In 2007, the  bill was introduced to strengthen consumer protections and included  provisions that would have created a safe harbor for loans that met certain  requirements. H.R. The bill would have reformed mortgage lending  by, among other things, setting minimum standards for residential  mortgage loans (see fig. The two standards included:    Reasonable ability to repay. Most Recent Nonprime Mortgages Would Not Have Been Safe Harbor Loans and Certain Variables Associated with the Safe Harbor Requirements and Other Factors Influenced Defaults

We estimate that almost three-quarters of securitized nonprime mortgages  originated from 2000 through 2007 would not have been safe harbor loans. Our statistical  analysis of loan data shows that certain variables associated with the safe  harbor requirements—documentation of borrower income and assets, in  particular—were associated with the probability of a loan default. The significance of particular safe harbor requirements varied by  origination year. More  specifically, the estimated percentages of nonprime loans without full  documentation ranged from a low of 27 percent in 2000 to a high of almost  60 percent in 2007. Consistent  with this view, H.R. For example, less than full  documentation was associated with a 5.5 percentage point increase in the  estimated probability of default for short-term hybrid ARMs used for home  purchases, all other things being equal (see table 4). In examining the influence of safe harbor variables on the probability of  default within 24 months, we controlled for other variables not associated  with the safe harbor requirements, such as house price appreciation,  borrower credit score, and the LTV ratio. Relevant Research and Stakeholder Perspectives Do Not Provide a Consensus View on the Bill’s Potential Impact

While some research indicates that anti-predatory lending laws can reduce  originations of problematic loans without overly restricting credit,  research on state and local anti-predatory lending laws and the views of  mortgage industry stakeholders do not provide a consensus view on the  potential effects of the bill. Mortgage industry and consumer group  representatives we interviewed disagreed on the bill’s potential effect on  credit availability and consumer protections. Our review of eight such  studies found evidence that anti-predatory lending laws can have the  intended effect of reducing loans with problematic features without  substantially affecting credit availability, but also that it is difficult to  generalize these findings to all anti-predatory lending laws or to the  potential effect of the bill. Additionally, this  study found that the strength of a law’s enforcement provisions (e.g., the  extent of potential liability for assignees) was not associated with changes  in the estimated likelihood of subprime originations. Safe Harbor Requirements

Mortgage industry representatives we interviewed generally viewed the  bill’s safe harbor requirements as overly restrictive and said that these  requirements would reduce mortgage options and increase the cost of  credit for certain borrowers. For example, some consumer group  representatives said that the bill’s assignee liability provisions should not  allow for any exemptions from liability, such as allowing assignees to cure  a loan (i.e., modify or refinance the loan so that it meets the bill’s  minimum lending standards) to avoid liability. Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) assess the proportion of recent nonprime loans  that would likely have met and not met the Mortgage Reform and Anti- Predatory Lending Act of 2007’s (bill) safe harbor requirements, and how  variables associated with those requirements affect loan performance; and  (2) discuss relevant research and the views of mortgage industry  stakeholders concerning the potential impact of key provisions of the bill  on the mortgage market. The scope of our analysis was limited to the  nonprime mortgages.
Why GAO Did This Study

H.R. 3915 (2007), a bill introduced, but not enacted by the 110th Congress, was intended to reform mortgage lending practices to prevent a recurrence of problems in the mortgage market, particularly in the nonprime market segment. The bill would have set minimum standards for all mortgages (e.g., reasonable ability to repay) and created a "safe harbor" for loans that met certain requirements. Securitizers of safe harbor loans would be exempt from liability provisions, while securitizers of non-safe harbor loans would be subject to limited liability for loans that violated the bill's minimum standards. In response to a congressional request, this report discusses (1) the proportions of recent nonprime loans that likely would have met and not met the bill's safe harbor requirements and factors influencing the performance of these loans, and (2) relevant research and the views of mortgage industry stakeholders concerning the potential impact of key provisions of the bill on the availability of mortgage credit. To do this work, GAO analyzed a proprietary database of securitized nonprime loans, reviewed studies of state and local anti-predatory lending laws, and met with financial regulatory agencies and key mortgage industry stakeholders.

What GAO Found

GAO estimates that almost 75 percent of securitized nonprime mortgages originated from 2000 through 2007 would not have met H.R. 3915's safe harbor requirements, which include, among other things, full documentation of borrower income and assets, and a prohibition on mortgages for which the loan principal can increase over time. The extent to which mortgages met specific safe harbor requirements varied by origination year. For example, the percentage of nonprime mortgages with less than full documentation rose from 27 percent in 2000 to almost 60 percent in 2007. Consistent with the consumer protection purpose of the bill, GAO found that certain variables associated with the safe harbor requirements influenced the probability of a loan entering default (i.e., 90 or more days delinquent or in foreclosure) within 24 months of origination. For example, on the basis of statistical analysis, GAO estimates that, all other things being equal, less than full documentation was associated with a 5 percentage point increase in the likelihood of default for the most common type of nonprime mortgage product. GAO also found that other variables--such as house price appreciation, borrowers' credit scores, and the ratio of the loan amount to the house value--were associated with default rates. Research on state and local anti-predatory lending laws and the perspectives of mortgage industry stakeholders do not provide a consensus view on the bill's potential effects on the availability of mortgage credit. Some research indicates that anti-predatory lending laws can have the intended result of reducing loans with problematic features without substantially affecting credit availability. However, it is difficult to generalize these findings to all anti-predatory lending laws or the potential effect of the bill, in part, because of differences in the design and coverage of these laws. Mortgage industry and consumer group representatives with whom GAO spoke disagreed on the bill's potential effect on credit availability and consumer protection. For example, mortgage industry officials generally said that the bill's safe harbor, securitizer liability, and other provisions would limit mortgage options and increase the cost of credit for nonprime borrowers. In contrast, consumer groups generally stated that these provisions needed to be strengthened to protect consumers from predatory loan products.