From the U.S. Government Accountability Office, www.gao.gov

Transcript for: Watchdog Report: Dodd-Frank’s Potential Impact on the
Mortgage Market

Audio interview by GAO staff with Bill Shear, Director, Financial
Markets & Community Investment

Related GAO Work: GAO-11-656: Mortgage Reform: Potential Impacts of
Provisions in the Dodd-Frank Act on Homebuyers and the Mortgage Market

Released on: July 19, 2011

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[ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and
information from the Government Accountability Office. It's July 19,
2011. The Dodd-Frank Wall Street Reform and Consumer Protection Act aims
to reform aspects of the mortgage market that contributed to the recent
financial crisis. A group led by Bill Shear, a Director in GAO's
Financial Markets and Community Investment team, recently reviewed the
potential effects of the Act’s mortgage-related provisions. GAO's Jeremy
Cluchey sat down with Bill to learn more.

[ Jeremy Cluchey: ] What were the conditions in the mortgage market that
motivated the legislative changes your team reviewed?

[ Bill Shear: ] As we all know too well we've had a financial crisis
that affected home buyers and investors and so the conditions that
precipitated this were a lot of people losing their homes through
foreclosures and a breakdown in what's called the private securities
market used to fund mortgages.

[ Jeremy Cluchey: ] Then how did the Dodd-Frank Act seek to address
these conditions?

[ Bill Shear: ] The Dodd-Frank Act, among other things, took actions to
reform mortgage lending in what's called securitization practices that
contributed to the financial crises. For example it created consumer
protections for home buyers and home owners in obtaining mortgage
credit, and it created certain rules for investor protection, for
investors in what are called mortgage-backed securities.

[ Jeremy Cluchey: ] One of the aspects of the Act that your team looked
at has to do with offering some protection for lenders who offered
qualified mortgages. What do we mean by this term?

[ Bill Shear: ] And Jeremy that's an excellent question that gets into
some of the details as far as how to reform mortgage lending. Qualified
mortgages exclude mortgages that are considered risky for borrowers--so
mortgages such as those where over time a borrower's principal balance
that they owe on their mortgage could increase over time rather than the
usual situation where the principal balance is reduced over time;
mortgages where borrower income and assets are not documented in the
loan application; those where borrowers may not have an ability to repay
the loan--so now I've stated what falls outside of a qualified mortgage,
some of the conditions--but lenders making qualified mortgages, which
are considered safer mortgages for borrowers, are provided certain legal
protections from litigation that might be initiated by borrowers who
have, for example, lost their homes.

[ Jeremy Cluchey: ] So for the qualified mortgage criteria that your
team reviewed in this study, what did you find?

[ Bill Shear: ] What we did since we don't have a crystal ball into the
future, we looked at mortgage practices that extend back in time even
before the crisis occurred to see what types of practices were out
there. So what we found that is over this longer period of time is that
most of the mortgages would have met the qualified mortgage criteria and
this is important in looking at the impacts of the Act, because what the
Act is trying to do is protect consumers from bad mortgage products but
at the same time it doesn't want to do it in a way that would unduly
restrict the availability of mortgage credit.

[ Jeremy Cluchey: ] So for tax payers interested in these potential
effects, what's the bottom line here?

[ Bill Shear: ] I think the bottom line is that the mortgage reform
process will take a number of years. Just looking at risk retention,
which is one of the most controversial issues here. What mortgages do
you want to have subject to risk retention? Should it be all mortgages
where borrowers are just making a small down payment, or should include
some that include larger down payments, like down payments up to 20
percent of the value of the house? These are extremely complicated and
controversial issues. The rule making is still evolving. The other
aspect of this is even one rule making for qualified residential
mortgages and qualified mortgages in all those complicated issues are
really placed into regulation, they'll still be a period of time where
they'll be experiences of how this plays out in the market place and
there might be adjustments that should be anticipated over time.

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[ Narrator: ] To learn more, visit GAO's Web site at GAO.gov and be sure
to tune in to the next edition of GAO's Watchdog Report for more from
the congressional watchdog, the Government Accountability Office.