Financial Regulation and Housing Finance - High Risk Issue
In response to the worst financial crisis in more than 75 years, U.S. policymakers created programs involving billions of dollars to stabilize the financial system. They continue to implement reforms across numerous areas of the financial regulatory system, and act to address home foreclosures and government’s role in housing finance.
The 2007-2009 financial crisis highlighted the high risk of the financial regulatory system’s failure to adapt to significant changes ahead of the crisis. Effective oversight of the practices that contributed to wide-scale home foreclosures, such as certain lending practices, and of the government entities that help finance housing, can also help protect consumers and taxpayers.
Financial Regulatory Reform
During the financial crisis, the federal government offered substantial support to the financial sector, including guarantees, support through the Board of Governors of the Federal Reserve System’s emergency loan programs and the Department of the Treasury’s (Treasury) Troubled Asset Relief Program (TARP).
GAO includes the federal role in housing finance on its High Risk List because key housing finance entities (the Federal Housing Administration (FHA) and two government-sponsored enterprises—Fannie Mae and Freddie Mac) face unresolved challenges relating to their future structures, roles, and financial conditions.
In 2010, Congress passed and the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which aims to address regulatory gaps revealed during the crisis and may better position the financial regulatory system to address changes to the financial system and their associated risks. The Dodd-Frank Act resulted in various reforms, including
- The Financial Stability Oversight Council, a new organization that monitors for systemic risks and includes representatives of the various financial regulators. This council holds regular meetings to carry out its mission of identifying risks to U.S. financial stability, has issued reports outlining risks to the U.S. financial system, and has designated certain financial market participants as systemically important.
- The Bureau of Consumer Financial Protection (CFPB), which has broad regulatory responsibilities for providers of residential mortgage loans and other consumer financial products and services. CFPB conducts examinations of financial institutions and has taken enforcement actions against various organizations for violation of consumer financial protection laws and regulations.
- New requirements intended to enhance oversight of markets (such as over-the-counter derivatives markets) and market participants (such as nonbank mortgage lenders, hedge fund advisers, and credit rating agencies), that various financial regulators have been issuing as proposed or final regulations since 2010.
- New standards for residential mortgage loans to help ensure that borrowers have a reasonable ability to repay.
Considerable progress has been made, with financial regulators having finalized rules to implement many of the reforms called for by the Dodd-Frank Act and with the new regulatory bodies operating and taking actions to address systemic risks and to improve consumer protections. However, the Dodd-Frank Act generally left the existing regulatory structure, which includes numerous regulators that oversee different firms, products, and markets, largely unchanged. This can result in inconsistency of oversight in examinations of financial firms, of increasingly interconnected securities and derivatives markets, and of insurance activities, which lack a federal regulator.
Mitigating Home Foreclosures
A range of federal programs have offered relief for millions of struggling homeowners facing potential foreclosure, such as loan modifications and refinancing into loans with lower interest rates. One of the key federal programs, Making Home Affordable Home Affordable Modification Program, which included $38.5 billion allocated to housing programs funded under TARP, closed to new entrants at the end of December 2016. Other efforts remain ongoing, such as programs implemented by the Department of Agriculture, the Department of Veterans Affairs, Federal Housing Administration, Fannie Mae, and Freddie Mac. However, there has been a lack of comprehensive data gathering, analysis, and reevaluation of federal foreclosure mitigation programs.
To help curb some of the abusive lending practices that contributed to the foreclosure crisis, CFPB issued regulations intended to ensure that lenders assess a consumer’s ability to repay a residential mortgage loan as part of the loan underwriting process. CFPB also issued mortgage-servicing related rules to provide better disclosure to consumers about their loan obligations and to require lenders to inform borrowers of and assist them with options that may be available if they have difficulty making their mortgage loan payments. However, Congress and lenders have expressed concerns that the regulations, which are intended to help protect consumers, may have the unintended effect of unduly burdening small institutions or restricting consumers’ access to credit. Further, foreclosure is governed primarily at the state level and federal agencies' past oversight of mortgage servicers' foreclosure activities has been limited and fragmented.
Additionally, rising mortgage delinquencies during the 2007-2009 financial crisis and subsequent new capital requirements (for example, more stringent requirements for certain mortgage-related assets held by banks) have created opportunities for nonbank servicers to increase their presence in the mortgage loan servicing market. Banks and nonbank servicers are subject to different safety and soundness standards and different capital rules. While nonbank servicers are generally regulated by federal and state regulators, there are some limitations to the oversight. Further, because of their rapid growth and business model, they may be more susceptible to certain risks that can lead to operational problems and pose additional risk to consumers and the market.
Housing Finance Reform
Federal agencies and policymakers are also considering ways to reform the role of the federal government in housing finance to reduce the exposure that the government and taxpayers face from risks arising from housing finance activities. According to data from Inside Mortgage Finance, in the years since the crisis began, the federal government has directly or indirectly supported over two-thirds of the value of new mortgage originations in the single-family housing market. Mortgages with federal support include those backed by Fannie Mae and Freddie Mac (the enterprises), whose aim is to provide stability in the secondary market for residential mortgages and serve the mortgage credit needs of targeted groups, such as low-income borrowers.
In September 2008, the Federal Housing Finance Agency placed the enterprises in conservatorship out of concern that their deteriorating financial condition would destabilize the financial system. The future role of the enterprises in the housing finance system has yet to be determined. As of September 2016, the enterprises had received about $187billion in financial assistance from Treasury through purchases of senior preferred stock, but had paid more than $250 billion in dividends to Treasury under the stock purchase agreements. The federal government also supports mortgages through the Federal Housing Administration (FHA), which helps households purchase and refinance homes by insuring private lenders against losses from defaults on FHA-insured mortgages. FHA has experienced substantial growth in its insurance portfolio and faced financial difficulties. At the end of fiscal year 2013, FHA received about $1.7 billion from the Treasury to ensure that it had sufficient funds to pay for all expected future losses on existing insurance obligations.
GAO-16-278: Published: Mar 10, 2016. Publicly Released: Apr 11, 2016.
The share of home mortgages serviced by nonbanks increased from approximately 6.8 percent in 2012 to approximately 24.2 percent in 2015 (as measured by unpaid principal balance). However, banks continued to service the remainder (about 75.8 percent). Some market participants GAO interviewed said nonbank servicers' growth increased the capacity for servicing delinquent loans, but they also noted ch...
GAO-16-351: Published: Mar 8, 2016. Publicly Released: Mar 8, 2016.
The U.S. Department of the Treasury (Treasury) monitors activity and aggregate expenditures under its Troubled Asset Relief Program (TARP)-funded Making Home Affordable (MHA) program, but it has not instituted a system to review the extent that it will use the full available program balance ($7.7 billion as of October 16, 2015). In a July 2009 report, GAO found that Treasury's estimates of program...
GAO-16-175: Published: Feb 25, 2016. Publicly Released: Mar 28, 2016.
The U.S. financial regulatory structure is complex, with responsibilities fragmented among multiple agencies that have overlapping authorities. As a result, financial entities may fall under the regulatory authority of multiple regulators depending on the types of activities in which they engage (see figure on next page). While the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Fr...
GAO-16-169: Published: Dec 30, 2015. Publicly Released: Dec 30, 2015.
Federal financial agencies conducted required regulatory analyses for rules issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and also reported required coordination. These agencies also addressed key elements of Office of Management and Budget guidance for conducting cost-benefit analyses for rules considered major—rules likely to result in an ann...
GAO-15-365: Published: Jun 25, 2015. Publicly Released: Jun 25, 2015.
Past banking-related crises highlight a number of regulatory lessons learned. These include the importance ofEarly and forceful action. GAO's past work on failed banks found that regulators frequently identified weak management practices that involved the banks in higher-risk activities early on in each crisis, before banks began experiencing declines in capital. However, regulators were not alway...