An Overview of the Housing Finance System in the United States (CRS Report for Congress)
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Release Date |
Revised Jan. 18, 2017 |
Report Number |
R42995 |
Report Type |
Report |
Authors |
Sean M. Hoskins, Analyst in Financial Economics; Katie Jones, Analyst in Housing Policy; N. Eric Weiss, Specialist in Financial Economics |
Source Agency |
Congressional Research Service |
Older Revisions |
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Summary:
When making a decision about housing, a household must choose between renting and owning.
Multiple factors, such as a household’s financial status and expectations about the future,
influence the decision. Few people who decide to purchase a home have the necessary savings or
available financial resources to make the purchase on their own. Most need to take out a loan. A
loan that uses real estate as collateral is typically referred to as a mortgage.
A potential borrower applies for a loan from a lender in what is called the primary market. The
lender underwrites, or evaluates, the borrower and decides whether and under what terms to
extend a loan. Different types of lenders, including banks, credit unions, and finance companies
(institutions that lend money but do not accept deposits), make home loans. The lender requires
some additional assurance that, in the event that the borrower does not repay the mortgage as
promised, it will be able to sell the home for enough to recoup the amount it is owed. Typically,
lenders receive such assurance through a down payment, mortgage insurance, or a combination of
the two. Mortgage insurance can be provided privately or through a government guarantee. After
a mortgage is made, the borrower sends the required payments to an entity known as a mortgage
servicer, which then remits the payments to the mortgage holder (the mortgage holder can be the
original lender or, if the mortgage is sold, an investor). If the borrower does not repay the
mortgage as promised, the lender can repossess the property through a process known as
foreclosure.
The secondary market is the market for buying and selling mortgages. If a mortgage originator
sells the mortgage in the secondary market, the purchaser of the mortgage can choose to hold the
mortgage itself or to securitize it. When a mortgage is securitized, it is pooled into a security with
other mortgages, and the payment streams associated with the mortgages are sold to investors.
Fannie Mae and Freddie Mac securitize mortgages that conform to their standards, known as
conforming mortgages. Mortgages that do not conform to all of Fannie Mae’s and Freddie Mac’s
standards are referred to as nonconforming mortgages. Ginnie Mae guarantees mortgage-backed
securities (MBS) made up exclusively of mortgages insured or guaranteed by the federal
government. Other financial institutions also issue MBS, known as private-label securities (PLS).
The characteristics of the borrower and of the mortgage determine the classification of the loan.
What happens to a mortgage in the secondary market is partially determined by whether the
mortgage is government-insured, conforming, or nonconforming. Depending on the type of MBS
or mortgage purchased, investors will face different types of risks.
Congress is interested in the condition of the housing finance system for multiple reasons. The
mortgage market is very large and can impact the wider U.S. economy. The federal government
supports homeownership both directly (through the Federal Housing Administration [FHA],
Department of Veterans’ Affairs [VA], and U.S. Department of Agriculture [USDA]) and
indirectly (through Fannie Mae and Freddie Mac). This support by the federal government means
that the government is potentially liable for financial losses. Fannie Mae, Freddie Mac, and FHA
experienced financial difficulty in the years following the housing and mortgage market turmoil
that began around 2007, although they are more financially stable of late. Congress has shown an
ongoing interest in exercising oversight and considering legislation to potentially reduce the
government’s risk in the mortgage market and reform the broader housing finance system.
For an abbreviated version of this report, see CRS In Focus IF10126, Introduction to Financial
Services: The Housing Finance System, by Katie Jones and N. Eric Weiss.