	Introduction

One critical housing decision that households make is whether to rent or to own. Multiple factors influence the decision, such as a household's financial status and expectations about the future. Few homebuyers have sufficient financial resources to make the purchase without borrowing money. Most need to take out a loan known as a mortgage. As described in more detail in the " Lender Protection " section, the government provides explicit support to certain homeowners through government agencies such as the Federal Housing Administration (FHA) and implicit support to others, such as through the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The housing finance system has two major components: a primary market and a secondary market . Many different types of lenders, including banks, credit unions, and finance companies (institutions that lend money but do not necessarily accept deposits) make home loans. A loan that uses real estate as collateral is typically referred to as a mortgage . When a borrower applies for a mortgage, the lender will underwrite, or evaluate, the borrower. If the borrower is unable or unwilling to pay, the lender can seize the house and sell it to recoup what is owed. To increase the probability that the sale of the house will be sufficient to recover the amount of the mortgage outstanding (and to reduce the advantage to the homeowner of defaulting), the lender will generally require a down payment . Mortgage insurance, an insurance policy purchased by either the borrower or the lender (though usually by the borrower), compensates the lender in the event that the borrower defaults. Borrowers typically purchase mortgage insurance from private businesses ( private mortgage insurance or PMI) or the federal government. Department of Veterans Affairs (VA) . U.S. Department of Agriculture ( USDA ) . Mortgage Servicing

After a loan is made, the borrower is responsible for making the required payments. Other types of mortgages may have their own requirements for considering loss mitigation options prior to a foreclosure. Nonconforming loans can be broken down into three additional categories depending on the reason they are not conforming. Credit risk refers to the risk that the lender bears if a borrower does not repay the mortgage on time. The market for buying and selling mortgages is called the secondary market, which is described below. When a mortgage is sold, the mortgage servicer may change. Securitization

When a lender sells a mortgage in the secondary market, the new mortgage holder can hold the mortgage as a whole loan . When held as a whole loan, the mortgage is in the portfolio of the new mortgage holder, and the new mortgage holder bears the risks associated with the mortgage. Mortgage securitization comes in many different forms, but generally speaking, the process involves a financial institution acquiring and combining (pooling together) many different mortgages and then issuing a mortgage-backed security (MBS). A servicer collects the payments of all the borrowers whose mortgages are part of the security and remits the payments to the investors. The underlying loans that comprise the MBS are related to the mortgage classifications described in " The Primary Market " section of this report: generally, conforming mortgages are included in Fannie Mae and Freddie Mac MBS, government-insured mortgages in Ginnie Mae MBS, and nonconforming mortgages in private-label MBS, although there are exceptions. Fannie Mae and Freddie Mac do not originate mortgages, a process that occurs in the primary market. Ginnie Mae guarantees MBS made up exclusively of mortgages insured or guaranteed by the federal government, namely FHA, VA, USDA, or HUD's Office of Public and Indian Housing. The relative illiquidity of specified-pool markets compared with the TBA market may be due to the structure of the market, the absence of a large forward market for non-agency MBS, or the type of securities being traded (i.e., securities that do not have a perceived or explicit government guarantee).
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.