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1 1 (January 8, 2019)

handle is hein.crs/govxyd0001 and id is 1 raw text is: Congressional Research Service Informing the legislative debate since 1914 0 Updated January 8, 2019 Introduction to Financial Services: The Housing Finance System This In Focus provides a summary of the U.S. single-family housing finance system and several related policy issues that have been of importance to Congress. The Mortgage Market A loan that uses real estate as collateral is typically referred to as a mortgage. The U.S. mortgage market is one of the largest markets in the world, with approximately $10 trillion in debt outstanding. The mortgage market can be thought of as having two major components-the primary market in which mortgages are originated and the secondary market in which existing mortgages are bought and sold. Primary Market. A potential borrower applies for a mortgage from a lender (a mortgage originator) in 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 make home loans, including banks, credit unions, and finance companies (institutions that lend money but do not accept deposits). The lender usually requires some additional assurance that it will be likely to recoup the amount it is owed even if the borrower does not repay the mortgage. Typically, lenders receive such assurance through a down payment (which reduces the amount that is borrowed relative to the home value), mortgage insurance, or a combination of the two. Mortgage insurance protects the lender when a borrower does not repay a mortgage. It can be provided privately or through a government agency, such as the Federal Housing Administration (FHA). Mortgage insurers set requirements that vary by provider, and borrowers typically pay explicit fees for the insurance. FHA is the largest provider of government mortgage insurance, but the government also provides access to the mortgage market through programs offered by the Department of Veterans Affairs and the U.S. Department of Agriculture. If a mortgage is made, the borrower sends the required scheduled payments to a mortgage servicer, which then remits the payments to the mortgage holder (which could be the original lender or, if the mortgage is sold, an investor). If the borrower does not repay the mortgage as promised, the servicer can attempt to keep the borrower in the home through a work out option (such as reducing the mortgage interest rate) or can repossess the property through a process known as foreclosure. Secondary Market. 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 may choose to hold the mortgage itself or to securitize it. When a mortgage is securitized, it is pooled with other mortgages to create a mortgage-backed security (MBS), and the payment streams associated with the mortgages are sold to investors. Mortgages can be securitized through three channels: * Fannie Mae and Freddie Mac, two government- sponsored enterprises (GSEs), securitize mortgages that conform to their standards (conforming mortgages). To be a conforming mortgage, the mortgage must meet certain creditworthiness thresholds and be below the conforming loan limit, a cap on the principal balance of the mortgage. The GSEs guarantee that the investors in their MBS will receive timely payment of principal and interest even if the borrower becomes delinquent. * Ginnie Mae, a government agency in the Department of Housing and Urban Development, guarantees MBS issued by private entities but made up exclusively of mortgages guaranteed by the federal government (such as by FHA). Ginnie Mae's guarantee is backed by the full faith and credit of the U.S. government. * Private financial institutions also issue MBS, known as private-label securities (PLS). PLS can be composed of any type of mortgage but often contain nonconforming mortgages that either exceed the conforming loan limit (jumbo mortgages) or do not meet Fannie Mae's or Freddie Mac's creditworthiness standards (non-prime or subprime mortgages). PLS do not have an implicit or explicit government guarantee. MBS generally are divided into two broad categories: agency MBS, which includes GSE and Ginnie Mae MBS, and non-agency MBS, which is only PLS. Investors that purchase mortgages and MBS are an important source of funding for mortgages originated in the primary market. Investors in MBS are typically large institutional investors, such as pension funds, domestic banks, foreign banks, and hedge funds. Investors choose which type of MBS to purchase based on the type and amount of risk they wish to bear and the expected return from their investment. Figure 1 illustrates the changing role of various MBS issuers since 2000. In the early 2000s, Ginnie Mae played a minor role and non-agency issuers played a growing role. During and after the financial crisis of 2007-2010, Ginnie Mae's market share increased and PLS issuance became negligible. https://crsreport

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