Understanding the Housing Finance System

housing thumbnailThe housing finance market is more than just homebuyers, sellers, and real estate agents—it’s a complicated landscape of borrowers, lenders, securitizers, servicers, and investors. The complexity of housing finance played a major role in the 2007-2009 financial crisis, and poses challenges for reforming the system.

We have reported on changes to the housing finance system, and offered a framework to assess the impact of potential changes. From that work, here’s a brief explanation of the system and players in the 4 major phases of a mortgage.

1. Origination

Homebuyers take out mortgages to finance the cost of a new home, and homeowners refinance their existing mortgages. This is called “origination” because this is where a mortgage starts—or originates.

However, there is more to origination than the borrowers and lenders, as shown below. For example, the bank that originally made the loan may sell it in what’s called a “secondary market.”

FIG-1Excerpted from GAO-15-131

2. Securitization

If a mortgage is sold into the secondary market, as described above, it could be pooled or bundled into “mortgage-backed securities.” Such mortgages are said to be securitized. Securitizing mortgages allows them to be traded on securities markets, similar to the trading of stocks and corporate bonds. This is intended to allow lenders to obtain funds to make more loans, lower mortgage rates for borrowers, and provide those buying the securities with additional investment options.

Most mortgages are securitized—almost 80% of new mortgages in 2013. Securities are generally issued by Fannie Mae and Freddie Mac, or by private financial institutions, as shown below.

FIG-2Excerpted from GAO-15-131

3. Servicing

Throughout the life of a mortgage, it is “serviced.” Servicing refers to a variety of administrative duties, such as sending statements and tax documents to borrowers, answering customer service inquiries, and collecting mortgage payments. Mortgages may be serviced by the lenders that originated them or by third parties that specialize in mortgage servicing.

FIG-3Excerpted from GAO-15-131

4. Termination

Optimally, a mortgage is terminated after the borrower fully repays the amount owed, as shown below. This happens when a borrower

  • pays off the full amount of the mortgage plus any interest,
  • prepays the mortgage by refinancing it with a new loan, or
  • pays off the mortgage when selling the property.

If a borrower fails to make a payment for 90 days, the mortgage goes into default, which may result in termination by foreclosure.

FIG-4Excerpted from GAO-15-131

With so many players involved in housing finance, if something goes wrong, it can be both difficult to fix and challenging to prevent from happening again. Prior to 2007, mortgage defaults and foreclosures were relatively low, but by the end of 2013, more than 1 million homes were in foreclosure.

To learn more, check out the videos, reports, and other resources on our Key Issues page on the Federal Response to the Foreclosure Crisis.

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GAO’s Physical Infrastructure Team

thumbnail_gaoGAO’s workforce is organized largely by subject area, with most employees working in 1 of 14 mission teams. Today, we’ll spotlight the Physical Infrastructure (PI) team, which helps Congress and federal agencies better manage the physical infrastructure network that connects the nation and bolsters its economy.


PI team reports cover 6 issue areas:

  1. Surface Transportation: Focusing on passenger and freight transportation safety and financing, reports have discussed mileage-based user fees, freight rail safety, rural and tribal transit, and natural gas pipeline integrity.
  2. Aviation Transportation: Reports have addressed the Next Generation Air Transportation System (NextGen), unmanned aircraft systems (often referred to as “drones”), and the aviation maintenance and pilot workforces.
  3. Postal Issues: These reports typically cover the U.S. Postal Service’s financial condition, benefits programs, and delivery system.
  4. Federal Properties: Work on federal properties has included security risk assessments, federal warehouse utilization, structure management, and deferred repair and maintenance.
  5. Telecommunications: We have issued reports on consumer-location data privacy, GPS disruptions that could affect critical infrastructure, financial support to rural broadband access providers, and requirements for wireless service licensees to build infrastructure and use their assigned spectrum.
  6. Special Topics: In 2014, these included U.S. coin inventory management, currency for the visually impaired, Arctic commercial maritime activities, and Recovery Act grant management.


In fiscal year 2014, PI’s work identified $1.5 billion in financial benefits for the federal government, as well as other efficiencies. In addition, directors from PI testified at 18 congressional hearings and contributed to 2 other hearings.

A Closer Look at a PI Report: Airline Pilot Availability

In February 2014, PI reported on commercial airline pilot availability. Recent industry forecasts indicate that the global aviation industry is poised for growth. However, stakeholders have voiced concerns that a number of factors—such as retirements, fewer pilots exiting the military, and new flight-hour requirements for first officers—could result in a shortage of qualified airline pilots.

We found mixed evidence regarding the extent of a pilot shortage when we looked at labor market data and information from associations and pilot schools. For example, although relatively low pilot unemployment rates might suggest a labor shortage, wages have not increased. In a shortage, higher wages would be expected, to draw would-be pilots to the profession.

Nonetheless, regional airlines reported difficulties finding sufficient numbers of qualified pilots, and the supply of potential airline pilots has been declining. Between 2000 and 2012, the number of new commercial pilot certifications issued annually decreased by 17 percent, as shown below.


Excerpted from GAO-14-232

To attract and retain qualified pilots, airlines we interviewed have increased recruiting efforts and developed partnerships with schools to provide incentives and clearer career paths for new pilots. Further, airline representatives and pilot schools suggested that the Federal Aviation Administration could do more to allow various kinds of flight experience to count toward the new commercial pilots’ flight-hours requirements.

Our podcast further explores potential shortages:

  • Questions on the content of this post? Contact Phillip Herr at herrp@gao.gov.
  • Comments on GAO’s WatchBlog? Contact blog@gao.gov.
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Weather Forecasting—Outlook Unclear

WeatherSandy forecasts can warn people before major storms strike—allowing time to protect homes, businesses, and lives. We have previously discussed the importance of the satellites the United States uses for its forecasts, and wanted to update our readers on recent developments in this area.

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GAO’s Education, Workforce, and Income Security Team

GAO’s workforce worker_family_supportsis organized largely by subject area, with many of its employees working in one of 14 mission teams. Today we’ll be putting the spotlight on the Education, Workforce, and Income Security (EWIS) team, which focuses on programs and legislation that affect Americans’ quality of life from infancy to old age.

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Funding the Children’s Health Insurance Program (CHIP)

Thumbnail Health CareSince 1997, the State Children’s Health Insurance Program (CHIP) has provided health care coverage for more than 8 million children in low-income families that don’t have health insurance, but make too much money to qualify for Medicaid. This year, Congress will decide whether to continue funding CHIP. Read on to learn about some of the issues involved in this decision.

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Happy Birthday, WatchBlog!

One year ago today, we published our first WatchBlog post. Since dogthen, we’ve published over 100 more, and the blog has been viewed more than 50,000 times. Celebrate this milestone with us by looking back on some of the areas we covered here in our first year.

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Reconstruction Efforts in Haiti 5 Years after the Earthquake

Five years ago today, on January 12, 2010, a powerful earthquake struck Haiti. The earthquake killed an estimated 230,000 people, displaced about 2 million more, and destroyed many homes, roads, and other buildings. In addition to immediate relief efforts, the United States pledged over $1 billion for reconstruction projects. On the 5th anniversary of the disaster, read about some of the challenges we identified facing efforts to rebuild housing and infrastructure.

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Welcome, 114th Congress!

thumbnail_gaoThe 114th Congress convened on January 6, 2015. As they begin their work, we wanted to highlight some of the ways we serve Congress, particularly at the start of each new Congress. Hopefully these links can also help anyone—elected or otherwise—better understand GAO’s role in congressional decisionmaking.

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Our 10 Most Popular Podcasts of 2014

Want to know what nanomanufacturing is? The connection GAO_Logo-squarebetween fracking and new oil pipelines? How much those F-35 Joint Strike Fighters will ultimately cost? Listen to our 10 most downloaded podcasts of 2014 to help understand some of the major issues of the year.

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Podcast on GAO’s State and Local Fiscal Outlook Model Update

GAO Podcast IconState and local governments nationwide face long-term fiscal sustainability challenges. Since 2007, GAO has published simulations of fiscal trends in the state and local government sectors.

Explore the state and local fiscal outlook model, and hear our podcast with Michelle Sager, a director in GAO’s Strategic Issues team who led the recent update of the model.

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