Share of All Rental Units by Ownership Type, 2017 61
Figure 10: Percentage of Federally Backed Multifamily Mortgages
in Forbearance, by Property Size (January–August 2020) 63
Figure 11: Alignment of Treasury’s Housing Finance Plan
Recommendations with GAO’s Framework for Assessing
Changes to the Housing Finance System 66
Figure 12: Alignment of HUD’s Housing Finance Plan
Recommendations with GAO’s Framework for Assessing
Changes to the Housing Finance System 67
Figure 13: Status of Administrative Recommendations in Treasury
and HUD Plans, as of January 20, 2021 69
Page ii GAO-22-104284 Housing Finance System
Abbreviations
ATR/QM Rule Ability to Repay/Qualified Mortgage Rule
CFPB Consumer Financial Protection Bureau
COVID-19 Coronavirus Disease 2019
Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer
Protection Act
DTI debt-to-income
enterprises government-sponsored enterprises (Fannie Mae
and Freddie Mac)
Federal Reserve Board of Governors of the Federal Reserve System
FHA Federal Housing Administration
FCRA Federal Credit Reform Act of 1990
FHFA Federal Housing Finance Agency
FHLBank Federal Home Loan Bank
Ginnie Mae Government National Mortgage Association
HUD Department of Housing and Urban Development
MBS mortgage-backed securities
MMI Fund Mutual Mortgage Insurance Fund
mREIT mortgage real estate investment trust
PSPA preferred stock purchase agreement
RHS Rural Housing Service
USDA Department of Agriculture
VA Department of Veterans Affairs
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Page iii GAO-22-104284 Housing Finance System
Letter
441 G St. N.W.
Washington, DC 20548
January 13, 2022
Congressional Addressees
In September 2019, the Department of the Treasury and Department of
Housing and Urban Development (HUD) issued and began implementing
housing finance reform plans pursuant to a presidential memorandum
that sought to address continuing challenges in the housing finance
system. 1 Then, within months, unemployment and business closures due
to the Coronavirus Disease 2019 (COVID-19) pandemic disrupted rental
and mortgage payments, straining a housing finance system largely
supported by the federal government and already on our high-risk list. 2
Housing agencies continued to implement many of the plans’
recommendations, while Congress and agencies took actions to address
the pandemic’s effects.
Other factors also have affected reform efforts. When the current
administration took office in early 2021, it did not adopt the prior
administration’s reform plans. While the current administration has noted
it has a key role and interest in housing finance reform, it has not issued
plans of its own. No consensus has emerged in Congress about the
future federal role in housing finance, including a plan for ending the
federal conservatorships of Fannie Mae and Freddie Mac, the
1Department of the Treasury, Housing Finance Reform Plan, Pursuant to the Presidential
Memorandum Issued March 27, 2019 (Washington, D.C.: September 2019); and
Department of Housing and Urban Development, Housing Finance Reform Plan, Pursuant
to the Presidential Memorandum Issued March 27, 2019 (Washington, D.C.: September
2019). The plans included a mix of administrative and legislative recommendations and
involved multiple federal entities.
2Since 2013, we have designated resolving the federal role in housing finance as a high-
risk area, for reasons including the government’s large fiscal exposure. For our most
recent report, see GAO, High Risk Series: Dedicated Leadership Needed to Address
Limited Progress in Most High Risk Areas, GAO-21-119SP (Washington, D.C.: Mar. 2,
2021).
Page 1 GAO-22-104284 Housing Finance System
government-sponsored enterprises (enterprises) that play a key role in
the housing finance system. 3
The CARES Act included a provision for GAO to report on efforts to
prepare for, respond to, and recover from the COVID-19 pandemic. 4
Additionally, the Department of Defense and Full-Year Continuing
Appropriations Act of 2011 includes a provision for GAO to annually
review financial services regulations. 5 This report examines (1)
vulnerabilities in the housing finance system highlighted by the pandemic
and factors that helped mitigate them, and (2) the nature and status of
recommendations in the 2019 reform plans and the extent to which they
align with system vulnerabilities and GAO’s 2014 framework for
assessing potential changes to the housing finance system. 6 Both
objectives contain analysis pertaining to the regulation of key housing
finance system participants, including the enterprises, and the potential
implications of such regulation on system stability and credit availability.
To address these objectives, we reviewed relevant legislation (including
the CARES Act), regulations, agency documents, and websites related to
system reforms and pandemic responses. We also reviewed our prior
work on housing finance—including our 2014 housing finance
3The enterprises are congressionally chartered, for-profit, shareholder-owned corporations
that purchase mortgages meeting certain criteria. They package the mortgages into
securities sold to investors and, in exchange for a fee, guarantee the timely payment of
interest and principal on the securities they issue. The enterprises have been in federal
conservatorships since 2008.
4Pub. L. No. 116-136, div. B, § 19010, 134 Stat. 281, 579-81 (2020). We regularly issue
government-wide reports on the federal response to COVID-19. For the latest report, see
GAO, COVID-19: Additional Actions Needed to Improve Accountability and Program
Effectiveness of Federal Response, GAO-22-105051 (Washington, D.C.: Oct. 27, 2021).
Our next government-wide report will be issued in January 2022 and will be available on
GAO’s website at https://www.gao.gov/coronavirus.
5Pub. L. No. 112-10, § 1573(a), 125 Stat. 38, 138-39 (codified at 12 U.S.C. § 5496b). We
are to analyze (1) the impact of regulation on the financial marketplace, including the
effects on the safety and soundness of regulated entities, cost and availability of credit,
savings realized by consumers, reductions in consumer paperwork burden, changes in
personal and small business bankruptcy filings, and costs of compliance with rules,
including whether relevant federal agencies are applying sound cost-benefit analysis in
promulgating rules; (2) efforts to avoid duplicative or conflicting rulemakings, information
requests, and examinations; and (3) other matters related to the operations of financial
services regulations deemed appropriate by the Comptroller General.
6GAO, Housing Finance System: A Framework for Assessing Potential Changes,
GAO-15-131 (Washington, D.C.: Oct. 7, 2014).
Page 2 GAO-22-104284 Housing Finance System
framework—and relevant concepts from our 2021 framework for
evaluating activities designed to assess and mitigate risks to financial
system stability. 7 We performed a literature search for studies on potential
vulnerabilities in the housing finance system.
We also analyzed recent federal and industry market data, including data
on servicing of single-family mortgages, holdings of and yields for
mortgage-backed securities (MBS), and enterprise capital levels. We
assessed the reliability of these data by reviewing documentation on data
collection and calculation and interviewing company or agency
representatives familiar with the data. We concluded the data were
sufficiently reliable for describing the market shares of different industry
participants for mortgage servicing and MBS holdings and trends in MBS
market volatility and enterprise capital reserves.
To determine the extent to which the 2019 reform plans align with system
vulnerabilities and our housing finance reform framework, we reviewed
and analyzed the recommendations in Treasury’s and HUD’s plans
against the identified vulnerabilities and the elements of our framework.
We reviewed the implementation status of the plans’ administrative
recommendations as of January 20, 2021 (the latest point at which
Treasury and HUD systematically tracked plan implementation) and the
enactment status of legislative recommendations. Since the January 2021
change in administration, agencies have taken actions relevant to some
of the recommendations, but not as part of a broader effort to implement
the 2019 plans. Where applicable, we incorporated information on agency
actions taken since January 2021. We interviewed officials from Treasury
(including the Financial Stability Oversight Council), HUD, the Federal
Housing Finance Agency (FHFA), Board of Governors of the Federal
Reserve System (Federal Reserve), Consumer Financial Protection
Bureau (CFPB), Department of Veterans Affairs (VA), Department of
Agriculture (USDA), Fannie Mae and Freddie Mac, and other mortgage
industry stakeholders. See appendix I for additional information on our
methodology.
7GAO, Macroprudential Oversight: Principles for Evaluating Policies to Assess and
Mitigate Risks to Financial System Stability, GAO-21-230SP (Washington, D.C.: Jan. 28,
2021). We created the macroprudential principles to serve as criteria for assessing
financial stability efforts. While designed with the broader financial system in mind, the
principles provide useful criteria for assessing housing finance reform efforts because of
the housing finance system’s large scale and importance to the economy and financial
markets.
Page 3 GAO-22-104284 Housing Finance System
We conducted this performance audit from April 2020 to January 2022, in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Background
Key Components of and The housing finance system includes a primary market, in which lenders
Federal Role in the make loans to borrowers, and a secondary market in which loans are
packaged into securities and sold to investors (see fig. 1). The federal
Housing Finance System
government participates in the primary and secondary mortgage markets
as both an actor and a regulator.
Page 4 GAO-22-104284 Housing Finance System
Figure 1: Overview of Primary and Secondary Mortgage Markets
Page 5 GAO-22-104284 Housing Finance System
Participants in the primary market include borrowers, bank or nonbank
lenders, servicers, and private and federal mortgage insurers. 8 Lenders
originate mortgage loans to borrowers to purchase single-family or
multifamily housing. Lenders hold the mortgages in their portfolios or sell
them in the secondary market (discussed later) to transfer risk such as
interest rate risk (see text box) or increase liquidity.
Mortgage Lending Risks
Credit risk - The risk that the borrower will default on the mortgage loan by failing to
make timely payments.
Prepayment risk - The risk that borrowers will pay off the principal of the loan before
the mortgage term ends, reducing or eliminating future interest payments.
Interest rate risk - The risk that an increase in interest rates will reduce the value of a
loan for the lender. For example, a lender might fund lending through short-term
deposits. If interest rates rise and the lender had made a long-term mortgage at a lower
rate, the earning potential of capital used for the mortgage decreases.
Liquidity risk - The risk that an institution will be unable to meet its financial obligations
as they come due without incurring unacceptable losses.
Source: GAO. | GAO-22-104284
Mortgage servicers are responsible for sending monthly account
statements to borrowers, answering customer service inquiries, collecting
monthly mortgage payments, and assisting with mitigation efforts if the
borrower defaults. 9 Servicers can be the same institution that originated
the loan or may change over the life of a mortgage. Mortgage owners and
servicers may sell servicing rights to third-party servicers that service the
loan for a fee. Servicers also interact with the mortgage owners or
investors in MBS by forwarding principal and interest payments. Servicers
8In this report, we use “banks” to refer to bank holding companies, financial holding
companies, savings and loan holding companies, insured depository institutions, and
credit unions, including their subsidiaries or affiliates. We define nonbanks as lenders or
servicers that are not banks.
9Defaults are generally due to borrowers becoming delinquent on mortgage payments.
When a borrower defaults or is at imminent risk of default, the servicer generally must
evaluate the borrower for certain mortgage relief options known as loss mitigation prior to
initiating foreclosure.
Page 6 GAO-22-104284 Housing Finance System
generally continue to forward payments to MBS investors when a
borrower defaults. 10
HUD’s Federal Housing Administration (FHA), VA, and USDA’s Rural
Housing Service (RHS) have mortgage guarantee and insurance
programs that assume some of the risks of certain mortgages (including
credit risk) from lenders. FHA operates the largest of these low- or no-
downpayment programs, and almost all its single-family mortgages are
supported by the Mutual Mortgage Insurance Fund (MMI Fund), which is
statutorily required to maintain at least a 2 percent capital ratio (defined
as the fund’s economic value divided by the insurance-in-force). 11 In
contrast, conventional mortgages are not insured or guaranteed by the
federal government.
Participants in the secondary market include the enterprises, federal
entities, private securities issuers, and investors. Private institutions,
primarily investment banks, may issue MBS (known as private-label
securities) backed by mortgages that are not federally insured or
guaranteed and do not conform to the enterprises’ requirements.
Secondary market institutions can hold the mortgages in their portfolios or
pool them into MBS that are sold to investors.
Agency MBS are issued by one of the enterprises or backed by federally
insured or guaranteed mortgages and issued by financial institutions
approved by the Government National Mortgage Association (Ginnie
Mae).
• Fannie Mae and Freddie Mac are congressionally chartered, for-profit,
shareholder-owned corporations that have two key housing missions:
to provide stability in the secondary market for residential mortgages
(including in periods of economic stress) and serve the mortgage
credit needs of targeted groups, such as low-income borrowers. The
enterprises generally purchase mortgages that meet certain criteria
and hold the loans in their portfolios or pool them as collateral for
MBS sold to investors. In exchange for a fee, the enterprises
guarantee the timely payment of interest and principal on MBS they
issue.
10The MBS issuer may remove a defaulted loan from the security under specified
circumstances, which terminates the advances of principal and interest to investors.
1112 U.S.C. § 1711(f)(4). The insurance-in-force is the remaining principal balance on all
insured loans in the MMI Fund.
Page 7 GAO-22-104284 Housing Finance System
• Ginnie Mae is a federally owned corporation in HUD that guarantees
the timely payment of principal and interest to investors in securities
issued through its MBS program. Unlike the enterprises, Ginnie Mae
does not purchase mortgages, but like the enterprises guarantees the
timely payment of interest and principal of MBS. Ginnie Mae MBS
consist entirely of federally insured or guaranteed mortgages, such as
FHA and VA mortgages.
The Federal Reserve also plays a role in the housing finance system. For
example, the Federal Reserve conducts monetary policy, which
influences interest rates, including rates on home mortgages. Additionally,
in financial crises, the Federal Reserve can implement strategies to help
stabilize financial markets, such as by purchasing agency MBS.
Federal Regulation of the The federal government regulates the housing finance system through
Housing Finance System FHFA, which oversees the enterprises and the Federal Home Loan
Banks (FHLBank), which provide liquidity for their member institutions to
support housing finance and community lending; CFPB; and the federal
banking regulators. 12 The Housing and Economic Recovery Act of 2008
established FHFA as an independent regulatory agency for the
enterprises and authorized the Director of FHFA to appoint FHFA as a
conservator for the enterprises. 13 FHFA put the enterprises into
conservatorship in September 2008 due to concern that their deteriorating
financial condition threatened economic stability.
Using authority provided in the Housing and Economic Recovery Act,
Treasury committed to providing up to $445.5 billion in capital support to
the enterprises while they are in conservatorship through senior preferred
stock purchase agreements (PSPA). 14 If Fannie Mae or Freddie Mac has
a net worth deficit at the end of a financial quarter, Treasury will provide
12The FHLBank System consists of 11 regionally based, federally chartered banks that
are cooperatively owned by member institutions (such as community banks and credit
unions) and of the Office of Finance. Federal banking regulators include the Federal
Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of
the Currency.
13Pub. L. No. 110-289, div. A, tit. I, § 1101, 122 Stat. 2654, 2661 (2008); Pub. L. No. 110-
289, div. A, tit. I, § 1145, 122 Stat. at 2734.
14Pub. L. No. 110-289, div. A, tit. I, §1117, 122 Stat. at 2683. As of the end of the second
quarter of 2021, the enterprises combined had received $191.4 billion in capital support
from Treasury, leaving $254.1 billion in remaining Treasury commitments. Modifications to
the PSPAs have allowed the enterprises to build capital by retaining earnings up to
specified thresholds.
Page 8 GAO-22-104284 Housing Finance System
funds to eliminate the deficit. In return for the support, Treasury received
from each enterprise nonvoting senior preferred shares, rights to
purchase 79.9 percent of the enterprise’s common stock, and a right to a
periodic fee to be determined at a later date. 15
Since the 2007–2011 housing crisis, Congress has taken steps to
improve regulation and consumer protection related to the housing
finance system. For example, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) created CFPB and required
housing and regulatory agencies to issue “qualified mortgage” and
“qualified residential mortgage” regulations designed to prevent a
recurrence of risky practices that contributed to the crisis. 16
However, the future federal role in the housing finance system remains
unresolved. In prior work, we recommended that Congress consider
establishing objectives for the federal role, including the structure of the
enterprises, and a transition plan that enables the enterprises to exit
federal conservatorship. 17 As of September 2021, Congress had not
enacted legislation addressing these issues.
HUD and Treasury 2019 In September 2019, Treasury and HUD issued housing finance reform
Housing Reform Plans plans pursuant to a presidential memorandum that set out the prior
administration’s goals in changing the housing finance system. 18 As
previously noted, the current administration has not adopted these plans.
The plans recommended actions by Congress (legislative
recommendations) and by other entities, such as FHFA and CFPB
(administrative recommendations). While Treasury and HUD consulted
some agencies in developing the plans, the plans did not necessarily
reflect other agencies’ priorities and preferences. The plans contained
15Letters of January 14, 2021, from the Department of the Treasury agreed to and
accepted by the Federal Housing Finance Agency (in its capacity of conservator for the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation).
16Pub. L. No. 111-203, tit. X, § 1011, 124 Stat. 1376, 1964 (2010); Pub. L. No. 111-203,
tit. IX, § 941, 124 Stat. at 1890 (2010).
17GAO, Federal Housing Finance Agency: Objectives Needed for the Future of Fannie
Mae and Freddie Mac After Conservatorships, GAO-17-92 (Washington, D.C.: Nov. 17,
2016); and Housing Finance: Prolonged Conservatorships of Fannie Mae and Freddie
Mac Prompt Need for Reform, GAO-19-239 (Washington, D.C.: Jan. 18, 2019).
18Department of the Treasury, Housing Finance Reform Plan; and Department of Housing
and Urban Development, Housing Finance Reform Plan.
Page 9 GAO-22-104284 Housing Finance System
116 recommendations (35 legislative recommendations and 81
administrative recommendations) for a wide range of entities (see fig. 2).
Figure 2: Type and Number of Recommendations in 2019 HUD and Treasury Housing Reform Plans
Some recommendations were to more than one entity.
a
b
Other entities include Fannie Mae and Freddie Mac, the Department of Justice, Securities and
Exchange Commission, federal financial regulators, and a White House Council on eliminating
regulatory barriers to affordable housing.
Housing Finance System The pandemic’s disruption of the housing finance system differed in key
Experienced Different respects from the 2007–2011 housing crisis that has served as a
reference point for previous housing finance reform efforts. For example,
Stresses in Pandemic
the 2007–2011 crisis featured a steep, multiyear decline in home prices
Than in 2007 Crisis following what has been characterized as a speculative housing bubble.
This resulted in many mortgage balances exceeding the underlying home
values, which heightened the risk of default and foreclosure. In contrast,
home prices have not deteriorated during the pandemic, and have
increased in many areas.
Page 10 GAO-22-104284 Housing Finance System
Also, in the previous crisis, many mortgages had lower credit quality
because they were underwritten with less than full documentation of
borrower incomes, among other reasons. For example, mortgages
entering the pandemic generally were underwritten to higher standards,
partly because of reforms implemented after the previous crisis.
Additionally, the pandemic featured a sharper spike in the national
unemployment rate than the previous crisis—rising from 3.5 percent in
February 2020 to almost 15 percent in April 2020—which abruptly put
millions of mortgage borrowers at risk of default from loss of income.
GAO Framework for In a 2014 report, we issued a framework comprising nine elements to
Assessing Potential help policymakers assess or develop proposals to change the housing
finance system (see table 1). 19 These elements help ensure a
Changes to the Housing
comprehensive plan, and help assess tradeoffs between reform goals.
Finance System
Table 1: Elements of GAO’s Framework for Assessing Potential Changes to the Housing Finance System
Element Description
Clearly defined and prioritized housing Broad goals for the housing finance system should be clearly articulated and relevant so
finance system goals that government and market participants can effectively conduct activities to implement
their missions. Additionally, market and government performance can be assessed
against those broad goals. These goals should recognize broader housing policy
objectives, as well. Where trade-offs among the broad goals exist, the goals should be
prioritized.
Policies and mechanisms that are aligned Housing finance policies and mechanisms should be aligned with the broader goals of
with goals and other economic policies housing finance. Changes in housing finance should consider the full range of options
(alignment of policies with goals) for government actions—such as direct participation in markets through government
guarantees, oversight and regulation, data collection and dissemination, and tax or other
federal incentives to promote greater private market participation—and show how
policies and mechanisms interact to achieve the goals on a comprehensive basis, while
minimizing fragmentation, overlap, and duplication. Additionally, these policies and
mechanisms should help to align incentives, provide more information and transparency,
and restrain excessive risk-taking.
Adherence to an appropriate financial In 2009, GAO proposed a framework for a financial regulatory system that included
regulatory framework (appropriate some of the elements listed in this table as well as ensuring that regulation was
financial regulatory framework) appropriately comprehensive, consistent, flexible, adaptable, and had a systemwide
focus (GAO-09-216). A regulatory system should also ensure that regulators have
independence from inappropriate influence; have sufficient resources, influence, and
authority to carry out and enforce statutory missions; and are clearly accountable for
meeting regulatory goals.
19GAO-15-131.
Page 11 GAO-22-104284 Housing Finance System
Element Description
Government entities that have capacity to Government entities will need adequate skills and resources to understand, price, and
manage risks (capacity to manage risks) manage risks. These entities would also need the capacity to ensure that their
counterparties in the private sector have the capacity to manage the risks inherent in
their activities.
Mortgage borrowers are protected and Borrowers need consistent, useful information, as well as legal protections, including
barriers to mortgage market access are disclosures, sales practice standards, and suitability requirements, throughout the
addressed (borrower protections and mortgage life cycle. Any barriers facing creditworthy borrowers in accessing mortgage
market access) markets should be addressed. Key issues will be to encourage innovation to reduce
barriers while ensuring that products are easily understood, such as through
standardization and developing better tools to assess creditworthiness.
Protection for mortgage securities investors Investors in the secondary market require adequate, reliable information to assess
(investor protections) secondary-market risks. This would include providing clear information on securitizer
and trustee responsibilities as they relate to investors. As with borrower protection,
some standardization may be useful; however, care must be taken to ensure that certain
protections do not discourage beneficial innovation.
Consideration of cyclical nature of housing Housing finance has been characterized by cycles that have alternated between loose
finance and impact of housing finance on credit standards and those that are tight. Because housing is a significant part of the
financial stability (consideration of economy, these cycles may pose risks to financial and economic stability. Government
cyclical nature of housing finance) should determine whether actions related to housing finance are procyclical or
countercyclical and consider making actions less procyclical. Government may also
want to consider the appropriateness of countercyclical measures. Actions also should
address the threat housing finance poses for financial stability when there are incentives
for excessive risk taking.
Recognition and control of fiscal exposure Choices about policies and mechanisms will result in different levels of fiscal exposure.
and mitigation of moral hazard (control of Wherever possible, exposures should be made explicit and costs recognized. Actions
fiscal exposure) should be taken to minimize unexpected costs and to mitigate any moral hazard created
by government policies and support.
Emphasis on implications of the transition Because changing the housing finance system may lead to substantial changes in the
(implications of transition) marketplace, issues related to transitioning from the current system to a new one should
be emphasized in any proposal for change. Any action that would severely limit market
liquidity during the transition should be of particular concern.
Source: GAO-15-131. | GAO-22-104284
Page 12 GAO-22-104284 Housing Finance System
Through literature reviews and interviews with housing finance
Federal Actions and stakeholders, and consistent with risk-assessment principles, we
Market Conditions identified three vulnerabilities to the housing finance system the pandemic
has highlighted: 20
Mitigated Risks
Highlighted by the • federal fiscal exposure, 21
Pandemic, but • nonbank liquidity risks, and
Vulnerabilities • MBS market instability. 22
Remain Although a combination of federal actions and a strong housing market
have mitigated these potential challenges to date, they continue to
expose the housing finance system to a range of risks and could
reemerge.
Borrower Protections and The pandemic has led to missed mortgage payments that have strained
House Price Growth the housing finance system and heightened fiscal risks to the federal
government. Because the federal government supports about two-thirds
Mitigated Credit Losses
of the $12 trillion single-family mortgage market, exposure to potential
during Pandemic, but mortgage credit losses during an economic crisis is substantial.
Federal Fiscal Exposure
Remains Substantial
Mitigating Factors However, to date, a combination of federal borrower protections, a fee on
some enterprise refinances, and house price appreciation have mitigated
credit losses.
Federal borrower protections. Congress, federal agencies, and the
enterprises have taken steps to protect the housing and financial stability
of mortgage borrowers during the COVID-19 pandemic through expanded
20Our prior work on macroprudential oversight (GAO-21-230SP) states that identifying and
analyzing potential sources of systemic risk is one of several key principles related to the
foundation of financial stability policy. While designed with the broader financial system in
mind, the principles are relevant to housing finance reform efforts because of the housing
finance system’s large scale and importance to the economy and financial markets.
21Fiscal exposures are responsibilities, programs, and activities that may legally commit
the federal government to future spending or create expectations for future spending
based on current policy, past practices, or other factors.
22The pandemic also highlighted other challenges in the housing market. For example, if
landlords of small rental properties were pressured to sell their properties because of the
disruption in rental payments, it could reduce the supply of already scarce affordable
rental housing. For more information on this issue, see app. II.
Page 13 GAO-22-104284 Housing Finance System
mortgage forbearance options and a foreclosure moratorium. Section
4022 of the CARES Act required mortgage servicers to provide borrowers
with federally backed mortgages on single-family homes who experienced
a financial hardship due to the COVID-19 emergency the option to
suspend or reduce their mortgage payments without charging additional
penalties, fees, or interest. 23 Servicers were required to provide borrowers
who requested forbearance with an initial 180-day forbearance period and
the option to extend it by 180 days.
The agencies and enterprises subsequently extended deadlines and
provided borrowers with additional time to use CARES Act forbearance.
Borrowers with loans backed by FHA, RHS, and VA can request an initial
forbearance through the end of the COVID-19 National Emergency.
Borrowers with enterprise-backed loans will continue to have access to
12-month forbearance options that were in place prior to the CARES Act,
according to FHFA officials.
Some borrowers nearing the end of forbearance can request an
extension beyond the 12 months provided in the CARES Act. Specifically,
borrowers with enterprise-backed loans that were in forbearance as of
February 28, 2021, and borrowers with FHA-, RHS-, or VA-backed loans
who requested an initial forbearance on or before June 30, 2020, may be
23Pub. L. No. 116-136, div. A. tit. IV, § 4022(b),(c), 134 Stat. 281, 490-91 (2020).
Page 14 GAO-22-104284 Housing Finance System
eligible for an additional 6 months of forbearance (up to 18 months in
total). 24
Section 4022 of the CARES Act also temporarily prohibited most
foreclosures of federally backed properties. Specifically, the act prohibited
servicers from initiating foreclosure processes, moving for a foreclosure
judgment or order of sale, or executing a foreclosure-related eviction or
foreclosure sale for not less than 60 days, beginning on March 18, 2020.
Thereafter, the agencies and enterprises initiated separate foreclosure
moratoriums, which they coordinated to extend through September 30,
2021. In June 2021, FHFA announced that servicers of enterprise-backed
mortgages would be prohibited from making most first filings for
foreclosure before new CFPB rules establishing safeguards for borrowers
affected by COVID-19 took effect on August 31, 2021.
Additionally, Section 3206 of the American Rescue Plan Act of 2021
appropriated nearly $10 billion for a Homeowner Assistance Fund. 25 The
act directed Treasury to allocate funds to eligible entities to prevent
homeowner mortgage delinquencies, defaults, foreclosures, loss of
utilities, and displacements of homeowners experiencing financial
hardship. Eligible costs include mortgage payments and other
homeowner expenses, such as utilities or insurance. The funds are
24FHA provided up to 18 months of forbearance for borrowers who requested their initial
forbearance between March 1, 2020, and June 30, 2020; up to 15 months for borrowers
who requested their initial forbearance between July 1, 2020, and September 30, 2020; up
to 12 months for borrowers who requested it between October 1, 2020, and June 30,
2021; up to 12 months for borrowers who requested it between July 1, 2021, and
September 30, 2021; and up to 12 months (if the initial forbearance 6-month period is
exhausted and expires during the COVID-19 National Emergency) for borrowers who
requested their initial forbearance between October 1, 2021, and the end of the COVID-19
National Emergency. VA provided up to 18 months of forbearance for borrowers who
requested their initial forbearance by June 30, 2020. Additionally, it announced that
forbearances were to be extended to borrowers who made their first request during the
COVID-19 Emergency. VA said it expected all COVID-related forbearances to end not
later than September 30, 2022. Under its guaranteed loan program, USDA provided up to
18 months of forbearance for borrowers who requested their initial forbearance between
March 1, 2020, and June 30, 2020; up to 15 months for borrowers who requested it
between July 1, 2020, and September 30, 2020; and up to 12 months for borrowers who
requested forbearance between October 1, 2020, and the end of the COVID-19 National
Emergency. Under its direct loan program, USDA provided up to 18 months of
forbearance for borrowers who requested their initial forbearance during the COVID-19
emergency.
25Pub. L. No. 117-2, § 3206, 135 Stat. 4, 63 (2021).
Page 15 GAO-22-104284 Housing Finance System
targeted to certain income groups and to socially disadvantaged
individuals.
These borrower protections likely prevented some near-term credit losses
for federal housing agencies and the enterprises because they decreased
or delayed mortgage defaults and foreclosures. For example, we
previously found that only about 15 percent of the foreclosures that would
have been expected based on recent historical trends have been
processed each month since the start of the moratorium, on average,
through February 2021. 26
Adverse market refinance fee. Over the long term, both Fannie Mae
and Freddie Mac anticipate increased credit losses because of the
economic disruption caused by the pandemic and the cost of borrower
protections they put in place. Specifically, FHFA estimated that
implementing the forbearance program and foreclosure moratorium could
cost the enterprises $6 billion or more depending on the path of the
economic recovery from the pandemic. To offset these anticipated credit
losses, both enterprises implemented a 0.5 percent one-time fee on
certain mortgage refinances. This fee went into effect in December 2020
and was eliminated on August 1, 2021. FHFA and enterprise COVID-19
policies reduced the effect of the pandemic and were effective enough to
warrant an early termination of the fee, according to FHFA.
House price appreciation. House price appreciation has likely helped
FHA and the enterprises avoid credit losses by increasing borrower equity
and reducing the likelihood of default or foreclosure. According to FHFA’s
House Price Index, house prices in the United States rose by 17.4
percent on average from the second quarter of 2020 to the second
quarter of 2021. 27 As of September 30, 2021, FHA’s MMI Fund had a
capital ratio of 8.03 percent, an increase from 6.10 percent in fiscal year
2020, and well above the 2 percent statutory minimum. FHA credits the
growth in the capital ratio during the pandemic primarily to house price
appreciation, which helps mitigate expected foreclosures and associated
credit losses. Similarly, Fannie Mae and Freddie Mac reported that house
26This figure is based on our analysis of data from Black Knight, a mortgage data provider.
See GAO, COVID-19 Housing Protections: Mortgage Forbearance and Other Federal
Efforts Have Reduced Mortgage Default and Foreclosure Risks, GAO-21-554
(Washington, D.C.: July 12, 2021).
27The FHFA House Price Index measures average price changes in sales or refinancings
on the same properties.
Page 16 GAO-22-104284 Housing Finance System
price appreciation partially offset credit losses anticipated as a result of
the pandemic.
Rising house prices help borrowers more quickly build equity in their
homes (the difference between any outstanding loans on the property and
its current market value). Home equity can help borrowers more easily
refinance or modify their loan to lower the monthly payment or sell their
property for a profit. Borrowers with no or negative equity in their
property—meaning they owe more than the value of their property—
generally are at a heightened risk of default and foreclosure because they
may not be able to refinance their mortgage or afford to sell their home in
the event they fall behind on mortgage payments. As we reported in July
2021, appreciation in home prices may help limit foreclosures after
pandemic-related forbearance protections expire. 28
Continuing Federal Fiscal But, federal fiscal exposure to the mortgage market—which contributed to
Exposure our placing the housing finance system on our high-risk list—remains
substantial, due partly to the ongoing enterprise conservatorships. The
federal government supports $8 trillion, or 67 percent, of the $12 trillion
single-family mortgage market through Ginnie Mae and enterprise
securitizations (see fig. 3). 29
28GAO-21-554.
29Nearly all FHA and VA single-family loans are securitized into Ginnie Mae pools.
Page 17 GAO-22-104284 Housing Finance System
Figure 3: Share of Single-Family Mortgage Servicing Outstanding by Market
Segment, as of June 30, 2021
Note: Percentages do not add exactly to the total federal share due to rounding.
a
We defined banks as bank holding companies, financial holding companies, savings and loan
holding companies, insured depository institutions, and credit unions, including any subsidiaries or
affiliates.
b
”Other” includes whole loans held by real estate investment trusts, life insurance companies, and
individual investors.
While FHA and the enterprises have not required taxpayer or Treasury
assistance during the pandemic, risks remain that could affect their ability
to absorb unexpected losses in the event of a severe and extended
economic downturn.
Page 18 GAO-22-104284 Housing Finance System
Reviews of FHA’s Insurance Fund FHA. According to agency estimates, the capital ratio for FHA’s MMI
The Federal Housing Administration’s (FHA) Fund would remain positive under a severely adverse economic scenario,
Mutual Mortgage Insurance Fund (MMI Fund) but would fall below its 2 percent requirement. Specifically, in its fiscal
is subject to an independent actuarial review
and a budgetary review each year. Both
year 2021 annual report to Congress on the results of the actuarial review
reviews involve long-term financial projections of the fund (see sidebar), FHA estimated that if the fund faced the same
that assume no new mortgages enter the macroeconomic conditions it faced in 2007 (when average house prices
fund.
FHA uses actuarial reviews to assess whether
began a steep multiyear decline, among other economic stresses), the
the fund’s capital ratio meets the statutory 2 fund would have a capital ratio of 1.54 percent. 30
percent requirement and how the fund would
perform under alternative economic
scenarios, including adverse conditions. The A negative capital ratio would indicate the fund had limited capacity to
reviews do not directly determine if the fund absorb unexpected losses and was at risk of requiring supplemental
needs additional budget authority; they
evaluate the fund’s ability to absorb
unexpected losses.
FHA’s budgetary reviews assess whether the
MMI Fund needs more budget authority to
cover expected future costs. The Federal
Credit Reform Act of 1990 (FCRA) provides
permanent and indefinite budget authority for
federal credit programs that need
supplemental funds for these costs. The fund
has drawn on this authority once (fiscal year
2013) since the implementation of FCRA.
Drawing on this authority means that the fund
is not self-sufficient under FCRA
requirements. But it does not indicate the fund
is unable to pay insurance claims in the near
term without supplemental funding. The fund
holds balances to cover anticipated net future
costs on insurance claims expected in the
near term and over the long term for the
existing insurance portfolio.
Source: GAO. | GAO-22-104284
30According to FHFA’s House Price Index, average house prices declined by 21 percent
from the second quarter of 2007 through the second quarter of 2011 at the national level.
We previously recommended that Congress consider specifying the economic conditions
the MMI Fund would be expected to withstand without substantial risk of drawing on
permanent and indefinite budget authority, and require FHA to specify and comply with a
capital ratio consistent with these conditions. As of August 2021, Congress had not acted
on this recommendation. See GAO, Federal Housing Administration: Capital
Requirements and Stress Testing Practices Need Strengthening, GAO-18-92
(Washington, D.C.: Nov. 9, 2017).
Page 19 GAO-22-104284 Housing Finance System
funds. 31 For example, in the wake of the 2007–2011 housing crisis, the
fund’s capital ratio fell below zero, and the fund required about $1.7 billion
in supplemental funds at the end of fiscal year 2013. 32
Although the financial condition of the MMI Fund has strengthened
considerably in recent years, FHA has noted that estimates of the capital
ratio can change materially and quickly. For example, the capital ratio is
sensitive to changes in house price appreciation. In 2 years (2007–2009),
the capital ratio fell from 6.97 percent to 0.53 percent, due partly to a
sharp decline in home prices. Additionally, due to the COVID-19
pandemic, the fund included $110 billion in seriously delinquent loans as
of the end of fiscal year 2021, $14 billion higher than the prepandemic
peak in fiscal year 2012. According to FHA, the size of the seriously
delinquent portfolio increases the sensitivity of the fund to
macroeconomic conditions that could diverge from projections used to
estimate the fund’s financial health.
31As discussed in GAO-18-92, the actuarial and budgetary assessments of the MMI Fund
are complementary but serve different functions. Under the Federal Credit Reform Act of
1990 (FCRA), federal credit agencies must estimate the net lifetime costs—or subsidy
costs—of their direct loan or loan guarantee programs in annual budgets. Generally,
agencies also must produce annual updates of these estimates—known as reestimates—
for each loan cohort on the basis of actual performance information and estimated
changes in future performance. Agencies do not need to request additional appropriations
to cover upward reestimates (increases in estimated lifetime costs) because FCRA
provides permanent and indefinite budget authority for this purpose. Permanent and
indefinite budget authority is available for obligation and expenditure without fiscal year
limitation and is not limited to a specified amount or ceiling.
32FHA’s MMI Fund required supplemental funds because the budgetary review
determined the fund’s capital reserve account—a budgetary account that holds funds to
cover unexpected losses—did not have a sufficient balance to cover upward reestimates.
Any upward reestimates for the MMI Fund are first covered by balances in the capital
reserve account, and FHA draws on permanent and indefinite budget authority only if that
account is depleted. The mortgage guarantee programs administered by VA and RHS are
not required to have, and do not have, capital reserves. Therefore, all upward reestimates
are covered by permanent and indefinite budget authority.
Page 20 GAO-22-104284 Housing Finance System
Enterprises. The results of stress tests conducted by Fannie Mae and
Evolution of Enterprise Capital Framework
Freddie Mac in 2021 do not suggest that either enterprise would need to
Capital requirements established in the 1990s
and early 2000s were insufficient for Fannie draw on remaining Treasury commitments under the severely adverse
Mae and Freddie Mac (enterprises) to economic scenario examined. The stress tests projected that both
withstand the 2007 crisis in financial and
mortgage markets. In July 2008, Congress enterprises would continue to report net income under a scenario in which
created a new enterprise regulator, the average house prices declined by 23.5 percent and the unemployment
Federal Housing Finance Agency (FHFA),
with authority to establish regulatory capital
rate increased to nearly 11 percent (among other adverse economic
levels higher than the statutory minimum developments) during a 9-quarter stress period. However, under certain
requirements. FHFA placed the enterprises in tax assumptions, both enterprises were projected to report net losses
conservatorships and suspended their capital
requirements. under the severely adverse scenario. If the future earnings in a stress
In July 2018, FHFA proposed a regulatory scenario are poor enough, the enterprises must record a write down of
capital framework designed to allow the their deferred tax assets, increasing the earnings loss in that stress
enterprises to continue operating after a
stress event comparable to the 2007 crisis. It scenario.
included a risk-based capital requirement and
options for a minimum leverage (fixed-ratio)
requirement to backstop the former.
Additionally, both enterprises are substantially undercapitalized compared
In June 2020, FHFA altered and reproposed
to an FHFA capital framework intended to ensure the safety and
the 2018 rulemaking to emphasize ending the soundness of the enterprises through the economic cycle. 33 In December
conservatorships and ensuring enterprise 2020, FHFA finalized a rule establishing a new regulatory capital
safety and soundness and market-stabilizing
capacity through the economic cycle. In part, framework for the enterprises that FHFA views as a critical step toward
the final rule issued in December 2020 ending the enterprise conservatorships (see sidebar). 34
increased the quantity and quality of required
capital and sought to address aspects of the
2018 proposal that could exacerbate market According to the enterprises, had the capital rule been in effect on March
swings.
31, 2021, the enterprises would have needed to hold $320 billion in
In September 2021, FHFA proposed
amendments to the 2020 rule to address combined capital to satisfy the rule. 35 This 2020 rule is a revision of a
concerns it discouraged use of programs that 2018 proposed rule, under which FHFA estimated that the enterprises
transfer credit risk from the enterprises to
private investors and included a leverage
capital requirement that could encourage
greater enterprise risk-taking. In part, the
proposal would provide greater capital relief
for credit risk transfers and modify the
leverage requirement to make the risk-based
capital requirement binding more often.
Source: GAO analysis of FHFA regulations. |
GAO-22-104284
33In general, capital exists to absorb unexpected losses and allow a financial institution to
continue operations during economic downturns.
3485 Fed. Reg. 82150 (Dec. 17, 2020).
35According to the final capital rule, the compliance date for many of the rule’s
requirements is tied to the termination of the conservatorship of the enterprises.
Page 21 GAO-22-104284 Housing Finance System
would have needed to maintain $180.9 billion in combined capital. 36 For
much of their time in conservatorship, the enterprises were limited in their
ability to build capital due to the terms of the PSPAs, and they sent most
of their profits to Treasury in the form of dividends. 37
Although the enterprises’ combined capital amounts have been
increasing, as of June 30, 2021, the enterprises held nearly $60 billion in
combined capital, well below the amount contemplated in the 2020 rule or
the 2018 proposed rule (see fig. 4). 38
36According to FHFA, the capital amount contemplated by the 2018 rule was insufficient
for the enterprises to remain viable going concerns during a severe economic downturn.
The 2020 rule sought to enhance the 2018 rule by increasing the quantity and quality of
the rule’s capital requirement and mitigating its procyclicality (tendency to exacerbate
swings in the housing market). To achieve these goals, the 2020 rule modified the method
for calculating certain types of capital requirements and introduced a stress capital buffer
that would mitigate procyclicality by encouraging each enterprise to retain capital during
periods of economic expansion, among other things.
37As discussed later in this report, amendments to the PSPAs ultimately increased the
amount of capital the enterprises could accumulate. As of June 2021, the enterprises
received $191.5 billion in capital support from Treasury and paid $301 billion in dividends
to Treasury.
38The January 2021 amendments to the PSPAs provide, as compensation to Treasury,
that the liquidation preference for each enterprise will increase by the amount of retained
capital until the enterprise has achieved its regulatory minimum capital. The liquidation
preference, in relation to the senior preferred stock the enterprises issued to Treasury,
refers to the amount that must be paid to Treasury before investors in more junior classes
of preferred or common stock can receive any payment on their stock in the event of
liquidation.
Page 22 GAO-22-104284 Housing Finance System
Figure 4: Combined Capital of Fannie Mae and Freddie Mac Compared to Estimated
Amount Required under 2018 Proposed Capital Rule and 2020 Final Capital Rule
Note: The most recent information the enterprises reported on the amount of capital they would be
expected to hold under the 2020 capital rule is as of March 31, 2021.
In September 2021, FHFA issued a proposed rule to amend the
December 2020 capital rule. 39 These amendments would generally
decrease the amount of capital each enterprise would be expected to
hold under the December 2020 rule.
Market Interventions and During the outset of the pandemic, nonbank servicers—nondepository
Mortgage Refinancing financial institutions that perform such activities as collecting borrowers’
monthly payments and modifying loan terms—faced stress conditions and
Eased Nonbank Funding
Challenges, but Liquidity
Concerns Remain
3986 Fed. Reg. 53230 (Sept. 27, 2021).
Page 23 GAO-22-104284 Housing Finance System
members of Congress, industry groups, and researchers warned that
nonbanks may encounter liquidity challenges and possibly fail. 40
Nonbank Issues Include Nonbanks may face liquidity challenges under stress conditions because
Liquidity Challenges, they have fewer resources on which to draw and depend on short-term
Adequacy of Regulation, and funding that may become unreliable during economic downturns. For
Share of MBS Servicing instance, nonbanks do not have access to the liquidity facilities that the
Federal Reserve System or FHLBank System makes available to banks.
Instead, nonbanks rely on short-term credit facilities, such as lines of
credit and advances with borrowing limits. In some cases, nonbank
servicers depend on a single investor or a few creditors and are therefore
particularly vulnerable to a withdrawal of funds. During difficult economic
conditions, these creditors may tighten loan terms or may face strong
incentives to cancel loans and seize collateral as permitted.
Although CFPB assesses nonbanks for compliance with federal
consumer financial laws, nonbanks generally are not subject to
consistently comprehensive federal safety and soundness standards. In
contrast, all banks that offer federal deposit insurance have a federal
banking (prudential) regulator, whose responsibilities include ensuring the
safety and soundness of the banks they oversee, protecting federal
deposit insurance funds, promoting stability in financial markets, and
enforcing compliance with applicable consumer protection laws.
Nonbank entities chartered or licensed in their states to offer mortgage-
related products and services are supervised by state regulators.
Nonbanks also are subject to monitoring by market participants, such as
the enterprises, Ginnie Mae, and FHA. For example, in 2015, FHFA
directed the enterprises to issue updated minimum financial eligibility
requirements (including net worth, capital ratio, and liquidity criteria) for all
their servicers.
Nonbanks are significant to the agency MBS market because they service
an increasing share of these mortgages. That share (in terms of dollar
volume) increased from 28 percent in the first quarter of 2015 to more
than 50 percent in the second quarter of 2021 (see fig. 5). Specifically, in
the second quarter of 2021, nonbanks serviced 74 percent of mortgages
40Funding liquidity risk is the risk that a firm will not be able to meet its current and future
cash flow and collateral needs, both expected and unexpected, without materially affecting
its daily operations or overall financial condition.
Page 24 GAO-22-104284 Housing Finance System
in Ginnie Mae MBS, and 54 and 51 percent of mortgages in Fannie Mae
and Freddie Mac MBS, respectively.
Figure 5: Share of Agency Mortgages Serviced by Nonbanks, 2015–2021 by Quarter (Q)
Note: In this report, we use “banks” to refer to bank holding companies, financial holding companies,
savings and loan holding companies, insured depository institutions, and credit unions, including their
subsidiaries or affiliates. We define nonbanks as lenders or servicers that are not banks.
At the outset of the pandemic, mortgage industry stakeholders questioned
whether nonbanks would have sufficient liquidity to manage servicing
advances, a decline in the value of mortgage servicing rights, 41 or hedge-
related margin calls. 42 If these conditions had led to nonbank failures,
41Servicing is inherent in all mortgage loans, but the right to service a mortgage becomes
a distinct asset—a mortgage servicing right—when contractually separated from the loan
at the time the loan is sold or securitized.
42Investors use hedging—taking the opposite position in a related asset—to reduce the
risk of adverse price movements (losses in value). When purchasing on margin, investors
borrow money to purchase assets. Investors must keep a minimum equity in their margin
accounts and are subject to margin calls if their equity decreases to a specified level. In
response to a margin call, an investor must either deposit more funds or liquidate
positions.
Page 25 GAO-22-104284 Housing Finance System
mortgage credit to underserved borrowers could have been constrained
and consumer protection risks related to mortgage servicing could have
increased (as discussed below). Despite concerns about nonbank
liquidity, officials from Treasury told us that they were not aware of any
nonbank failures, as of September 2021.
Servicing advances. As mortgage servicers, nonbanks are responsible
for passing principal and interest payments from borrowers to MBS
investors. Generally, servicers must continue advancing these payments
to investors even if borrowers do not make them. 43 Servicers also may
have to satisfy property tax and insurance obligations for the delinquent
borrower. As mentioned previously, agencies and Congress established
forbearance options that allow borrowers with certain mortgages to
temporarily suspend or reduce their payments without penalty. Therefore,
researchers and government officials feared that if enough borrowers
entered forbearance, cash flows for nonbank servicers could be
disrupted.
Mortgage servicing rights. Mortgage servicing rights are a large asset
held by nonbanks. At the outset of the pandemic, the value of the
servicing rights declined due to falling interest rates and rising
prepayment and delinquency risks. According to one estimate, the value
of the rights fell approximately 50–60 percent during March and April
2020. 44 Nonbanks often pledge mortgage servicing rights as collateral to
obtain short-term loans from lenders. As the value of the rights declined,
lenders began to demand increased collateral from nonbanks. These
margin calls from lenders threatened servicer liquidity.
Hedge-related margin calls. Nonbanks also faced margin calls on their
hedge positions. Many mortgage lenders hedge the risk that newly
originated mortgages could fall in value before their sale on the
secondary market by taking short positions (mitigating risk from
downward price movement) in the agency MBS market. In March 2020,
43Enterprise servicers must advance payments for a limited time, while Ginnie Mae
issuers must advance payments until final credit resolution (for example, until the loan
performs again or is foreclosed).
44Karan Kaul and Laurie Goodman, Should Nonbank Mortgage Companies Be Permitted
to Become Federal Home Loan Bank Members? (Washington, D.C.: Urban Institute, June
2020);
https://www.urban.org/research/publication/should-nonbank-mortgage-companies-be-per
mitted-become-federal-home-loan-bank-members.
Page 26 GAO-22-104284 Housing Finance System
the agency MBS market became illiquid. 45 To restore smooth market
functioning, the Federal Reserve purchased agency MBS and MBS
valuations rose. As a result of this increase, nonbanks lost money on their
short hedge positions, which caused them to experience additional
margin calls.
Potential effects of failures. Nonbanks are major originators and
servicers of mortgages insured by FHA, which plays a particularly large
role among minority, lower-income, and first-time home buyers. According
to Ginnie Mae—which guarantees the performance of securities backed
by FHA-insured mortgages—nonbanks accounted for over 90 percent of
FHA mortgage origination activity as of July 2021. Therefore, failure of
nonbanks could limit mortgage credit available to these underserved
groups.
Additionally, failure of nonbanks could increase consumer protection risks
because the transfer of loan servicing responsibilities from a failed
institution to a new servicer could lead to a disruption in servicing for
borrowers. Such a disruption could be problematic for delinquent
borrowers whose loans generally require more resources to service than
performing loans. CFPB told us that servicing transfers have been one of
the bureau’s areas of interest. The bureau issued guidance in April 2020
that officials said would facilitate the servicing transfer process should
nonbanks or other servicers fail in the future. 46
Nonbank Liquidity Stresses According to researchers and government officials, nonbanks weathered
Were Mitigated, but Concerns these liquidity challenges due partly to earnings on a large volume of
Remain mortgage refinancings and government interventions.
A large volume of mortgage refinancing (spurred by low interest rates)
has helped ease nonbank liquidity concerns. Many nonbank mortgage
servicers are also mortgage originators and when a borrower refinances,
it provides the nonbank with funds it can use to offset principal and
interest advances to investors. According to HUD officials, the volume of
45In an illiquid market, securities cannot be converted into cash easily or without incurring
a substantial reduction in the price of the security.
46Bureau of Consumer Financial Protection, Compliance Bulletin and Policy Guidance:
Handling of Information and Documents During Mortgage Servicing Transfers, Bulletin
2020-02 (Washington, D.C.: Apr. 24, 2020).
Page 27 GAO-22-104284 Housing Finance System
this refinance market has allowed most servicers to cover missed
borrower payments during the pandemic.
FHFA and Ginnie Mae actions also have helped ease liquidity stress on
nonbanks. Specifically, FHFA limited to four the number of months that a
servicer must continue advancing payments to investors. According to
FHFA officials, this decision was designed to mitigate the financial impact
of advancing principal and interest payments that borrowers did not
make.
Likewise, Ginnie Mae revised and expanded its Pass-Through Assistance
Program, which allows servicers to request funds on a monthly basis to
help meet principal and interest payment obligations to investors on
delinquent loans. Although participation in the program has been low (at
the end of July 2021, one issuer had an outstanding balance), Ginnie
Mae officials said the program has been beneficial because it has instilled
confidence in the market. Additionally, Ginnie Mae said it has used a
nonbank stress-testing framework it developed in 2019 to evaluate
potential threats to issuers stemming from the COVID-19 pandemic. 47
According to Mortgage Bankers Association representatives and
research, and other market assessments, nonbanks generally remained
profitable during the pandemic. However, a series of concerns about
nonbanks has underscored their significant role and potential risks.
Specifically, in October and November 2020, agency officials told us that
nonbanks again could face liquidity stresses if refinancing volume slowed.
Agency officials and researchers also noted that nonbanks potentially
faced further liquidity challenges if mortgage forbearance or delinquency
rates rose. As a result, the Financial Stability Oversight Council in its
2020 annual report encouraged regulators to take additional steps to
ensure the largest and most complex nonbank mortgage companies were
prepared if refinancings slowed or forbearance rates increased. 48 In
December 2021, Federal Reserve officials said declining forbearance
rates had helped mitigate concerns about that scenario. But they also
noted that a drop in home prices could present a new concern for
nonbanks by impeding mortgage refinancing and increasing costs from
servicing of defaulted loans.
47Stress tests are projections of financial condition under adverse scenarios.
48Financial Stability Oversight Council, 2020 Annual Report (Washington, D.C.: 2020).
Page 28 GAO-22-104284 Housing Finance System
Efforts to strengthen oversight of nonbanks are ongoing. In July 2021, the
Conference of State Bank Supervisors, a nationwide organization of state
financial regulators that helps coordinate state financial regulation,
published final model prudential standards for nonbank mortgage
servicers. These standards cover several areas of a nonbank’s business,
including capital and liquidity. The Conference of State Bank Supervisors
developed the standards to generally align with FHFA’s capital and
liquidity requirements for servicers. These standards are intended as a
model for voluntary adoption by each state as deemed appropriate and
necessary and do not impose any immediate requirement on nonbank
mortgage servicers. The Housing Policy Council, a trade association
whose members include mortgage originators and servicers, said
standards for nonbanks should be consistent with federal requirements
and be uniformly applied and enforced by the states.
Additionally in July 2021, Ginnie Mae requested input from stakeholders
about changes it anticipates making to the capital and liquidity
requirements for single-family MBS issuers. According to Ginnie Mae,
these changes are informed by its analysis of stress testing results and
observations of systemic stress from the pandemic. These changes are
intended to introduce risk-based capital requirements for issuers and to
align Ginnie Mae’s capital and liquidity requirements to the greatest
degree possible with those of other government entities.
To strengthen regulatory oversight of nonbanks, we previously
recommended that Congress consider granting FHFA explicit authority to
examine third parties, such as nonbank servicers, that do business with
the enterprises. 49 Without such statutory authority, FHFA lacks a
supervisory tool to effectively monitor third-parties’ operations and the
enterprises’ actions to manage any associated risks. As of June 2021,
Congress had not enacted legislation that would provide FHFA this
authority.
49GAO, Nonbank Mortgage Servicers: Existing Regulatory Oversight Could Be
Strengthened, GAO-16-278 (Washington, D.C.: Apr. 14, 2016).
Page 29 GAO-22-104284 Housing Finance System
Federal MBS Purchases In March 2020, the MBS market experienced a period of price declines
Calmed the Market, but and illiquidity that was later improved by the Federal Reserve’s purchase
of MBS. During this time, the uncertainty of the COVID-19 economic
Amount of Purchase
shock prompted a demand for cash and near-cash investments among
Raises Concerns about investors. In response, investors began selling assets, including agency
Market Resiliency MBS. The value of MBS fell and spreads against U.S. Treasury securities
widened (see fig. 6). 50
Figure 6: Spread between Agency Mortgage-Backed Securities (MBS) and U.S. Treasury Securities, 2020
Notes: The graph shows yield spread between the Fannie Mae 30-year current-coupon bond and the
5/10-year U.S. Treasury bond blend. Spreads are the difference in yields between a security (such as
MBS) and a safer asset (such as a Treasury security) with similar timing of interest and principal
payments. Higher spreads reflect investor perceptions of higher perceived risk for MBS. A basis point
is 1/100th of a percentage point.
In March 2020, some market participants responsible for facilitating the
sale and purchase of MBS reached capacity and were unable to
intermediate further sales. Together, the pressure to sell and the
overwhelmed market intermediaries created illiquidity in the agency MBS
market. Officials from the Federal Reserve told us that other markets,
50Spreads are the difference in yields between a security (such as MBS) and a safer asset
(such as a Treasury security) with similar timing of interest and principal payments. Higher
spreads reflect investor perceptions of higher perceived risk for MBS.
Page 30 GAO-22-104284 Housing Finance System
including the U.S. Treasury securities market, also experienced illiquidity
due to asset sales pressures and overwhelmed market intermediaries.
The experience of mortgage real estate investment trusts (mREIT)
illustrates the pressures that contributed to MBS market instability early in
the pandemic. Among agency MBS investors, mREITs decreased their
holdings of these securities the most during this period. 51 These
leveraged investment entities rely on short-term funding to purchase long-
term mortgage-related assets (such as agency MBS) and obtain short-
term funding by pledging MBS as collateral. 52 Because of this business
model, funding for mREITs is at risk of disruption should the value of MBS
decline.
The decline in MBS prices that occurred in March 2020 prompted
demands from mREITs’ lenders for more collateral because the collateral
mREITs had pledged was no longer sufficient for their loans. In response
to margin calls from their lenders, mREITs began selling MBS, which
created additional downward pressure on the price of MBS and prompted
more margin calls. Asset sales by mREITs potentially contributed to
overwhelming the capacity of market intermediaries. Representatives
from the National Association of Real Estate Investment Trusts, an
industry association representing mREITs and other real estate
investment trusts, told us that, although their members faced margin calls
during this period, none failed.
On March 15, 2020, the Federal Reserve announced it would purchase at
least $200 billion of agency MBS to support the smooth functioning of this
market. However, the MBS-Treasury spread continued to widen. On
March 23, the Federal Reserve pledged to expand its purchase of agency
MBS to amounts necessary to restore market functioning. According to a
Federal Reserve Bank of New York executive vice president, credit
51According to the Financial Accounts of the United States published by the Federal
Reserve, mREIT holdings of securities backed by agencies and government-sponsored
enterprises decreased by $124 billion from the fourth quarter of 2019 to the first quarter of
2020. This category of securities includes debt securities issued by budget agencies
(those that are part of the federal budget under special financing authorities), government-
sponsored enterprises, and agency- and enterprise-backed mortgage pools. According to
Federal Reserve officials, almost all mREIT holdings in this category are agency MBS.
52To qualify as a REIT, a company must have 75 percent of its assets and gross income
connected to real estate investment and must distribute at least 90 percent of its taxable
income to shareholders annually in the form of dividends.
Page 31 GAO-22-104284 Housing Finance System
markets would have seized up had market dysfunction continued. 53
Continued market dysfunction also could have limited mortgage
availability. The Federal Reserve’s purchase of agency MBS partially
relieved the strain on intermediaries’ capacity, gradually improved liquidity
conditions, and helped stabilize MBS prices.
In June 2020, the Federal Reserve began increasing its holdings of
agency MBS by $40 billion per month, and continued at that pace until
November 2021. In November 2021, the Federal Reserve announced that
it would begin reducing the amount of agency MBS it purchased per
month.
The nature of the Federal Reserve’s actions underscores the stability
challenges faced by the MBS market. Industry stakeholders have noted
that the Federal Reserve’s purchases of MBS during this period differed
from its previous MBS purchases in that they were both larger and
executed more quickly. Additionally, the same Federal Reserve Bank of
New York executive vice president noted that the purpose of the recent
MBS purchases differed from purchases following the financial crisis of
2007–2009. That official said whereas the past MBS purchases primarily
were meant to put downward pressure on longer-term interest rates, the
recent purchases were intended to restore market functioning. One
researcher noted that the large size of the Federal Reserve intervention
needed to restore market functioning raises concerns about the resiliency
of the market intermediaries that facilitate the purchase and sale of
MBS. 54
Researchers have identified practices or suggested additional methods
for improving MBS market liquidity under stress conditions. One group of
researchers theorized that the normal channels of intermediation failed
during the outset of the pandemic because the liquidity the market
intermediaries provided was insufficient to meet the large volume of
53Lorie K. Logan, The Federal Reserve’s Market Functioning Purchases: From Supporting
to Sustaining (July 15, 2020);
https://www.newyorkfed.org/newsevents/speeches/2020/log200715. The Federal Reserve
Bank of New York is authorized to buy and sell agency MBS to execute directives from the
Federal Reserve System’s Federal Open Market Committee.
54Borys Grochulski, “Federal Reserve MBS Purchases in Response to the COVID-19
Pandemic,” Economic Brief, no. 20-08 (July 2020);
https://www.richmondfed.org/publications/research/economic_brief/2020/eb_20-08.
Page 32 GAO-22-104284 Housing Finance System
investors’ MBS sales. 55 They noted that during March 2020, the Federal
Reserve changed how it purchased MBS, allowing intermediaries to
quickly reduce their inventories, which lessened short-term selling
pressure. 56
Another group of researchers noted that intermediaries’ ability to provide
market liquidity relies on having stable access to funding through the
repurchase (or repo) market—a short-term market that provides financing
for securitization activities and financial institutions. 57 To provide stable
access, the researchers proposed creating a standing (as opposed to an
emergency) repurchase facility at the Federal Reserve that would offer
intermediaries financing in exchange for collateral such as agency MBS
through repurchase agreements. However, according to Federal Reserve
officials, the availability of reliable funding may not be sufficient in some
cases. For example, losses could force some investors to liquidate
securities if they are leveraged and have diminished capital. Lastly, one
researcher suggested setting maximum leverage and minimum liquidity
standards for mREITs as a way to prevent these entities from becoming a
potential source of weakness during future economic downturns. 58
55Jiakai Chen, et al., “Did Dealers Fail to Make Markets during the Pandemic?,” Federal
Reserve Bank of New York Liberty Street Economics (Mar. 24, 2021);
https://libertystreeteconomics.newyorkfed.org/2021/03/did-dealers-fail-to-make-markets-d
uring-the-pandemic.html.
56Most MBS are sold in the forward market, which is known as the to-be-announced
market. These trades normally settle once per month according to a schedule set by the
Securities Industry and Financial Markets Association. During March 2020, the Federal
Reserve contracted with market intermediaries to settle many MBS transactions within 2–
3 trading days.
57Nellie Liang and Pat Parkinson, “Enhancing Liquidity of the U.S. Treasury Market Under
Stress,” Hutchins Center Working Paper, no. 72 (December 2020);
https://www.brookings.edu/research/enhancing-liquidity-of-the-u-s-treasury-market-under-
stress/. A repurchase agreement is the transfer of cash for a specified amount of time,
typically overnight, in exchange for collateral. When the term of the agreement is over, the
transaction unwinds, and the collateral and cash are returned to their original owners, with
a premium paid on the cash.
58Don Layton, America’s Housing Finance System in the Pandemic, Part 2: Extraordinary
Support and Necessary Consequences (Apr. 3, 2020);
https://www.jchs.harvard.edu/blog/americas-housing-finance-system-in-the-pandemic-part
-2-extraordinary-support-and-necessary-consequences.
Page 33 GAO-22-104284 Housing Finance System
Our analysis of Treasury and HUD’s 2019 housing finance reform plans—
2019 Plan the most recent set of plans to date—found they contained
Recommendations recommendations that aligned with system vulnerabilities and our 2014
housing finance reform framework, and that progress on the
That Align with recommendations varied. The current administration has stated its
System Vulnerabilities interest in helping shape future reforms, but has not issued its own plans
or performed an analysis similar to ours. Considering the
and GAO’s recommendations in the 2019 plans and addressing all GAO framework
Framework Could elements could help ensure that future plans address key risks and are
comprehensive.
Inform Future
Planning
2019 Plans Include As noted earlier, the 2019 housing finance reform plans contained 116
Recommendations recommendations, some of which were legislative recommendations for
Congress and others administrative recommendations to federal
Related to Vulnerabilities
agencies. Although these plans were developed before the pandemic,
Highlighted by the some of their recommendations relate to vulnerabilities the pandemic
Pandemic highlighted (as discussed earlier in this report) and that future reform
efforts may seek to address. Because there may be other ways to
address these vulnerabilities, our analysis is intended only to identify
relevant recommendations, not to endorse their inclusion in future reform
plans.
Federal fiscal exposure. We identified 49 plan recommendations related
to federal fiscal exposure, which is also an element of our 2014 reform
framework. Specifically, fiscal exposure was the primary framework
element for 34 of these recommendations and the secondary element for
the remaining 15. 59 As previously discussed, federal fiscal exposure is
substantial due to the large portion of the mortgage market that is
federally backed. Examples of recommendations that address fiscal
exposure include the following:
• Several recommendations in Treasury’s plan related to increasing the
enterprises’ capital and liquidity requirements to help them exit federal
conservatorship and decrease the likelihood they would require
59The appendixes of 2019 plans assign a specific number to each recommendation.
Figures 11 (Treasury plan) and 12 (HUD plan) in app. III of this report refer to the
numbering for the 49 recommendations (categorized under the “control of fiscal exposure”
framework element). Appendix III also includes web links to the 2019 plans.
Page 34 GAO-22-104284 Housing Finance System
taxpayer assistance in the future. Agencies acted on a number of
these recommendations. For example, in September 2019 Treasury
and FHFA amended the PSPAs to allow the enterprises to retain
earnings and build capital of up to $45 billion combined. 60 Building
capital reduces federal fiscal exposure by increasing the enterprises’
ability to absorb unexpected losses during an economic downturn. In
January 2021, Treasury and FHFA amended the PSPAs again to
allow the enterprises to build capital to the level prescribed by FHFA’s
2020 capital framework (discussed earlier). In September 2021, FHFA
proposed additional amendments to the capital framework that,
among other things, would alter the leverage requirement and change
the capital treatment of credit risk transfer transactions. 61 These
amendments would result in a decrease to the enterprises’ capital
requirements below the amounts prescribed in the 2020 capital
framework. According to FHFA, these amendments are intended to
facilitate an environment in which leverage is not the binding capital
constraint for the enterprises and the enterprises have incentives to
distribute acquired credit risk to private investors.
• A number of recommendations in HUD’s plan concerned the
management of FHA’s mortgage insurance programs. In July 2020,
FHA implemented a recommendation in HUD’s plan to more
effectively and efficiently use alternatives to property conveyance—
the often-lengthy process by which a mortgage servicer transfers
ownership of a foreclosed property with an FHA-insured mortgage to
FHA. 62 Specifically, FHA announced enhancements to a program that
60Specifically, the 2019 agreements allowed capital retention up to $25 billion for Fannie
Mae and up to $20 billion for Freddie Mac.
61Generally, a leverage capital requirement is the minimum amount—usually expressed
as a percentage—of capital that must be held against total assets. In 2012, FHFA began
development of a credit risk transfer program intended to reduce the enterprises’ overall
risk and, therefore, the risk they pose to taxpayers while in conservatorship. The
enterprises implemented the programs in 2013 and have transferred a significant amount
of credit risk to private investors, mostly though debt and trust issuance structures.
Transferring credit risk reduces the amount of capital the enterprises are required to hold.
62Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation number 13.
Page 35 GAO-22-104284 Housing Finance System
allows servicers to sell foreclosed properties to third parties. 63 The
enhancements include steps to improve the accuracy of prices for
properties and updated guidance on costs for which servicers may be
reimbursed. According to HUD, avoiding conveyance reduces
administrative, holding, and servicing costs associated with property
disposition. Reducing these costs can positively affect the financial
condition of the MMI Fund and thus help control federal fiscal
exposure. In contrast, implementation of certain administrative and
legislative recommendations aimed at improving the financial viability
of FHA’s program for reverse mortgages (a type of loan against home
equity) was not completed. 64
• Treasury’s plan included recommendations that could limit the
federally supported share of the market and reduce fiscal exposure.
For example, Treasury’s plan recommended that FHFA assess credit
and other risks posed by the enterprises’ underwriting parameters,
including for acquisitions of single-family mortgages with higher-risk
characteristics, and use this assessment to guide the underwriting
restrictions it prescribed. 65
Consistent with this recommendation, in January 2021, Treasury and
FHFA amended the PSPAs to limit the enterprises’ acquisitions of
single-family mortgages with two or more higher-risk characteristics to
no more than 6 percent of purchase mortgages and no more than 3
percent of refinance mortgages in any 52-week period. 66 Market
analysts have noted that these acquisition restrictions may present
63Under the claims without conveyance of title program, the servicer attempts to secure a
third-party purchase of an eligible property for an adjusted fair market value that is less
than the amount of the servicer’s projected insurance claim to FHA. For more information,
see GAO, Federal Housing Administration: Improved Procedures and Assessment Could
Increase Efficiency of Foreclosed Property Conveyances, GAO-19-517 (Washington,
D.C.: June 20, 2019).
64Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation numbers 36, 37, and 39.
65Department of the Treasury, Housing Finance Reform Plan, recommendation number
33.
66The higher-risk characteristics include a loan-to-value ratio over 90 percent, a borrower
debt-to-income ratio over 45 percent, and a borrower credit score of less than 680. A
credit score is a numeric value (generally ranging from 300 to 850) that indicates a
borrower’s ability to repay future obligations. According to Treasury, the acquisition
percentages reflected current levels at the time of the amendments.
Page 36 GAO-22-104284 Housing Finance System
tradeoffs in relation to credit availability. 67 In September 2021, FHFA
and Treasury suspended the acquisition restrictions for at least 1
year. 68 During the suspension, FHFA said it would review the extent
to which these restrictions are redundant or inconsistent with
mandated sustainable lending standards and consult with Treasury on
any recommended revisions.
Nonbank liquidity risks. Treasury and HUD’s 2019 plans together
contained three recommendations relating to nonbank liquidity risks. First,
the Treasury plan recommended that Congress consider permitting
additional classes of mortgage lenders to become members of the
FHLBank System (for example, to give nonbanks access to liquidity
support). 69 Representatives from the Mortgage Bankers Association
stated that nonbanks align with the mission of the FHLBank System and
access to FHLBank advances could ease liquidity challenges among
nonbanks in the future. However, including nonbanks could pose risk-
management challenges to the system. As one analysis of this issue
noted, nonbanks are subject to less regulatory oversight and have weaker
capital positions than their bank counterparts. 70 As of September 2021,
Congress had not enacted legislation to implement this recommendation.
The HUD plan contained two additional recommendations indirectly
relating to nonbank liquidity risks. Both recommendations aimed to
address the shift in FHA’s lender base from banks to nonbanks by
encouraging bank participation in originating and servicing FHA-insured
mortgages. 71 According to HUD, banks have cited potential legal liability
relating to enforcement actions under the False Claims Act as a leading
67For example, see Urban Institute, The Preferred Stock Purchase Agreements Will
Hamper Access to Credit: A Further Modification Is in Order (Washington, D.C.: February
2021).
68The suspensions were agreed to on September 14, 2021, and will terminate on the later
of 1 year after this date or 6 months after Treasury notifies the enterprises.
69Department of the Treasury, Housing Finance Reform Plan, recommendation number
48.
70Brookings Institution, Task Force on Financial Stability (June 2021): 88. The Brookings
Institution and the University of Chicago’s Booth School of Business formed the task force
in October 2019.
71Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation numbers 24 and 25.
Page 37 GAO-22-104284 Housing Finance System
reason for their limited participation in FHA’s programs. 72 For instance,
some lenders expressed concern about minor loan errors leading to
exposure to severe financial penalties under the act.
In October 2019, HUD took action consistent with a recommendation in
its 2019 plan to clarify HUD and Department of Justice consultations on
use of the False Claims Act. Specifically, the agencies completed a
memorandum of understanding that prescribes standards for when HUD
may refer a matter to Justice to pursue a case under the False Claims
Act. In September 2020, HUD also implemented a recommendation to
revise its method for identifying loan-level underwriting defects; it aligned
the severity of the defects with proposed remedies. According to HUD’s
plan, these actions will provide lenders with transparency and a higher
level of certainty and promote a more diverse lender base in FHA’s
programs. But their ultimate impact is not yet known.
MBS market instability. Treasury’s plan included one recommendation
related to MBS market instability (such as occurred in March 2020).
Previously, some mREITs had access to the FHLBank System through
the captive insurance arms of their parent companies, but a 2016 FHFA
rule that sought to address circumvention of system membership
requirements removed that access. 73 Captive insurers are special-
purpose insurance companies set up by commercial businesses to self-
insure risks arising from the owners’ business activities. FHFA’s 2016 rule
terminated captive insurers’ FHLBank memberships. FHFA explained its
decision by stating that most new captive insurers that had been admitted
as members were owned by entities not eligible for membership.
Treasury’s plan recommended that FHFA revisit its 2016 rule in light of
the continued evolution of the housing finance system. 74 FHLBank
System membership through captive insurance companies could help
72The False Claims Act is one of the government’s primary antifraud tools. In
investigations that began in 2012, HUD, HUD’s Office of Inspector General, and the
Department of Justice uncovered evidence that certain lenders were originating mortgage
loans insured by FHA that the lenders knew were ineligible for insurance. The lenders
submitted false certifications to FHA that those loans were eligible, causing FHA to pay
hundreds of millions of dollars in ineligible insurance claims. The Department of Justice
used the False Claims Act in a series of settlements and actions against these lenders.
The act, as amended, is codified at 31 U.S.C. §§ 3729-33.
7381 Fed. Reg. 3246 (Jan. 20, 2016).
74Department of the Treasury, Housing Finance Reform Plan, recommendation number
49.
Page 38 GAO-22-104284 Housing Finance System
entities such as mREITs weather economic disruptions, but also could
increase risk to the system or encourage greater risk-taking. In February
2020, FHFA issued a request for input on FHLBank System membership,
but as of September 2021, had not taken further action on the
recommendation. In September 2021, FHFA officials told us that
expanding access to the FHLBank System presents challenges and
would not fully address housing finance system vulnerabilities such as
MBS market instability.
A 2015 Financial Stability Oversight Council report (issued prior to the
2016 FHFA rule) stated that membership in the FHLBank System—such
as through captive insurers—provided some mREITs a more diverse
capital base, reducing risks associated with a heavy reliance on short-
term borrowing in the repurchase market. 75 However, the report also
noted that captive insurance companies may be subject to less regulatory
oversight than other entities in the FHLBank System. Representatives
from the National Association of Real Estate Investment Trusts told us
they support expanding FHLBank membership because they view
mREITs as highly aligned with the mission of the FHLBank System, and
membership would allow mREITs to expand market share and access
additional capital. They added that mREITs can operate without the
financial support of the FHLBank System and they did not think
implementation of the Treasury recommendation was needed for market
stability reasons.
2019 Plans Include A large majority of the plans’ 116 recommendations related to three of the
Recommendations eight relevant elements of our framework: controlling fiscal exposure,
aligning policies with goals, and enhancing capacity to manage risks. 76
Related to Each Element
Some recommendations applied to two framework elements (see fig. 7).
of Our Framework, with Accounting for this overlap,
Emphasis on Controlling
Fiscal Exposure • 49 recommendations applied to controlling fiscal exposure, including
those to help ensure that the enterprises and FHA are sufficiently
capitalized;
75Financial Stability Oversight Council, 2015 Annual Report (Washington, D.C.: May 19,
2015).
76We did not use the framework element related to clearly defined and prioritized housing
finance system goals because it applies to a reform plan overall, not to specific reform
recommendations.
Page 39 GAO-22-104284 Housing Finance System
• 26 recommendations applied to aligning policies with goals, such as
those intended to focus FHA’s programs on its mission of serving
borrowers not served by traditional underwriting;
• 26 recommendations applied to enhancing capacity to manage risks,
including recommendations aimed at hiring and retaining FHA staff
with specialized skills and modernizing FHA’s and Ginnie Mae’s
information technology; and
• 14 or fewer recommendations applied to each of the remaining five
elements (appropriate financial regulatory framework, borrower
protections and market access, implications of transition,
consideration of the cyclical nature of housing finance, and investor
protections), including recommendations to clarify statutory and
regulatory requirements. 77
77See figures 11 and 12 in app. III for a more detailed analysis of the plans’
recommendations using the relevant eight elements of our framework. That analysis links
the eight elements with specific numbered recommendations from the plans. The
percentage of recommendations aligned with each framework element is not a
comprehensive measure of plan emphasis because it treats each recommendation
equally, when in fact some recommendations may be more consequential than others.
However, in this case, the percentages are broadly consistent with the plans’ overall
goals, which stress limiting the role of and risks to the federal government.
Page 40 GAO-22-104284 Housing Finance System
Figure 7: Distribution of 2019 Housing Reform Plan Recommendations across Elements of GAO’s Framework for Assessing
Potential Changes to the Housing Finance System
While consistent with the overall goals of the plans, the strong emphasis
on reducing fiscal exposure presents potential trade-offs in relation to
borrower access to mortgage credit. For example, actions that would
Page 41 GAO-22-104284 Housing Finance System
reduce risks to the federal government by raising the cost of federal
guarantees or tightening underwriting standards also might reduce the
number of borrowers who could afford or qualify for mortgages. Changes
in policy priorities could shift emphasis to other framework elements and
therefore present different trade-offs.
Progress on 2019 Plan Progress on the recommendations in the 2019 plans was limited to the
Implementation Varied by administrative recommendations and varied by framework element.
Future reforms may emphasize different framework elements. Therefore,
Framework Element
analysis of the status of the 2019 recommendations by framework
element may help agencies decide whether to sustain or modify (or
possibly reverse) actions on the administrative recommendations to meet
future reform goals.
Page 42 GAO-22-104284 Housing Finance System
Recent Changes in Ability to The 2019 plans contained legislative and administrative
Repay/Qualified Mortgage (ATR/QM) Rule recommendations, but only administrative recommendations have been
The ATR/QM Rule requires creditors to make implemented. As of September 2021, Congress had not enacted any of
a good faith determination of a borrower’s
ability to repay a residential mortgage loan
the 35 legislative recommendations, but, consistent with one
and provides certain protections from liability recommendation, funded a portion of a multiyear modernization of FHA’s
for mortgage loans meeting the definition of a single-family IT systems. 78 Additionally, by finalizing amendments to the
“qualified mortgage,” the categories of which
include a General QM category. qualified mortgage rule, CFPB took steps related to a legislative
Under a previous version of the rule, a recommendation regarding the Truth in Lending Act and compliance with
residential mortgage loan could be a General the required ability-to-repay determination (see sidebar). 79 Fourteen of the
QM only if it did not have certain features
(such as interest-only payments or points and 35 legislative recommendations call for, or assume, prior enactment of
fees above specified limits) and the major changes to the housing finance system—including an explicit, paid-
borrower’s monthly debt-to-income (DTI) ratio
did not exceed 43 percent. The creditor also for Ginnie Mae guarantee of qualifying conventional and multifamily MBS,
had to verify borrower debt and income using or repeal and replacement of the enterprises’ statutory charters and
prescribed standards.
authorization of competitors to the enterprises. The remaining 21
In December 2020, the Consumer Financial
Protection Bureau (CFPB) amended the recommendations encompass issues including FHLBank membership
General QM definition to replace the DTI ratio and reorganizing HUD. Among the legislative recommendations, seven of
limit with one based on the mortgage’s annual 18 in Treasury’s plan applied to controlling fiscal exposure, and nine of 17
percentage rate. CFPB also made
requirements for verifying borrower income in HUD’s plan applied to the capacity to manage risks.
and debts less prescriptive. Creditors must
comply with the new definition starting
October 1, 2022. As of January 20, 2021, housing and regulatory agencies had acted on
A second, temporary category of QMs was 57 of the 81 administrative recommendations. Specifically, agencies
residential mortgages eligible to be purchased completed implementation of 27 recommendations and took partial action
or guaranteed by Fannie Mae and Freddie
Mac (enterprises). To meet the definition for
on 30. There was no documented action for the remaining 24 (see fig. 8).
this category, a mortgage had to comply with
ATR/QM prohibitions on certain loan features
and points and fees limits, but did not have to
meet the 43 percent DTI limit.
Due to amendments to the enterprise
conservatorship agreements, this temporary
QM category effectively expired. Mortgage
loans with application dates of July 1, 2021, or
later must meet the revised General QM
category definition to be eligible for sale to the
enterprises.
Source: GAO analysis of CFPB regulations. |
GAO-22-104284
78The recommendation was for Congress to appropriate sufficient funds to complete the
IT modernization. As of September 2021, Congress had appropriated $60 million for this
effort. See Pub. L. No 116-6, 133 Stat. 13, 454 (2019); Pub. L. No. 116-94, 133 Stat.
2534, 2998 (2019); Pub. L. No. 116-260, 134 Stat. 1182, 1891 (2020). HUD has estimated
that the total cost of the modernization will be about $92 million. However, in a September
2021 report, we concluded HUD lacked reliable cost and schedule estimates. See
GAO-21-459.
79See Fed. Reg. 86308 (Dec. 29, 2020). CFPB extended the mandatory compliance date
with the rule from July 1, 2021, to October 1, 2022. 86 Fed. Reg. 22844 (Apr. 30, 2021).
Page 43 GAO-22-104284 Housing Finance System
Figure 8: Status of Administrative Recommendations in 2019 Housing Finance Reform Plans, by GAO Framework Element
(Agency Actions as of January 20, 2021)
Note: Several recommendations applied to two of GAO’s framework elements. In these cases, we
identified a primary and secondary element. We categorized recommendations in this graphic based
on the framework element we identified as primary, and indicated the recommendations that also
applied to a secondary element using superscript letters.
a
These recommendations also applied to the consideration of cyclical nature of housing finance
element of the framework.
b
These recommendations also applied to the appropriate financial regulatory framework element of
the framework.
c
These recommendations also applied to the control of fiscal exposure element of the framework.
d
This recommendation also applied to the implications of transition element of the framework.
e
These recommendations also applied to the alignment of policies with goals element of the
framework.
f
This recommendation also applied to the capacity to manage risks element of the framework.
Page 44 GAO-22-104284 Housing Finance System
Progress on recommendations related to each framework element varied
(some recommendations applied to more than one element, as noted in
the figure). 80 For example, agencies completed or took partial action on
19 of the 24 recommendations related to fiscal exposure. In contrast,
agencies completed or took partial action on nine of 18 recommendations
related to aligning policies with goals. Appendix III contains examples of
implemented and unimplemented administrative recommendations from
the 2019 plans as of January 20, 2021—including descriptions of related
agency actions—organized by framework element.
Since the January 2021 change in administration, agencies have taken
actions relevant to some recommendations, although not as part of a
broader effort to implement the 2019 plans. For example, Ginnie Mae
officials stated they continue to pursue administrative recommendations
from the 2019 plans as part of their operating plan. Agencies also have
taken steps to amend or suspend actions related to recommendations
from the 2019 plans. For example, as previously discussed, FHFA issued
a proposed rulemaking in September 2021 that would amend the 2020
capital framework, and Treasury and FHFA announced the suspension
and review of certain requirements in the January 2021 PSPAs. Where
applicable, we discuss actions agencies have taken since January 2021
in appendix III.
The pandemic and the transition to a new administration have increased
Conclusions uncertainty about the future of housing finance reform. Sustained focus
on reforming the housing finance system remains critical because of the
significant risks of the current system, including the substantial federal
fiscal exposure and other vulnerabilities highlighted by the pandemic.
While the current administration has not issued its own reform plans, it
has stated its interest in helping shape future reforms.
Our analysis, which incorporated principles for identifying and analyzing
risks and critical elements of housing finance reform, showed that the
2019 reform plans are relevant to future planning efforts.
• First, although the Treasury and HUD plans were issued shortly
before the pandemic, they contain implemented and unimplemented
recommendations relevant to vulnerabilities the pandemic highlighted.
While mitigated by federal actions and market conditions thus far, the
vulnerabilities remain relevant for risk assessments that may support
80See figure 13 in app. III for the status of specific numbered recommendations from the
plans.
Page 45 GAO-22-104284 Housing Finance System
future Treasury and HUD planning efforts. Accordingly, considering
the plan recommendations we identified could help identify options for
mitigating the vulnerabilities and aid assessment of steps already
taken.
• Second, our analysis of the nature and status of the plans identified
recommendations related to each element of our framework but in
different stages of implementation. While future housing reforms may
emphasize different policy goals, considering the prior plans in the
context of the framework could (1) help identify actions that would
cover all framework elements in future plans and (2) aid decisions
about implementing or altering prior recommendations to reflect
current policy priorities and the framework elements they emphasize.
As Treasury and HUD develop future reform plans, considering the
recommendations in the 2019 plans and addressing all GAO framework
elements could help ensure the plans address key risks, are
comprehensive, and account for prior actions.
We are making the following two recommendations, one each to Treasury
Recommendations for and HUD:
Executive Action
The Secretary of the Treasury, as part of developing future housing
finance reform plans, should consider recommendations from the 2019
plans that could help address system vulnerabilities and ensure future
plans address all GAO framework elements. (Recommendation 1)
The Secretary of HUD, as part of developing future housing finance
reform plans, should consider recommendations from the 2019 plans that
could help address system vulnerabilities and ensure future plans
address all GAO framework elements. (Recommendation 2)
We provided a draft of this report to Treasury, HUD, VA, CFPB, FHFA,
Agency Comments USDA, and the Federal Reserve for review and comment. Treasury and
and Our Evaluation HUD provided written comments, which are reprinted in appendixes IV
and V, respectively. Treasury, VA, CFPB, FHFA, and the Federal
Reserve provided technical comments, which we incorporated as
appropriate.
Treasury accepted our recommendation and said it will consider a range
of viewpoints and recommendations as it works with Congress and other
agencies on housing finance reform issues.
Page 46 GAO-22-104284 Housing Finance System
HUD accepted our recommendation. HUD said it will consider
recommendations and input from a range of sources—including the 2019
housing reform plans and GAO’s framework—in developing plans to
support HUD’s objective of a more accessible and inclusive housing
finance system. HUD said any future housing finance reform plans it
develops will be guided by the policies and priorities of the administration
and reflect the President’s Executive Order on Advancing Racial Equity
and Support for Underserved Communities Through the Federal
Government.
HUD also described several FHA and Ginnie Mae actions it said were
consistent with the 2019 plan’s recommendations. These included steps
to streamline FHA’s loss mitigation options, modernize FHA’s IT systems,
and revise Ginnie Mae’s financial eligibility standards for issuers. Our
draft report considered these actions and cited a number of them
specifically. As a result, we did not make changes to the analysis or
discussion of FHA and Ginnie Mae actions in the final report.
HUD also cited the results of FHA’s actuarial analysis of the MMI Fund for
fiscal year 2021. FHA released the results shortly after we sent our draft
report to HUD for comment. HUD noted that the MMI Fund's capital
increased by $21.5 billion in fiscal year 2021, resulting in a capital ratio of
8.03 percent, an increase of 1.93 percentage points from the prior fiscal
year. We updated our final report to reflect the recent actuarial analysis,
including the higher capital ratio and the results of fund stress tests.
We are sending copies of this report to the appropriate congressional
committees, and other interested parties. In addition, the report is
available at no charge on the GAO website at https://www.gao.gov.
Page 47 GAO-22-104284 Housing Finance System
If you or your staff have any questions about this report, please contact
me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made key contributions to this
report are listed in appendix VI.
Daniel Garcia-Diaz
Managing Director, Financial Markets and Community Investment
Page 48 GAO-22-104284 Housing Finance System
List of Addressees
The Honorable Charles E. Schumer
Majority Leader
The Honorable Mitch McConnell
Minority Leader
United States Senate
The Honorable Nancy Pelosi
Speaker
The Honorable Kevin McCarthy
Minority Leader
House of Representatives
The Honorable Debbie Stabenow
Chairwoman
The Honorable John Boozman
Ranking Member
Committee on Agriculture, Nutrition, and Forestry
United States Senate
The Honorable Patrick Leahy
Chairman
The Honorable Richard Shelby
Vice Chairman
Committee on Appropriations
United States Senate
The Honorable Sherrod Brown
Chairman
The Honorable Patrick J. Toomey
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
The Honorable Maria Cantwell
Chair
The Honorable Roger F. Wicker
Ranking Member
Committee on Commerce, Science, and Transportation
United States Senate
The Honorable Ron Wyden
Page 49 GAO-22-104284 Housing Finance System
Chairman
The Honorable Mike Crapo
Ranking Member
Committee on Finance
United States Senate
The Honorable Patty Murray
Chair
The Honorable Richard Burr
Ranking Member
Committee on Health, Education, Labor, and Pensions
United States Senate
The Honorable Gary C. Peters
Chairman
The Honorable Rob Portman
Ranking Member
Committee on Homeland Security and Governmental Affairs
United States Senate
The Honorable Chris Van Hollen
Chairman
The Honorable Cindy Hyde-Smith
Ranking Member
Committee on Appropriations
Subcommittee on Financial Services and General Government
United States Senate
The Honorable David Scott
Chairman
The Honorable Glenn ‘GT’ Thompson
Republican Leader
Committee on Agriculture
House of Representatives
The Honorable Rosa L. DeLauro
Chair
The Honorable Kay Granger
Ranking Member
Committee on Appropriations
House of Representatives
Page 50 GAO-22-104284 Housing Finance System
The Honorable Frank Pallone, Jr.
Chairman
The Honorable Cathy McMorris Rodgers
Republican Leader
Committee on Energy and Commerce
House of Representatives
The Honorable Maxine Waters
Chairwoman
The Honorable Patrick T. McHenry
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Bennie G. Thompson
Chairman
The Honorable John Katko
Ranking Member
Committee on Homeland Security
House of Representatives
The Honorable Carolyn B. Maloney
Chairwoman
The Honorable James Comer
Ranking Member
Committee on Oversight and Reform
House of Representatives
The Honorable Richard Neal
Chairman
The Honorable Kevin Brady
Republican Leader
Committee on Ways and Means
House of Representatives
The Honorable Mike Quigley
Chairman
The Honorable Steve Womack
Ranking Member
Committee on Appropriations
Subcommittee on Financial Services and General Government
House of Representatives
Page 51 GAO-22-104284 Housing Finance System
Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
Methodology
Methodology
The Department of the Treasury and Department of Housing and Urban
Development (HUD) each issued a housing finance reform plan in 2019.
This report examines (1) vulnerabilities in the housing finance system
highlighted by the pandemic and factors that helped mitigate them, and
(2) the nature and status of recommendations in the 2019 reform plans
and the extent to which they align with system vulnerabilities and GAO’s
2014 framework for assessing potential changes to the housing finance
system.
Methodologies Used for For both objectives, we reviewed relevant documentation (including
Both Objectives statures, regulations, agency documents, our previous work, and
academic and industry articles) and interviewed representatives from
federal entities and the housing finance industry. We reviewed relevant
laws—including the CARES Act; Consolidated Appropriations Act, 2021;
Housing and Economic Recovery Act of 2008; and the Dodd-Frank Wall
Street Reform and Consumer Protection Act—and regulations, including
the Federal Housing Finance Agency’s (FHFA) regulatory capital
framework for Fannie Mae and Freddie Mac (enterprises), and the
Consumer Financial Protection Bureau’s (CFPB) qualified mortgage
definition. 1
We reviewed the Treasury and HUD 2019 housing finance reform plans,
and other agency reports and documents, including Treasury and FHFA’s
2019 and 2021 letter agreements amending the enterprises’ preferred
stock purchase agreements, Financial Stability Oversight Council annual
reports, the Federal Housing Administration’s (FHA) annual reports to
1CARES Act, Pub. L. No. 116-136, 134 Stat. 281 (2020); Consolidated Appropriations Act,
2021, Pub. L. No. 116-260, 134 Stat. 1182 (2020); Housing and Economic Recovery Act
of 2008, Pub. L. No. 110-289, 122 Stat. 2654 (2008); Dodd–Frank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010); 85 Fed. Reg.
82150 (Dec. 17. 2020); 86 Fed. Reg. 53230 (Sept. 27, 2021); 85 Fed. Reg. 86308 (Dec.
29. 2020); and 86 Fed. Reg. 22844 (Apr. 30. 2021).
Page 52 GAO-22-104284 Housing Finance System
Appendix I: Objectives, Scope, and
Methodology
Congress, the Board of Governors of the Federal Reserve System’s
(Federal Reserve) financial stability reports, and HUD mortgagee letters. 2
We reviewed prior GAO work on housing finance reform, oversight of
nonbanks, high-risk areas, federal actions taken in response to the
pandemic, mortgage servicing, and macroprudential oversight. 3 We
reviewed relevant articles from academic researchers and industry
stakeholders. 4 We also reviewed agency documents and websites related
to system reforms and pandemic responses.
We interviewed housing finance system stakeholders, including officials
from Treasury (including the Financial Stability Oversight Council staff),
HUD, FHFA, the Federal Reserve, CFPB, the Department of Veterans
Affairs (VA), the Department of Agriculture, the enterprises, industry
groups, and industry experts. In interviews, we asked about federal
actions taken in response to the pandemic, vulnerabilities highlighted by
the coronavirus pandemic, the federal role in the housing finance system,
and the 2019 housing finance reform plans.
2Department of the Treasury, Housing Finance Reform Plan, Pursuant to the Presidential
Memorandum Issued March 27, 2019 (Washington, D.C.: September 2019); Department
of Housing and Urban Development, Housing Finance Reform Plan, Pursuant to the
Presidential Memorandum Issued March 27, 2019 (Washington, D.C.: September 2019);
Financial Stability and Oversight Council, 2020 Annual Report (Washington, D.C.: 2020);
Federal Housing Agency, Annual Report to Congress Regarding the Financial Status of
the FHA Mutual Mortgage Insurance Fund Fiscal Year 2020 (Washington, D.C.: 2020);
and Federal Reserve System Board of Governors, Financial Stability Report May 2020
(Washington, D.C.: 2020).
3Our reports include GAO, Housing Finance System: A Framework for Assessing
Potential Changes, GAO-15-131 (Washington, D.C: Oct. 7, 2014); Nonbank Mortgage
Servicers: Existing Regulatory Oversight Could Be Strengthened, GAO-16-278
(Washington, D.C.: Apr. 14, 2016); Mortgage Servicing: Community Lenders Remain
Active under New Rules, but CFPB Needs More Complete Plans for Reviewing Rules,
GAO-16-448 (Washington, D.C.: Jun. 23, 2016); Macroprudential Oversight: Principles for
Evaluating Policies to Assess and Mitigate Risks to Financial System Stability,
GAO-21-230SP (Washington, D.C.: Jan. 28, 2021); High Risk Series: Dedicated
Leadership Needed to Address Limited Progress in Most High Risk Areas,
GAO-21-119SP (Washington, D.C.: Mar. 2, 2021); and COVID-19 Housing Protections:
Moratoriums Have Helped Limit Evictions, but Further Outreach Is Needed, GAO-21-370
(Washington, D.C.: Mar. 15, 2021).
4These articles include W. Scott Frame, Brendan McCartney, and Eva Steiner, “COVID-19
Exposes Mortgage Market Vulnerabilities that Led to Volatility, Fed Intervention” (Feb. 2,
2021); Laurie Goodman, et al., “The Mortgage Market Has Caught the Virus” (May 2020);
and You Suk Kim, et al., “Liquidity Crises in the Mortgage Market,” Finance and
Economics Discussion Series, 2018-016 (Washington, D.C.: May 31, 2018).
Page 53 GAO-22-104284 Housing Finance System
Appendix I: Objectives, Scope, and
Methodology
Housing Finance System To address the first objective, we used relevant concepts from our 2021
Vulnerabilities Highlighted framework for evaluating activities designed to assess and mitigate risks
to financial system stability. 5 Specifically, identifying and analyzing
by the Pandemic
potential sources of systemic risk is one of the key principles the
framework identifies as related to the foundation of financial stability
policy. In this context, we reviewed relevant research and interviewed
housing finance system stakeholders on risks to and vulnerabilities in the
housing finance system.
We reviewed research from several sources, including academic, think
tank, news, and government publications. To identify relevant research
for review, we performed internet searches and two database searches
with the assistance of a research librarian. The first search focused on
academic and think tank research on housing finance system
vulnerabilities published since 2010. The second search examined a
wider variety of sources, including news articles on the pandemic and the
housing finance system published since 2020. In total, we reviewed 82
papers and articles to identify vulnerabilities to the housing finance
system highlighted by the pandemic. To help illustrate the nature and
scale of the vulnerabilities, we analyzed the data described in the next
section of this appendix.
We identified housing finance system stakeholders to interview through
our literature review and through recommendations from the individuals
and organizations with whom we spoke. Specifically, we spoke with
officials from the Joint Center for Housing Studies of Harvard University,
Falcon Capital Advisors, the Housing Policy Council, the Mortgage
Bankers Association, the National Association of Affordable Housing
Lenders, the National Association of Real Estate Investment Trusts, and
the Securities Industry and Financial Markets Association.
Data Analysis for Housing- For the first objective, we analyzed federal and industry market data as
Related Vulnerabilities follows:
• To determine the federal share of single-family mortgage servicing
outstanding as of the second quarter of 2021 and the share of agency
mortgages nonbanks serviced from 2015 through the second quarter
of 2021, we analyzed mortgage servicing data from Inside Mortgage
5GAO-21-230SP. We created these principles to serve as criteria for assessing financial
stability efforts. While designed with the broader financial system in mind, the principles
provide useful criteria for assessing housing finance reform efforts because of the housing
finance system’s large scale and importance to the economy and financial markets.
Page 54 GAO-22-104284 Housing Finance System
Appendix I: Objectives, Scope, and
Methodology
Finance. The data break down the total mortgage servicing portfolio in
various ways, including the dollar amount of mortgages in mortgage-
backed securities (MBS) from the Government National Mortgage
Association (Ginnie Mae), Fannie Mae, and Freddie Mac—which we
collectively defined as the federal share—and the dollar amount of
mortgages in each of those market segments that nonbanks serviced.
• To determine the amount of capital the enterprises have accumulated
since the third quarter of 2019, we reviewed the enterprises’
regulatory financial filings (10-Qs and 10-Ks). To determine the
amount of combined capital the enterprises would be expected to hold
under the 2018 and 2020 capital rules, we reviewed FHFA documents
and enterprise regulatory financial filings.
• To calculate the yield spread between the Fannie Mae 30-year
current-coupon bond and the 5/10-year U.S. Treasury bond blend
from January through December 2020, we analyzed data from
Bloomberg. We first calculated the average yield between the 5-year
and 10-year Treasury bonds using a 50/50 weighting. We then
subtracted the average yield from the Fannie Mae 30-year current-
coupon bond yield.
• To determine the amount by which mortgage real estate investment
trusts reduced their holdings of agency securities—including MBS
issued or guaranteed by the enterprises or Ginnie Mae—between the
fourth quarter of 2019 and the first quarter of 2020, we used federal
securities holding data from the Financial Accounts of the United
States.
We assessed the reliability of these data by reviewing documentation on
how the data were collected and calculated and by interviewing company
or agency representatives familiar with the data. We concluded that the
data were sufficiently reliable for describing federal and nonbank market
shares, enterprise capital accumulation, spreads between agency MBS
and U.S. Treasury securities, and changes in mortgage real estate
investment trust holdings during the specified time periods.
Additionally, for appendix II on the pandemic’s effect on small landlords,
we reviewed the results of two federal surveys, as follows:
• To describe the percentage of renters who had no to slight confidence
that they would be able to fully satisfy their next rental payment, we
used data from the U.S. Census Bureau’s Week 36 (August 18–
August 30, 2021) Household Pulse Survey. This survey provides data
Page 55 GAO-22-104284 Housing Finance System
Appendix I: Objectives, Scope, and
Methodology
to help understand the experiences of American households during
the coronavirus pandemic.
• To describe the share of rental units owned by individual landlords
and the ownership of units with average rental receipts totaling less
than $750, we used rental property data from the 2018 Rental
Housing Finance Survey sponsored by HUD and conducted by the
U.S. Census Bureau. This survey is conducted every 3 years and
provides a measure of financial, mortgage, and property
characteristics of rental housing properties in the United States.
To assess the reliability of data from these surveys, we reviewed
documentation from the Census Bureau and HUD detailing the survey
methodologies. We concluded that the data were sufficiently reliable for
describing renters’ confidence in making rent payments and the relative
size and characteristics of the rental property market owned by individual
landlords.
Analysis of Treasury and To address our second objective, we analyzed the recommendations in
HUD 2019 Reform Plans the 2019 Treasury and HUD housing finance reform plans against the
vulnerabilities identified in our first objective and the eight applicable
element of our 2014 framework for assessing housing finance reforms. 6
(The eight elements are alignment of policies with goals, appropriate
financial regulatory framework, capacity to manage risks, borrower
protections and market access, investor protections, consideration of the
cyclical nature of housing finance, control of fiscal exposure, and
implications of transition.) We considered Treasury’s and HUD’s 2019
housing finance reform plans as a single systemwide reform because
both plans responded to the presidential memorandum and issued on the
same day.
We assigned each recommendation to a vulnerability (if applicable) and
to one or more framework elements using an approach in which three
analysts reached consensus after reviewing the text of the
recommendation, any associated plan narrative, and descriptions of each
vulnerability and framework element. In cases in which a
recommendation applied to more than one framework element, the three
analysts used a similar process to reach consensus on which element
was primary (the most directly relevant) and which element was
6We analyzed the 2019 plans using eight of the nine elements of our framework. We did
not use the framework element related to clearly defined and prioritized housing finance
system goals because it applies to a reform plan overall, not specific reform
recommendations. GAO-15-131.
Page 56 GAO-22-104284 Housing Finance System
Appendix I: Objectives, Scope, and
Methodology
secondary (relevant, but in a less direct or significant way). We then
determined the number of recommendations that addressed each
vulnerability and how many addressed each framework element. Figures
11 and 12 in appendix III show how we categorized each
recommendation by framework element for the Treasury and HUD plans,
respectively.
Additionally, we analyzed the status of the plans’ recommendations. For
each administrative recommendation, we categorized the status (as
completed, partial action, or no documented action) as of January 20,
2021. 7 To do so, we reviewed information provided by Treasury and HUD
in September 2020 and again near the administration change in January
2021. This information included the recommendation status reported in
agency tracking spreadsheets and other supporting documentation that
an agency provided. In some cases, we supplemented documentation we
obtained through information found on agency websites such as
mortgagee letters from FHA and notices from the Securities and
Exchange Commission. We also interviewed industry stakeholders.
We incorporated the results of this analysis into our analysis of the
recommendations by housing finance system vulnerability and framework
element described earlier. Since the January 2021 change in
administration, agencies have taken actions relevant to some of the
recommendations, although not under the auspices of the 2019 plans.
Where applicable, we incorporated information on agency actions taken
since January 2021.
For the legislative recommendations, we determined whether legislation
had been enacted to implement them as of September 2021. To do so,
we conducted legal research and reviewed information from relevant
agencies on their authorities and responsibilities. Some recommendations
assumed enactment of more foundational recommendations in the plans,
such as the authorization of competitors to the enterprises. In those
cases, we assessed implementation status as a set (the foundational
recommendation plus the recommendations that build upon it) rather than
on an individual basis.
We conducted this performance audit from April 2020 to January 2022, in
accordance with generally accepted government auditing standards.
7We use the end of the administration because agencies said they consider the plans to
be of the prior administration and no longer track recommendations status. Figure 13 in
Appendix III shows the status of each administrative recommendation.
Page 57 GAO-22-104284 Housing Finance System
Appendix I: Objectives, Scope, and
Methodology
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Page 58 GAO-22-104284 Housing Finance System
Appendix II: The Pandemic’s Effect on
Appendix II: The Pandemic’s Effect on Renters
and Small Landlords
Renters and Small Landlords
This appendix provides information about the effect of the Coronavirus
2019 (COVID-19) pandemic on renters and small “mom and pop”
(individual) landlords. While federal support has helped renters stay in
their homes and mortgage forbearance assisted individual landlords
facing disruption in rental payments, these landlords have experienced
financial difficulties and remain at risk as support programs and
provisions expire. Renters have experienced greater financial hardship
and potential housing instability during the pandemic partly because they
have experienced higher rates of unemployment and greater income
losses than homeowners. According to the U.S. Census Bureau’s
Household Pulse Survey (for August 18–30, 2021), 25 percent of renters
had no to slight confidence they would be able to pay the next month’s
rent.
Federal Support Helped Federal actions have helped renters stay in their homes. Specifically, the
Protect Renters expanded unemployment benefits and economic impact payments in the
CARES Act and subsequent legislation helped renters to continue to
make rental payments. 1 Likewise, the Consolidated Appropriations Act,
2021 and the American Rescue Plan Act of 2021 (enacted in December
2020 and March 2021, respectively) together provided about $46.6 billion
for emergency rental assistance. 2 These acts directed the Department of
the Treasury to disburse funds to eligible state and local grantees that
must use the funds to financially assist households—generally through
direct payments to property owners and utility providers. Eligible costs
include accrued and future rent, utilities, and other housing expenses.
The American Rescue Plan Act of 2021 also appropriated nearly $10
billion for a Homeowner Assistance Fund, which provides funds allocated
by Treasury to prevent homeowner mortgage delinquencies, defaults,
foreclosures, loss of utilities, and displacement due to financial hardship.
This funding may help landlords who own single-family rental properties
continue to make mortgage payments.
Additionally, Fannie Mae and Freddie Mac offer forbearance as needed to
multifamily property owners who are experiencing financial hardship due
to COVID-19. Owners agree not to evict tenants solely for the
nonpayment of rent while the property is in forbearance. Lastly, the
CARES Act contained an eviction moratorium for federally backed or
115 U.S.C. §§ 9021, 9023, 9027; 26 U.S.C. §§ 6428, 6428A, 6428B.
2Pub. L. No. 116-260, div. N, § 501, 134 Stat. 2069 (2020); Pub. L. 117-2, § 3201, 135
Stat. 54 (2021).
Page 59 GAO-22-104284 Housing Finance System
Appendix II: The Pandemic’s Effect on Renters
and Small Landlords
supported properties and the Centers for Disease Control and Prevention
issued other eviction moratoriums. 3
But some of these programs and provisions have expired. The CARES
Act eviction moratorium expired on July 24, 2020, and a Supreme Court
ruling terminated the Centers for Disease Control and Prevention’s
eviction moratorium in August 2021. The expanded unemployment
benefits granted by the American Rescue Plan Act expired in September
2021. Furthermore, the previous federal eviction moratoriums did not
forgive or reduce rent. Therefore, renters’ ability to make payments could
be threatened should they continue to experience financial challenges
due to the pandemic. Consequently, cash flow to landlords could be
disrupted.
Individual Landlords That At particular risk are individual landlords. As shown in figure 9, according
Supply Affordable Rental to the Census Bureau’s 2018 Rental Housing Finance Survey, in 2017
(the most recent year for which published data are available) individual
Housing Could Be at Risk
landlords owned 41 percent of the 48 million rental housing units in the
United States. 4
3The CARES Act and Centers for Disease Control and Prevention moratoriums—in
combination with state and local measures—helped limit evictions during the pandemic.
GAO, COVID-19 Housing Protections: Moratoriums Have Helped Limit Evictions, but
Further Outreach Is Needed, GAO-21-370 (Washington, D.C.: Mar. 15, 2021).
4The Rental Housing Finance Survey measures financial, mortgage, and property
characteristics of rental housing properties in the United States. It is sponsored by the
Department of Housing and Urban Development and conducted by the U.S. Census
Bureau.
Page 60 GAO-22-104284 Housing Finance System
Appendix II: The Pandemic’s Effect on Renters
and Small Landlords
Figure 9: Share of All Rental Units by Ownership Type, 2017
Notes: Percentages may not add to 100 due to rounding. Individual landlords also may form limited
liability companies for their properties. Therefore, the “limited partnership, liability partnership, or
liability company” category may contain some individual landlords.
a
Other includes entities such as general partnerships, real estate investment trusts, and nonprofit
organizations.
According to experts with whom we spoke and researchers, individual
landlords are less likely to have access to capital to weather severe
disruptions in rental payments. For example, a March 2020 survey by
Avail, a rental services firm for individual landlords, found that 58 percent
of landlords surveyed did not have access to credit options that might
help them in an emergency. 5 Thus, they may be less able to continue to
pay mortgages or meet other obligations. While we could not identify a
comprehensive source of data detailing the extent to which individual
landlords have struggled to make mortgage payments or lost or sold their
properties due to the pandemic, some research helps illustrate the
financial stress individual landlords have faced during the pandemic. For
example, another Avail survey in October 2020 found that nearly 31
percent of landlords surveyed were feeling an increased pressure to sell
5Avail, Avail Report: Landlord and Renter Responses to COVID-19 (March 2020). This
study surveyed 2,775 landlords.
Page 61 GAO-22-104284 Housing Finance System
Appendix II: The Pandemic’s Effect on Renters
and Small Landlords
their rental property. 6 A survey by Harvard University’s Joint Center for
Housing Studies of small landlords in Rochester and Albany, New York,
found that while 2.6 percent of landlords’ rental properties had missed
mortgage payments from March to October 2020, 8.2 percent had missed
property tax payments, and 30.1 percent had deferred maintenance. 7
In prior work, we found that property owners relied on temporary
mortgage forbearance—in which a lender or mortgage servicer allows a
temporary pause or reduction in payments—to offset missed rental
payments. 8 Section 4023 of the CARES Act required servicers to provide
multifamily properties with federally backed mortgages up to 90 days of
forbearance. 9
Multifamily mortgage forbearance rates have been highest among smaller
properties, which suggests that smaller, individual landlords experienced
the greatest financial challenges from missed rental payments. In August
2020, about 5.4 percent of properties with 5–9 units with mortgages
backed by the Federal Housing Administration, Fannie Mae, or Freddie
Mac were under forbearance, as compared to about 1.1 percent of such
properties with 50 or more units (see fig. 10).
6Marin Scott, “Missed Rent, No Government Aid, and the Pressure to Sell: What Renters
and Landlords are Facing During COVID-19” (Oct. 30, 2020);
https://www.avail.co/blog/missed-rent-no-government-aid-and-the-pressure-to-sell-what-
renters-and-landlords-are-facing-during-covid-19. This study surveyed 1,381 landlords.
7Elijah de la Campa, “The Impact of COVID-19 on Small Landlords: Survey Evidence from
Albany and Rochester, New York,” Joint Center for Housing Studies working paper
(Cambridge, Mass.: March 2021);
https://www.jchs.harvard.edu/research-areas/working-papers/impact-covid-19-small-landlo
rds-survey-evidence-albany-and-rochester. This study surveyed landlords in Albany and
Rochester, New York, in June and October 2020. The number of landlords who
responded to the surveys ranged from 91 to 165.
8GAO-21-370.
9Pub. L. No. 116-136, § 4023, 134 Stat. at 491.
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Appendix II: The Pandemic’s Effect on Renters
and Small Landlords
Figure 10: Percentage of Federally Backed Multifamily Mortgages in Forbearance,
by Property Size (January–August 2020)
Note: We excluded data from the Rural Housing Service because the agency did not provide
forbearance data by property size. However, loans backed by the agency used forbearance at a
relatively high rate—about 22 percent of multifamily loans backed by the Rural Housing Service were
in forbearance in June 2020.
Properties owned by individual landlords are important sources of
affordable housing. For example, according to the Census Bureau’s 2018
Rental Housing Finance Survey, individual landlords own the majority of
units with average rental receipts of less than $750 per month. If
individual landlords experience rental payment disruption, they may face
pressure to sell their properties and such sales could exacerbate an
existing shortage of affordable rental housing units. In a prior report, we
found that rental housing affordability had declined. 10 We reported that by
2017, an estimated 48 percent of renter households were rent burdened,
10GAO, Rental Housing: As More Households Rent, the Poorest Face Affordability and
Housing Quality Challenges, GAO-20-427 (Washington, D.C.: May 27, 2020).
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Appendix II: The Pandemic’s Effect on Renters
and Small Landlords
6 percentage points higher than in 2001. 11 Severe rent burden also
became more common. Of the households that were rent burdened in
2017, about half were severely rent burdened. These households
represented 24 percent of all renter households—an increase of 4
percentage points from 2001.
Some experts observed that if individual landlords were forced to sell their
properties, the units might not necessarily remain available or affordable
to renters once purchased. For example, one expert we interviewed noted
that, due to the strong demand for homeownership, once sold, the
properties might be converted to owner-occupied properties and therefore
no longer available for rental occupancy. Treasury officials noted that the
low supply of affordable single-family homes available for purchase may
add to this potential challenge. Another expert told us that in local
markets where rent demand is strong, new owners may remodel and
refurbish an affordable property and then raise rents. Thus, the property
is removed from the affordable housing stock even if it remains renter-
occupied.
11Federal housing policy generally considers rents at or below 30 percent of household
income to be affordable, and households that pay more than 30 percent of income in rent
are considered to be rent burdened. Households that pay more than 50 percent are
considered to be severely rent burdened.
Page 64 GAO-22-104284 Housing Finance System
Appendix III: Analysis of Recommendations
Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
in 2019 Housing Finance Reform Plans
We analyzed the 2019 housing finance reform plans of the Department of
the Treasury and the Department of Housing and Urban Development
(HUD) using eight of the nine elements of a framework we previously
developed for assessing potential changes to the housing finance
system. 1 The eight elements are alignment of policies with goals,
appropriate financial regulatory framework, capacity to manage risks,
borrower protections and market access, investor protections,
consideration of the cyclical nature of housing finance, control of fiscal
exposure, and implications of transition.
Treasury and HUD developed the plans pursuant to a March 27, 2019,
presidential memorandum that listed overall goals and related objectives
for the plans to address. 2 While Treasury and HUD consulted with other
agencies in developing the plans, the plans did not necessarily reflect
other agencies’ priorities and preferences. In addition, the current
administration has not adopted these plans. The 2019 plans contained
legislative recommendations—actions for Congress to take—and
administrative recommendations—actions for other entities such as the
Federal Housing Finance Agency (FHFA) and the Consumer Financial
Protection Bureau (CFPB) to take.
Below, we provide the results of our analysis of Treasury’s and HUD’s
plans, the status of the administrative recommendations as of January 20,
2021, and examples of implemented and unimplemented administrative
recommendations for each of the eight framework elements. Each figure
below references the specific numbered recommendations from the
plans.
Treasury’s Plan Figure 11 shows our categorization of each Treasury plan
recommendation by framework element. Most of the recommendations
applied to control of fiscal exposure (29) and alignment of policies with
goals (9). The plan had six recommendations related to an appropriate
financial regulatory framework, five related to consideration of the cyclical
1GAO, Housing Finance System: A Framework for Assessing Potential Changes,
GAO-15-131 (Washington, D.C.: Oct. 7, 2014). We did not use the framework element
related to clearly defined and prioritized housing finance system goals because it applies
to a reform plan overall, not to specific reform recommendations.
2Department of the Treasury, Housing Finance Reform Plan, Pursuant to the Presidential
Memorandum Issued March 27, 2019 (Washington, D.C.: September 2019); see
https://home.treasury.gov/system/files/136/Treasury-Housing-Finance-Reform-Plan.pdf.
Department of Housing and Urban Development, Housing Finance Reform Plan, Pursuant
to the Presidential Memorandum Issued March 27, 2019 (Washington, D.C.: September
2019); see https://archives.hud.gov/news/2019/Housing-Finance-Reform-Plan0919.pdf.
Page 65 GAO-22-104284 Housing Finance System
Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
nature of housing finance and implications of transition, and fewer than
four recommendations related to each of the other three elements. Some
recommendations (those listed in italics in the figure) also applied to a
second framework element.
Figure 11: Alignment of Treasury’s Housing Finance Plan Recommendations with GAO’s Framework for Assessing Changes
to the Housing Finance System
HUD’s Plan Figure 12 shows our categorization of each HUD plan recommendation
by framework element. The HUD plan included recommendations relating
to seven of the eight relevant elements of our framework, most of which
applied to control of fiscal exposure (20), alignment of policies with goals
(17), and capacity to manage risks (23). The plan had nine
recommendations related to borrower protections, eight related to an
appropriate regulatory framework, and two or fewer recommendations
each related to investor protections and the cyclical nature of housing
finance. We did not identify any recommendations applying to the
implications of transition in HUD’s plan. Some recommendations (those
listed in italics in the figure) also applied to a second framework element.
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Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
Figure 12: Alignment of HUD’s Housing Finance Plan Recommendations with GAO’s Framework for Assessing Changes to
the Housing Finance System
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Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
Status of Plans’ Figure 13 shows the progress made in implementing the administrative
Recommendations recommendations in the 2019 plans as of January 20, 2021 (the start of a
new administration). 3 Specifically, agencies completed implementation of
27 recommendations and took partial action on 30. For the remaining 24
recommendations, there was no documented action. In addition, progress
on recommendations related to each framework element varied (some
recommendations applied to more than one framework element as noted
in the figure).
3The 2019 plans contained a mix of legislative and administrative recommendations, but
only administrative recommendations were implemented. As of September 2021,
Congress had not enacted any of the 35 legislative recommendations. Fourteen of the 35
legislative recommendations call for, or assume, prior enactment of changes to the
housing finance system—including an explicit, paid-for guarantee of qualifying
conventional mortgage-backed securities by the Government National Mortgage
Association, repeal and replacement of the enterprises’ statutory charters, or authorization
of competitors to the enterprises. The remaining 21 recommendations encompass a wide
range of issues, including membership in the Federal Home Loan Bank System and
reorganizing HUD.
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Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
Figure 13: Status of Administrative Recommendations in Treasury and HUD Plans, as of January 20, 2021
Notes: Several recommendations applied to two framework elements in GAO’s framework for
assessing potential changes to the housing finance system. In these cases, we identified a primary
and secondary element. We categorized recommendations in this graphic based on the framework
element we identified as primary, and indicated the recommendations that also applied to a
secondary element using superscript letters. Refer to plans’ appendixes for recommendation
numbering.
a
These recommendations also applied to the consideration of cyclical nature of housing finance
element of the framework.
b
These recommendations also applied to the appropriate financial regulatory framework element of
the framework.
c
These recommendations also applied to the control of fiscal exposure element of the framework.
d
This recommendation also applied to the implications of transition element of the framework.
e
These recommendations also applied to the alignment of policies with goals element of the
framework.
f
This recommendation also applied to the capacity to manage risks element of the framework.
Examples of Implemented The following examples of implemented and unimplemented
and Unimplemented administrative recommendations from the 2019 plans are organized by
relevant elements of our framework and include any agency actions as of
Recommendations
January 20, 2021 (the start of the new administration). Since January
2021, agencies have taken actions relevant to some of the
Page 69 GAO-22-104284 Housing Finance System
Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
recommendations, although not under the auspices of the 2019 plans.
Where applicable in the following examples, we discuss these actions.
• Controlling fiscal exposure
• The Federal Housing Administration (FHA) implemented a
recommendation in HUD’s plan to establish a paperless, data-
driven claims process to validate FHA mortgage insurance claims
before they are paid and thus better protect taxpayers. 4
Specifically, in December 2020, FHA expanded the functionality of
an automated claims system that servicers of FHA-insured
mortgages use to submit insurance claims. The expansion
increased system use to all types of claims on single-family
forward (traditional) mortgages. 5 According to HUD, the
automated claims module eliminates redundant work, provides
error check processes, and enhances data integrity, leading to
more accurate and efficient submissions.
• HUD’s 2019 plan also included a recommendation that FHA
develop and implement tiered pricing for its insurance—that is,
charge higher-risk borrowers higher premiums than lower-risk
borrowers—to protect the Mortgage Mutual Insurance Fund and
ensure appropriate pricing for higher-risk loans. 6 Currently, most
borrowers pay the same premium rate, which results in lower-risk
borrowers subsidizing higher-risk borrowers. 7 FHA did not act on
this recommendation. Risk-based pricing could help reduce
financial risks to FHA from adverse selection, but it also could
4Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation number 17.
5Previously, the system did not process some claim types, such as those associated with
property conveyances to FHA and property sales.
6Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation number 40.
7FHA-insured mortgages with certain loan characteristics have different premium rates.
For example, mortgages with terms of 15 years or less or loan-to-value ratios less than 95
percent have lower rates. However, these loan characteristics are not typical in FHA’s
portfolio.
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Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
affect the cost and availability of FHA insurance for some
borrowers. 8
• Aligning policies with goals
• FHFA implemented a recommendation in Treasury’s plan to
assess if the current products and services of Fannie Mae and
Freddie Mac (enterprises) were consistent with their statutory
mission and should continue to benefit from support under
commitments in the preferred stock purchase agreements
(PSPA). 9 The recommendation stated that FHFA should solicit
information on whether to tailor support for cash-out refinancings,
investor loans, vacation home loans, higher principal balance
loans, or other subsets of enterprise-acquired mortgages.
Consistent with this recommendation, through amendments to the
PSPAs in January 2021, FHFA limited the enterprises’ acquisition
of single-family mortgage loans secured by second homes and
investment properties to 7 percent of total single-family
acquisitions in any 52-week period. In September 2021, FHFA
and Treasury suspended these restrictions for at least 1 year,
during which time FHFA plans to review them and consult with
Treasury on any recommended revisions. 10
• HUD’s plan included a recommendation that FHA pursue an
interagency agreement on credit policy coordination with other
federal mortgage insurance agencies to help ensure efficient
targeting, reduce overlap, and achieve the policy goal of having
FHA assume primary responsibility for housing finance support to
low- and moderate-income families that cannot be fulfilled through
8GAO, Federal Housing Administration: Modernization Proposals Would Have Program
and Budget Implications and Require Continued Improvements in Risk Management,
GAO-07-708 (Washington, D.C.: June 29, 2007). In an insurance context, adverse
selection occurs when individual insurance buyers may differ in their underlying risk
factors in ways that are not fully observed by the insurer. If an insurer offers policy terms
and rates designed to cover its costs based on the average risks of a group of potential
buyers, the result may be that buyers who are riskier than average purchase the
insurance, and impose larger-than-average claims on the insurer, while buyers who are
less risky than average do not purchase the insurance.
9Department of the Treasury, Housing Finance Reform Plan, recommendation number 11.
10The suspension will terminate on the later of September 14, 2022, or 6 months after
Treasury notifies the enterprises.
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Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
traditional underwriting. 11 FHA is not restricted in the types of
borrowers it may serve, but it has a statutory operational goal to
provide mortgage insurance to traditionally underserved
borrowers, such as low-income, minority, and first-time
homebuyers. In fiscal year 2020, 83 percent of FHA-insured home
purchase mortgages went to first-time buyers, and 33 percent of
FHA-insured purchase and refinance transactions served minority
borrowers. HUD did not act on this recommendation.
• Capacity to manage risks
• FHA substantially implemented a recommendation in HUD’s plan
to develop a mortgage origination tool that integrates an
automated underwriting system and other components for risk
management. 12 Specifically, from April 2019 through January
2021, FHA enhanced the functionality of an information
technology platform for modernizing its single-family loan
origination system by incorporating components for electronic
document delivery, loan applications, property valuations, and
credit underwriting (including the automated underwriting
system). 13 Additional enhancements are ongoing.
• HUD’s plan recommended pursuing a reorganization that would
place the agency’s mortgage insurance programs and rental
assistance programs in separate offices. 14 Currently, both
programs are under the Office of Housing, and the Assistant
Secretary for Housing is also the FHA Commissioner. This
administrative recommendation echoes legislative
recommendations in HUD’s plan intended to help FHA better
address risk-management functions and allow the FHA
Commissioner to focus solely on managing the insurance
11Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation number 31.
12Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation number 51. FHA’s automated underwriting system allows lenders to
electronically submit loan application data for single-family mortgages from their loan
origination systems and receive mortgage insurance eligibility scoring decisions.
13For additional information on the development of the platform (FHA Catalyst), including
challenges with cost and schedule estimates, see GAO, IT Modernization: HUD Needs to
Improve Its Estimation and Oversight Practices for Single-Family Housing, GAO-21-459
(Washington, D.C.: Sept. 29, 2021).
14Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation number 53.
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Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
programs. 15 The plan suggests that, absent legislation, pursuing a
reorganization to create separate mortgage insurance and rental
assistance program offices would be a step in the same direction.
HUD did not act on this recommendation.
• Adhering to an appropriate regulatory framework
• FHA implemented a recommendation in HUD’s plan to prioritize
revision of lender certification forms to provide lenders additional
certainty and clarity on FHA’s requirements. 16 In December 2020,
FHA revised a form on which lenders certify compliance with FHA
requirements for each loan. According to HUD, the form changes,
which became effective March 2021, better reflect regulatory and
other legal requirements and help ensure the accuracy of
information provided to FHA.
• Treasury’s plan recommended that FHFA, in consultation with the
other federal financial regulators, attempt to harmonize
requirements applicable to the enterprises and other participants
in the housing finance system, including for capital relief provided
to the enterprises and banking organizations for their transfers of
mortgage credit risk to third parties. 17 According to the Treasury
plan, differences in the regulatory frameworks between the
enterprises and the private sector are biased in favor of the
enterprises and could create opportunities for regulatory
arbitrage—the potential for market participants to use a particular
market or product instead of a competing market or product to
exploit regulatory differences. While not broadly implemented, the
recommendation was partially implemented through FHFA’s 2020
enterprise capital rule, which adopted some features of the U.S.
banking framework.
• Borrower protections and market access
• In January 2021, Treasury and FHFA implemented a
recommendation in the Treasury plan to amend the PSPAs to
15Specifically, the plan recommends that Congress restructure FHA as an autonomous
corporation in HUD and separate the position and responsibilities of the FHA
Commissioner from the Assistant Secretary for Housing.
16Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation number 26.
17Department of the Treasury, Housing Finance Reform Plan, recommendation number
34.
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Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
require the enterprises to maintain nationwide cash windows for
small lenders and prohibit large lenders from receiving volume-
based pricing discounts. 18 Through the cash windows, lenders can
sell individual loans directly to the enterprises and retain servicing
rights. This arrangement facilitates participation of small lenders
that do not have large pools of loans to sell to the enterprises.
According to the Treasury plan, smaller, community-based lenders
play a vital role in serving rural and other historically underserved
borrowers, and fostering these lenders’ access to the secondary
market helps promote access to mortgage credit.
• HUD’s plan recommended that FHA create more flexible
processes to streamline borrower qualification for loss mitigation
options in case of hardship. 19 In July 2020, FHA took partial action
on this recommendation by announcing loss mitigation options for
hardship caused by the coronavirus pandemic that includes the
use of partial claims. 20 FHA’s announcement outlines reduced
documentation requirements and streamlined processing for
borrowers and servicers. According to HUD, these options could
be leveraged for more generalized improvements.
To further streamline its COVID-19 loss mitigation options, FHA
issued revisions in February, June, and July 2021. For example, in
June 2021, FHA announced that servicers must mail loan
modification documents to borrowers who can achieve a 25
percent reduction in their principal and interest payment through a
permanent change in one or more terms of their mortgage.
Borrowers are not required to contact their servicer to receive
these documents.
18Department of the Treasury, Housing Finance Reform Plan, recommendation number
47. The January 2021 PSPA amendments also required each enterprise to limit the
volume purchased through the cash window to $1.5 billion per lender during any period
comprising four calendar quarters. In September 2021, FHFA and Treasury suspended
this requirement. The suspension was agreed to on September 14, 2021, and will
terminate on the later of 1 year after this date or 6 months after Treasury notifies the
enterprises. FHFA plans to review the requirement during that period.
19Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation number 14.
20In a partial claim, servicers may advance funds on behalf of a mortgage borrower to
reinstate a loan. FHA reimburses the servicer for the partial claim and executes an
interest-free subordinate lien with the borrower for the amount, which is payable when the
property is sold or the mortgage is paid off.
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Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
• Protections for mortgage investors
• The Government National Mortgage Association (Ginnie Mae)
took partial action on a recommendation in HUD’s plan to continue
to coordinate with appropriate federal mortgage insurance
programs, take action where (and when) necessary for the
integrity of the Ginnie Mae guaranty of mortgage-backed
securities (MBS), and increase data transparency. 21 According to
HUD’s 2019 plan, in recent years, Ginnie Mae has grown
concerned about “loan churning”—repeated mortgage
refinancings that may not financially benefit the borrower—in part,
because churning increases prepayment risks for MBS investors
and threatens the integrity of the MBS. In July 2019, Congress
enacted legislation requiring six consecutive monthly payments
before certain mortgages guaranteed by the Department of
Veterans Affairs can be refinanced. 22 Additionally, Ginnie Mae has
taken a number of policy and enforcement actions to address the
issue, including its most recent action to implement restrictions on
cash-out refinances. For example, beginning in November 2019,
Ginnie Mae barred the securitization of cash-out refinance
mortgages with loan-to-value ratios over 90 percent into certain
Ginnie Mae securities pools. 23
• The Treasury plan recommended that FHFA determine how and
to what extent the enterprises’ historical loan-level data and
property valuation data could be publicly disclosed, taking into
account any privacy and safety and soundness risks. 24 Treasury’s
plan stated that, although each enterprise makes some loan-level
data available as part of its credit risk transfer program, a
considerable amount of data (such as appraisal and other
21Department of Housing and Urban Development, Housing Finance Reform Plan,
recommendation number 66.
22Pub. L. No. 116-33, § 2, 133 Stat. 1038 (2019). This legislation revised the loan
seasoning requirements first prescribed by the Economic Growth, Regulatory Relief, and
Consumer Protection Act of 2018. Pub. L. No. 115-174, § 309(b), 132 Stat. 1296, 1350
(2018).
23The restrictions were included in a Ginnie Mae memorandum issued in August 2019 and
applied to MBS guaranteed on or after November 1, 2019. Government National Mortgage
Association, Revised Pooling Eligibility Requirements for VA Refinance Loans, All
Participant Memorandum 19-05 (Washington, D.C.: Aug. 1, 2019).
24Department of the Treasury, Housing Finance Reform Plan, recommendation number
42.
Page 75 GAO-22-104284 Housing Finance System
Appendix III: Analysis of Recommendations in
2019 Housing Finance Reform Plans
collateral data) is not made available to market participants. 25
According to the plan, disclosing more loan-level data could
enhance the ability of market participants (such as MBS investors)
to analyze and price mortgage credit risk. FHFA did not act on this
recommendation.
• Consideration of cyclical nature of housing finance
• Treasury’s plan recommended that FHFA revisit its rule excluding
captive insurance companies from Federal Home Loan Bank
(FHLBank) System membership. 26 Expanding membership to
captive insurance companies, and therefore some mortgage real
estate investment trusts, might enhance MBS market stability
during economic downturns. However, trade-offs include
potentially increasing risks to the FHLBank System or
encouraging greater investor risk-taking. In February 2020, FHFA
issued a request for input on FHLBank System membership, but
as of September 2021, had not taken further action on the
recommendation.
• Implications of transition
• As discussed above, Treasury’s plan contained a number of
legislative recommendations that would substantially change the
housing finance system, while also noting that any proposal to
fundamentally change the system should take careful account of
the risks posed by the transition. To avoid market disruption
pending legislative action, among other things, Treasury’s plan
included recommendations to maintain its ongoing commitments
to support each enterprise’s single-family MBS through the
PSPAs. 27 Treasury and FHFA kept these commitments in place
when they amended the PSPAs in September 2019 and January
2021.
25Through the enterprises’ credit risk transfer programs, a portion of the mortgage credit
risk from their purchased loans is transferred to third-party investors. As a result of this
transfer, the enterprises are allowed to hold less capital.
26Department of the Treasury, Housing Finance Reform Plan, recommendation number
49.
27Department of the Treasury, Housing Finance Reform Plan, recommendation numbers 2
and 4.
Page 76 GAO-22-104284 Housing Finance System
Appendix IV: Comments from the
Appendix IV: Comments from the Department
of the Treasury
Department of the Treasury
Page 77 GAO-22-104284 Housing Finance System
Appendix V: Comments from the Department
Appendix V: Comments from the Department
of Housing and Urban Development
of Housing and Urban Development
Page 78 GAO-22-104284 Housing Finance System
Appendix V: Comments from the Department
of Housing and Urban Development
Page 79 GAO-22-104284 Housing Finance System
Appendix V: Comments from the Department
of Housing and Urban Development
Page 80 GAO-22-104284 Housing Finance System
Appendix VI: GAO Contact and Staff
Appendix VI: GAO Contact and Staff
Acknowledgments
Acknowledgments
Daniel Garcia-Diaz, (202) 512-8678 or garciadiazd@gao.gov
GAO Contact
In addition to the contact named above, John H. Pendleton (Director),
Staff Steve Westley (Assistant Director), Karen Jarzynka-Hernandez (Analyst
Acknowledgments in Charge), Stephen Brown, Maxwell Kaufman, Risto Laboski,
Christopher Lee, Charlene Lindsay, John McGrail, Marc Molino, Barbara
Roesmann, and Andrew Stavisky made key contributions to this report.
(104284)
Page 81 GAO-22-104284 Housing Finance System
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