Wednesday, September 17, 2008
Good afternoon. Thank you, Karen (Thomas). Before I begin, I would like to provide an update on our response to Hurricane Ike. Currently, teams from HUD are assessing multifamily and public housing through the State of Texas and Louisiana. Tomorrow, I am going to Texas to obtain a first-hand assessment of the damage. My team and I are working closely with FEMA to address potential long term housing needs. I plan to meet with local and state officials tomorrow to discuss this further.
We are already speeding disaster relief to the counties that have been hard hit. First, for homeowners, HUD has announced a foreclosure moratorium to give families whose homes are insured through the Federal Housing Administration. This will give families the breathing room they need to put their lives back together without worrying about the prospect of losing their homes.
Second, HUD is strongly recommending that loan servicers provide special forbearance, loan modification, refinancing and waiver of late charges to help homeowners through this difficult time. Finally, HUD has offered states the ability to re-allocate existing federal resources toward disaster relief.
It is an honor to be here. I am especially pleased to speak to you on September 17th, Constitution Day, the day when the American Constitution was signed in 1787. The Constitution is the enduring thread that binds our nation together, providing strength and stability for more than two hundred years. One of the signers was Alexander Hamilton, our first Treasury Secretary who started the federal banking system. Another signer was Robert Morris, who devoted himself to the creation of a system of finance and trade in this new country. Their efforts brought stability to our fledgling financial system during a time of tremendous uncertainty and provided the underpinning for free trade. They started an economic effort that has become a $13 trillion enterprise. It led to a system that enabled free enterprise to become the powerful engine that drives ours and the world's economy.
Overtime, our financial system has proven itself to be deep, dynamic, and resilient. It has been remarkable in its ability to adapt to opportunity and risk. Today, we are living through a decisive moment in American economic history, a moment that will profoundly test our investors and institutions.
So, today, with respect to the housing market, I would like to:
- Frame where we are today,
- Outline what we are doing, and
- Discuss considerations for the path forward.
Our financial markets have hit a very rough patch.
As we entered this crisis our markets had become more complex and interdependent than anyone really understood with respect to asset classes, financial institutions, and geographies. Without industry or regulatory oversight that fully addressed these issues, and without proper diligence and transparency at various points in the system, our markets moved ahead in ways that have had a devastating impact.
At the heart of the turmoil are our housing and mortgage markets.
- We saw overbuilding and an overly aggressive push to sell more and more homes.
- Home buyers either reached too far on speculation or fundamentally did not understand what they were getting into.
- Lenders and originators increasingly focused on doing deals at whatever cost and often selling the risk to investors.
- Purchasers of that risk invested dollars but not judgment or diligence in mortgages that were destined for failure.
- There were breakdowns at all levels, and we are seeing the dramatic effects every day.
So, where are we now? First – We have a fundamental oversupply of homes in many markets, which have contributed to a decline in home values.
- Nationally, existing home sales are 13 percent lower than last year, which leads to lower prices.
- The Case-Shiller Index of home prices in 20 major metropolitan areas is down 19 percent from the high in 2006.
- A full 9 percent of all loans in this country are either delinquent or in some state of foreclosure.
- Close to half a million homes entered the foreclosure process in the second quarter of this year. Most people expect that number to exceed 2 million or more foreclosures this year.
- We remain concerned about this issue. We expect Option ARMs and Alt-A resets to continue into 2010.
- Nationwide, we have an 11-month inventory of supply of housing relative to sales.
There is some hopeful news. Deterioration in home prices has slowed in the last couple of months. Seven of the 20 markets saw an increase in prices.
Second, in addition to these issues, we have seen a major pullback in mortgage liquidity provided without government support.
- We need liquidity both to help people refinance out of mortgages they cannot afford and to support markets in desperate need of buyers.
- The U.S. Government is supporting over 90 percent of the market for new mortgages today through the GSE's and insurance programs like HUD's Federal Housing Administration.
- That market share has doubled in just two years as our private markets have evaporated.
Now, what are we doing? In the near term, we are taking a pragmatic approached to deal with the urgencies in front of us.
We are starting with the belief that if there are people in troubled mortgages that want to stay in their homes and can afford to do so with the right mortgage, we should work to help them do so.
- First and foremost, it's good for the families
- It's also good for the housing market – one in three homes sold are short sales or foreclosures. We don't need additional supply that will drive down prices further.
- And it's good for financial institutions who can protect all or a large portion of their loan values. Lenders today lose 25-50 percent of the value of their loans in a foreclosure because of the costs involved and the decline in property values.
Let me outline some of the actions we have taken to help struggling homeowners.
First, we have and continue to expand HUD's Federal Housing Administration (FHA) refinancing programs. A year ago, we launched FHASecure which expanded eligibility of FHA to homeowners with subprime mortgages that had gone delinquent because of a reset.
We expanded the program further this summer to assist families who have missed up to three monthly mortgage payments over the previous 12 months and experienced temporary economic hardship.
In the last year, we have helped more than 350,000 families keep their homes by refinancing into a fixed-rate FHA-insured mortgage, and expect to help a total of about 500,000 families by the end of the year.
Our FHA refinancing volume is 3-4 times last year's levels. Our refinancing program will expand further when we launch the Hope for Homeowners program that passed as part of the new housing law.
The Hope for Homeowners program will go into effect on October 1st. For the past several weeks, the Board of Directors, made up of HUD, Treasury, FDIC, and the Federal Reserve, has been working to finalize the program design. I appreciate the hard work these agencies have put into standing this new program up in a short period of time.
The legislation stipulates that the loans entering the program are no greater than 90 percent of the value of the underlying home. Clearly, many lenders will need to take a significant principal write-down to qualify homeowners for the program. Because principal write-downs are costly for lenders, we can be certain that most applicants will be distressed homeowners who would not otherwise qualify for an FHA loan.
As a result, the Board of Directors has placed much attention on the underwriting criteria. We want to ensure that we reach out to people in need, while at the same time ensuring that the resulting loan is affordable to the homeowner—both for their benefit and for the taxpayer's. Much of the burden for crafting a solution that works will be on the shoulders of the lender.
The Hope for Homeowners program will only be available to owner occupants, will only offer 30-year fixed rate mortgages, and will require sound underwriting standards.
Beyond FHA, we continue to advance a voluntary industry effort to assist struggling homeowners called the HOPE NOW Alliance. It involves 27 of the nation's biggest mortgage companies that hold about 90 percent of the sub-prime loans. It is helping to refinance mortgages and keep people out of foreclosure by establishing industry guidelines to assist servicers in working with borrowers, and by encouraging servicers to provide sufficient support and maintain standards for responsiveness to borrowers.
In July alone, HOPE NOW reworked a record 192,000 mortgages to avoid foreclosure, and since June 2007, HOPE NOW has reworked more than two million loans.
All of these efforts have been supported by housing counseling. There are 2300 HUD-approved housing counseling agencies in the United States. We know that approximately 97 percent of those in default who completed a housing counseling program with a HUD-approved housing counselor avoided foreclosure nationwide in 2007. That is powerful evidence about the difference that housing counseling can make.
And that is why the President has requested $65 million in his new budget for housing counseling. That is an increase of more than 150 percent since he assumed office. In October, I look forward to announcing the latest round of funding for housing counseling agencies.
Beyond helping distressed homeowners refinance, having adequate liquidity for purchasers of homes will be essential to getting us out of this housing slump. As I mentioned, the Federal Government is the provider of that liquidity today with the GSEs representing more than 70 percent of the market.
Fannie Mae and Freddie Mac are vital sources of mortgage financing for millions of American families seeking to own or retain a home.
A few weeks ago I would've been telling you how important it is to have an effectively functioning regulator at Fannie and Freddie. Well, today we find ourselves in an entirely different realm. And none of us like it, however, I do believe the actions announced early last week were necessary.
We simply could not wait any longer and risk additional deterioration in these two mortgage giants. If these institutions had continued to falter, the ripple effect would have further constrained liquidity for homeowners and impaired financial markets around the globe. Instead, these actions will provide stability to financial markets, support the availability of mortgage finance, and protect taxpayers against future risk. Interest rates have already gone down. Mortgages will be more affordable. And just last week, we saw refinances increase 88 percent over the previous week. All of this is very important for our housing and our financial markets.
So where do we go from here? I started out by stating that our financial system has proven itself to be deep, dynamic, and resilient. It has been remarkable in its ability to adapt to opportunity and risk. I continue to believe that, even in these trying times.
As such, I also believe that one of our first steps ahead will need to be to bring mortgage liquidity back to the marketplace through institutions that are not dependent on government support. It may seem difficult to even think in those terms, considering the massive rescue missions and failures that occurred over the past couple of weeks. It is all far beyond what anyone could have predicted and much of it is based on breakdowns in our most sophisticated financial institutions—as much as I hate to admit it, being an alum of both Lehman Brothers and the University of Chicago.
But I am undeterred in my confidence that the private markets will be the answer. Mortgage markets for a number of years had increasingly migrated away from government support and, I believe, would have made more progress. Based on a flawed construct, the GSEs impeded that evolution and led us to an unhealthy dependence.
Private sector mortgage finance has suffered a setback. The path forward will require greater trust among investors who need confidence and transparency into loan assets. Investors need to know what they are buying and have the tools to evaluate it.
While it doesn't seem that it should be that difficult to achieve considering how long structured mortgage instruments have been in the market, we have seen a fundamental breach of trust and it will take some time to restore it.
We have learned a tremendous amount about the GSEs, our system of mortgage finance, the drivers of risk, and the need for oversight to keep up with a dynamic marketplace. That knowledge, while sobering at times, should be the basis of our path forward.
Beyond the GSEs, we need to ensure in our own backyard at HUD that FHA is retooled for the future.
Congress has eliminated FHA's ability to price its services based on the risk of the borrower—that is a remarkable restriction to put on an insurance company in this market. We have a one-size-fits all price for borrowers resulting in a higher cost for hundreds of thousands of Americans who have been careful managers of their credit. While the moratorium on risk-based pricing is set to expire in 10 months, we are concerned that the moratorium could be extended.
The new housing law bans a practice that allows home sellers to fund FHA's down payment requirements, leaving the buyer with no equity. Yesterday, a bill passed out of committee in the House that would resurrect it. This practice has led to billions in losses in the FHA portfolio, and make no mistake, it will lead to billions more from our current book into the future. Unless we have broad authority to price this risk and limit the process, this bill could lead to mounting losses at FHA.
In addition, the Administration, and myself personally, have fought hard to get funding to improve the staffing and technology infrastructure of HUD. We need to respond to a rapidly changing market where it is critical that we have the ability to serve the needs of Americans. Yet, our staffing is based on an annual appropriations process which assumes knowledge of the year ahead. In addition, our core systems are based on 26-year old COBOL technology that stitches together over a dozen systems to meet the processing and oversight needs at FHA. The President requested in increase in HUD's IT budget last year, but Congress cut that number by $65 million. Our large government institutions, especially those that operate large financial operations, need to have the infrastructure, the tools and technologies to run efficiently, to serve their clients effectively, and provide proper oversight to protect the taxpayer.
Finally, let me make one more comment about the path forward before I take questions. Yesterday there was a hearing on the Hill where we heard numerous legislators assail proposed reforms to the Real Estate Settlement Procedures Act (RESPA). The unnecessary complexity of mortgages has significantly contributed to our housing crisis. We must do something to make mortgages more understandable and the process more transparent. That's why we have been seeking new regulations to require all mortgage lenders and brokers to clearly display an estimate of all settlement services, fees, and charges. They must not be hidden in the fine print. Borrowers would know their closing costs, interest rate and monthly payment amount. They would know whether or not the rate or principle balance would increase over time. They would know if there are prepayment penalties or any balloon payments. The rule would require a clear statement that would itemize closing costs and lock in certain charges at settlement. This would offer greater transparency and certainty, allowing Americans to shop and compare.
We have gone through a lengthy public comment period. We are committed to striking a balance between the needs of consumers and those in business of homeownership. But, I believe it is absolutely reprehensible that so many people in Congress today are fighting to stall progress, especially when they know so many families are in trouble because they didn't understand the terms of their mortgage. Our goal is to get RESPA completed by the end of this year and then provide the industry with a full year to implement that the rule. I firmly believe this will be a big step forward for restoring trust and transparency between the industry and the homeowner.
I started by discussing our financial founding fathers and the ongoing legacy of the American economic powerhouse. Yes, we face enormous challenges right now. Events will test our knowledge, experience, and talent. If we are diligent and prudent, if we work together and come up with on-point, creative solutions, our resources just might be equal to the problem. And America's success has been a daily recognition that we must continually use opportunity and freedom to make this nation stronger, better, and nobler.
We achieve great things when we work together, tapping into the strengths of our financial system and the innovative enterprise of the American people. And that is another way of saying that the future will be written by you and me, the latest generation of economic stewards in the long history of the American financial system.