Prepared Remarks for Alphonso Jackson
Secretary of Housing and Urban Development
at the FHA Regional Homeownership Summit
Los Angeles, California
Monday, June 25, 2007
Good afternoon. Thank you all for coming. Also, many thanks to the organizers of this regional summit.
This summit is timely. We need your prudent reflection, sound advice, and steadfast commitment to action. Consumer confidence in housing is becoming fragile. This is completely understandable given the environment out there right now. Housing is front page news...and not in a good way. Positive forces are weakening; reliable trends are now more unpredictable. In the past few years, the homeownership story has been exciting, sometimes thrilling, and sometimes hair-raising (for those who still have hair). For several years, the housing market rocketed into the sky...and home values rose by 66 percent between 2000 and 2006. I believe the housing industry was a major component in keeping the American economy afloat after 9/11.
But now that trajectory is leveling off, even descending. In the past several months, we have been confronted with a sobering, steady narrative...inappropriate sub-prime loans, predatory lending, staggering rates of foreclosure, higher mortgage rates, and fewer housing starts. For example, earlier this month, we learned that more than 176,000 home foreclosures were filed in the month of May - a historic high. For the first quarter, the percentage of mortgage payments that were 30 or more days past due for "subprime' adjustable-rate home mortgages were also the highest on record. The National Association of Home Builders reports that sales of new, single family homes declined to its lowest rate in 16 years.
Adjustments are underway. Treasury Secretary Paulson confirmed this last week. He believes that we are nearing the end of the slump. Fed Chief Bernanke said virtually the same thing two weeks ago, and reported that there have been "no major spillovers from housing onto other sectors of the economy."
Well, that is good news. But it could take up to two years to work-off excess inventories of homes and to complete the market correction. At the same time, it could be up to five years before we see the housing market return to where it would have been without the dramatic up/down cycle during this decade. Many economists believe that housing market cycles tend to be roughly 10 years in duration. A 5-year run-up, like we experienced from 2001 to 2005, is usually followed by a five-year period of correction and recovery. This market cycle just began its correction last year. We will know that the correction is over when we see a steady flow of new home sales above 1.1 million units per year, existing home sales stabilizing close to 6.5 million units per year, and house price appreciation of close to 4 percent per year. We also need to see the inventory of homes for sale drop from its current 7-plus months to something less than 5 months supply.
So it is likely we may have already seen the worst.
But we must do better at smoothing out these cycles and anticipating problems.
These "adjustments" won't be easy. I've just come from a speech before the National Conference of Mayors. They are very concerned. So am I. The mayors understand the importance of homeownership. For them, homeownership is more than graphs and charts, national trends or international finance, reports or studies. It is about people they know and see everyday. It is also about creating a sustained and predictable tax base. Foreclosures harm families, neighborhoods, and communities - and they hurt a city's bottom line. Foreclosure on a home costs the city money: one study indicates that for approximately every $100,000 in value in a foreclosed home, the city loses $1,200 per year in taxes and other sources of revenue. And they hurt the neighborhood, too: another study found that properties within 150 feet of a foreclosed vacant house lose 10 percent of their value.
Clearly, it is important to help Americans realize the dream of homeownership. But the sub-prime market provides a clear lesson: we must have a more transparent and informed approach to homeownership.
For example, sub-prime loans made homeownership possible for millions of Americans and they took advantage of that opportunity. As Alan Greenspan said, sub-prime loans "democratized credit." And that happened in a responsible, affordable manner for most sub-prime loans. The Center for Responsible Lending recently argued that four out of five sub-prime mortgages remain viable and will not result in foreclosure.
But, roughly one out of five of these sub-prime loans will have problems. Why? Well, for many homeowners, they didn't read the fine print and, even if they did, they didn't understand the conditions of the loan. Some people signed the loan papers without more than a glance at the words, more concerned about finding the dotted line than comprehending the commitment of the contract. I know. Understanding the home-buying process is pretty tricky, after all - it was for me, and look at where I sit! But I was dealing with a reputable lender and I was fortunate enough to be able to afford the loan.
Some people who have a sub-prime mortgage are not so fortunate. What they see at first is not always what they ultimately get. I strongly urge potential homebuyers to seek counseling. They must ask for help. Half of homeowners who recently experienced foreclosure didn't even pick up the phone to contact their lender. Counselors can give the kind of advice and information that can keep people from taking unaffordable loans and can help them spot a predatory lender before it's too late.
We must have informed, educated homeowners -- not homeowners who operate on blind faith. The 2,300 HUD-approved housing counseling programs throughout the nation offer a wide array of counseling services to prepare families to buy their first home. This will help them avoid predatory lending practices. Housing counseling could even assist current homeowners facing default or foreclosure.
I am proud to say this Administration has increased counseling from $13 million when we came in to $41 million now, more than a 200 percent increase. In the coming fiscal year, President Bush has requested $50 million for housing counseling grants.
Counseling is one thing; punishment and deterrence of predatory lending is another. We must expose and end predatory practices. We have restrained or stopped several companies engaged in questionable practices. I am committed to using every possible means in my power to end predatory lending in America.
We must give consumers the highest possible confidence in the home buying process - and that confidence must be justified. That's why we pushed for more housing counseling the last few years. And why we have been pushing for Federal Housing Administration reform for two years now. We anticipated this problem. People needed FHA and we should have been able to help them. But the changes we requested were ignored by Congress.
If we are really serious about helping homeowners, we must have reform of the FHA now!!! Reforms must be made for FHA to adapt to today's marketplace. We have internally modernized FHA as much as we can. The time has come to bring FHA into the 21st Century housing marketplace. For two years, the President and I have encouraged Congress to pass legislation that modernizes the FHA. Every day of delay places more and more homeowners at risk.
A new FHA could be an antidote for sub-prime difficulties. FHA reform could be one important answer to our sub-prime problems. FHA has a proven track record. It has helped more than 34 million families become homeowners. And we have helped families stay in their homes. Right now, without reform, FHA refinancing is helping tens of thousands of families who currently have sub-prime loans. So the anti-reformers will say we really don't need to do anything...the sub-prime borrowers will come to FHA now anyway. But, we could help more families with problematic sub-prime mortgages - hundreds of thousands of families -- if Congress acts. With expanded authority to set insurance premiums commensurate with risk, FHA could help so many find an exit strategy from their sub-prime mortgages. Unfortunately, under today's restricted premium limits and maximum loan amounts, FHA simply cannot reach all the borrowers who need us.
Reform legislation will level the playing field for all families by providing a safe, fair and affordable mortgage alternative to exotic sub-prime loans. Take California as an example. Here in this state, many Californians have resorted to high-priced, high-risk mortgage loans to purchase a home. A recent study found that 139 of California's ZIP codes fell within the top 500 for total foreclosure filings in the U.S.
California would benefit from FHA reform. Since 1934, the FHA has helped more than two million families in California purchase and maintain their homes. Unfortunately, as the lending industry has changed through automated underwriting systems, risk-based pricing, and other new products, FHA has been taken off the table for most Californians. Few home buyers in the state have been able to use FHA financing. The FHA loan limits, which range from 200,000 to over $362,000 in California, are not high enough to meet the cost of most homes in the state. And we see the result: in 1999, FHA insured 131,000 loans in California; in 2006, FHA insured only 2,500.
Reform legislation, if approved by Congress, could increase the number of FHA insured loans in California by nearly 2,500 next year, more than 8,000 in 2008, and thousands more each year thereafter. My department estimates that in 2010, a reformed FHA would help generate more than $5 billion in safer home loans for California alone.
This is about more than dollars and numbers. We must think of the human costs. If Congress had passed legislation for FHA reform, thousands and thousands of Americans would still have their homes, would have avoided the financial ruin of foreclosure, and would have been spared the pain and trauma of having the American Dream turn into the nightmare of Paradise Lost.
We must do more to help our citizens, and the American people agree. A recent poll found that nearly 80 percent of Americans responded with a resounding "yes" to an improved FHA. That shows Americans want financially sound options...real choices.
FHA reform is certainly preferable to one option that is being discussed. Some in Congress want a bailout. I think that would be a mistake. A bailout will only compound the sub-prime problem. A bailout is nothing but a payoff that rewards bad behavior. I don't think we should use the taxpayer dollars to cover bad investments. While I have sympathy for people who are in a tricky situation, I strongly disagree that a bailout is the answer. There is a reason it is called "moral hazard." And we should not reward investors who were fiscally irresponsible.
Again, this is our challenge, to find solutions that provide the right kind of incentives and reward the most financially responsible behavior. We must not let such a powerful part of our economy find itself hostage to wildly risky behavior or to those who want to simply roll the dice. Prudence demands that we come up with answers that provide homeownership without placing the economy on a shaky foundation.
Ladies and gentlemen, we must promote and protect homeownership. We must do this in California and throughout America. We must join with families and neighbors, businesses and investors, clergy and educators, mayors and city managers, to build an ownership society. And if we can do this, we help fulfill the American promise...the American Dream...for millions of Americans. We give each homeowner a strong stake in the community, financial security, and equity. With each home, we gain something that is ours...and a place for our families to grow up and grow old together.
Again, thank you for coming.