San Francisco, California
Tuesday, October 21, 2008
Thank you, Chairman (David) Kittle.
I understand this session is about the "political landscape." While it is central to our thinking during an election season, the issues our country is facing complicate and twist that landscape in unexpected ways.
We are in new territory; the issues are enormous, the consequences vast, global. We are wading into new waters with strong undercurrents, shifting streams, uncharted hazards. And those currents have pulled us into policy debates that few of us contemplated even a few short months ago-both in terms of the actions we are taking and the magnitude of those actions.
And as we have proceeded, the cost of action though major financial intervention has necessarily been weighed against the cost of inaction on our economy, our communities and on peoples' lives. Because the debate is taking us into new waters, people are rethinking what it means to be a conservative or a liberal. There are now strange and previously unseen alliances: liberals who argue that government is now doing too much and conservatives urging the government to act swiftly, decisively and aggressively.
Our decisions have changed our world.
Over time, 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 markets, our institutions, and our ability to conquer financial crises through intervention.
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. Perhaps never before has John Donne's notion that "No Man is an Island" ever rung louder or truer.
And 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. An impact that has lead to hundreds of billions in write downs in our financial institutions, trillions of dollars in lost equity value of American public companies, and a lockup in our global system of credit. What we once thought we knew and trusted is now in question. Institutions, instruments and analytics no longer fit into the model and our system is experiencing a seizure in confidence as a result.
You all know as lenders that liquidity is the air we breathe in our economy. And confidence is the valve that enables it to flow.
We recognize the impact these difficult times are having on families and business. That is why our response has been swift and broad-based, bolstering virtually every major funding activity of our financial institutions. These actions have been directed to restore trust that all of us need to have in our financial markets. And while we all have been reading about it in unfolding, riveting detail, I would like to pull back for a second and paint the actions in a single set of strokes.
- Restoring trust in our financial institutions begins with an equity foundation:
Treasury is purchasing preferred equity. By injecting an additional layer of equity, we are injecting an essential layer of confidence. Treasury has targeted $250 billion for the infusion, starting with $125 billion in 9 major financial institutions at the heart of our banking and capital markets.
This action will bolster capital and allow banks to expand their lending and other activities.
- As we move up the balance sheet, we are restoring trust in financial institutions liquidity:
The Fed has provided unprecedented access to the discount window to a broader range of financial institutions.
Bank debt, including overnight funds have been guaranteed by the FDIC to bring interbank liquidity back into the market
To support an essential source of stable funding for banks, the FDIC has increased insurance on deposits to $250,000, with an unlimited guarantee on non-interest bearing transaction accounts.
- Restoring trust in capital markets:
Money market accounts have been insured by Treasury to give investors confidence in those investments and maintain stability in the commercial paper markets.
Soon, the Fed will begin purchasing commercial paper to ensure that commercial companies continue to get the financing they need to operate their businesses.
The Fed, FDIC and Treasury have taken direct measures to resolve challenges presented by key market participants, for example Bear Stearns, WAMU, AIG and Indy Mac.
- Restoring trust in the mortgage markets:
Today, the US government supports approximately 90 percent of the new mortgages in our country through our Government Sponsored Enterprises and government mortgage insurance, primarily through HUD's Federal Housing Administration (FHA).
FHA has gone from a bit player in the market with a 2 percent share to a quarter of the market by recent counts. And Ginnie Mae is issuing more securities than Freddie Mac.
- In addition to moving the GSEs into conservatorship:
The Treasury has authority to inject up to $200 billion to support their equity needs
Treasury can also support their liquidity needs through collateralized lending and purchase of MBS
Under the Troubled Asset Relief Program (TARP), Treasury is able to purchase both whole mortgages and mortgage-backed securities.
Clearly, we are beyond being able to pull out the bazooka to deal with the issues. Our arsenal of options is fully loaded. Our actions have been comprehensive.
And we have seen similar moves coordinated with governmental actions around the world.
And as we contemplate the comprehensive actions that have been undertaken and the need for those actions, we need to look forward to righting the ship in the market that has been the heaviest contributor to the problem.
In our housing market, we continue to have a fundamental supply/demand imbalance, leading to large inventory of unsold homes and high vacancy rates.
The oversupply has been compounded by lower sales and higher foreclosures, which are at historical levels.
We expect to see more than 2 million foreclosures this year.
That pressure has led to:
That is roughly one-third of the 5.5-6 million total home sales we expect this year, and it is more than double the pace of new housing starts.
And while those will not all end up in forced sale, it is likely to be a primary driver in the supply and prices of homes.
Our policy has always started with the belief that we should work to help people in troubled mortgages who want to stay in their homes, and can afford to do so with the right mortgage.
- It is important for American families.
- It is makes economic sense in most cases for lenders who lose 25 to 40 percent of the value of their loan in a foreclosure.
- And it is increasingly good for the housing market and the far-reaching impact it has.
Not every mortgage can be saved, nor should it. But there are many that can be for the benefit of families in need of relief, the benefit of communities, and your benefit.
We have to address these problems and even get ahead of them. There is much that we have already done. There are new tools in place, and we need to fully employ them.
I am also so thankful for the HOPE NOW effort, which is a voluntary, private sector effort that many of you are involved in to contact homeowners in trouble and help them stay in their home, often by renegotiating the mortgage. As many of you know, second liens have proven to be an impediment to loan workouts. Negotiations between borrowers, first lien holders and second lien holders can be complicated. To help address this, HOPE NOW has streamlined the loan review process to speed up loan modifications and refinancings. At the moment, 27 of the nation's biggest mortgage companies are participating, companies that service about 90 percent of subprime loans. Nearly 2.3 million loans have been reworked since July 2007. This is an important industry-wide effort, and I appreciate the work that many of you are doing.
I want to thank so many of you for using FHASecure. As you know, in August of 2007 we opened FHA up to more borrowers. We have expanded this refinance program twice to provide assistance to subprime borrowers with adjustable rate mortgages who are past due on their mortgages, and have helped to restore liquidity and stability to the markets.
On October 1, we have further expanded our efforts with the HOPE for Homeowners program. This program will provide additional help to borrowers who wouldn't have previously qualified for FHA. As those of you who have signed up for the program know, lenders must reduce the loan amount to no more that 90% of the home value, insuring a layer of equity. In addition, the restructured loan must meet an affordable standard for the family, to reduce the chance of another default.
Since last September, FHA has helped nearly 400,000 families keep their homes by refinancing into a more affordable FHA-insured mortgage. We believe a total of about 500,000 families will refinance into more affordable FHA mortgages by the end of the year.
As a result of more refinances and more homebuyers purchasing homes, FHA's share of the market has grown from 2 percent in 2006 to nearly a quarter of the market, by some estimates. Our volume is 3-4 times last year's level. In fact, here in California, the growth has been even greater. There has been a 400 percent increase in families using FHA to purchase or refinance their home, compared to last year.
We also continue to support homebuyers on the back end when they need extra help to keep their homes.
In 2008, FHA servicers completed more than 100,000 loss mitigation actions. The overwhelming majority of these families kept their homes. This represents an 11.5 percent increase in home ownership retention over 2007. In fact, loss mitigation efforts have helped about 300,000 families keep their homes over the last three years.
We know that housing counselors can be a lifeline to help borrowers in stress. There are 2300 HUD-approved housing agencies in the United States. The President has been a steady supporter of housing counseling, asking for 150 percent more in his 2009 budget than when he first took office. Two weeks ago, I announced the release of $50 million in housing counseling grants. And through the economic stimulus and housing legislation this year, there is now over $400 million available for housing counseling.
And while these efforts have been critical in stemming the tide of foreclosures and helping millions of Americans, there is more to do. We must expand the reach and impact of our collective actions, because the issue is not going away and it will continue to pressure our housing market and our economy. Every preventable foreclosure we mitigate on reasonable terms is good for families, good for communities, and good for our economy.
There are a number of areas that need our focus.
I was in southern California several weeks ago with a group of mayors and local industry leaders. I was struck that they were not familiar with many of the programs that are available to support them. Shortly after that, we at HUD decided to hold a Housing Summit in Washington for state and local officials. The Summit was designed to draw leaders and decision makers together to inform them about federal programs and put together an ongoing forum for best practices sharing. On short notice, over 900 participants from 45 states signed up. The feedback was overwhelmingly positive.
- FHA Commissioner Brian Montgomery and his team have also reached out to work more closely with lenders and state housing finance agencies.
- FHA has instituted a liaison program to better inform lenders about FHA's products.
In addition, FHA has also signed a Memorandum of Understanding (MOU) with the state housing finance agency in Minnesota to help qualifying borrowers in that state. We are working on signing similar MOUs in other states. The program was just started, but already we are seeing some results. There are outreach efforts to several cities in Minnesota. We must continue to build partnerships like this one with state and local agencies on the front lines of today's mortgage crisis.
We are also revamping our online resources at HUD.gov and sent hundreds of thousands of outreach letters to borrowers at risk of foreclosure.
Second, we need to continue to expand engagement of private partners. We have seen bold moves on the part of many private lenders-broad based moratoriums on rate resets, dramatic expansions of staff to assist borrowers, and an increased willingness to modify loans to help those in need. Nonetheless, we also continue to receive consistent feedback from borrowers and counselors that servicers do not have the authority to help them or that loan modification guidelines are so rigid that many people who can be helped are unnecessarily falling through the cracks.
Unless the industry addresses these concerns head on, Congress may lose patience and impose stronger measures upon those in the business of homeownership. Now is the time to be bold, especially with the new tools that have government has provided.
Finally, we need to leverage programs through TARP and the GSEs that have capital to invest in troubled mortgages and support American families who need help.
Before I conclude, I want to briefly discuss actions to help homeowners avoid getting into trouble with their mortgages in the first place. The unnecessary complexity of mortgage has significantly contributed to our housing crisis. We must do something to make mortgage more understandable and the process more transparent. That's why we have been seeking new reforms to the Real Estate Settlement Procedures Act (RESPA) to require all mortgage lenders and brokers to clearly display an estimate of all settlement services, fees, and charge. They must not be hidden in the fine print. Under our plan, borrowers would know their closing costs, interest rate and monthly mortgage payment. They would know whether or not the interest 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.
We have gone through a lengthy public comment period. We are committed to striking a balance between the needs of consumers and industry concerns. With so many families in trouble with their mortgages because they did not understand the fine print, now is the time act. Our goal is to complete RESPA by the end of the year and then provide the industry with a full year to implement the rule. I firmly believe this will be a significant step forward for restoring trust and transparency in the settlement process.
In the end, we need to form and maintain partnerships that work in the best interests of our economy and the American people. We need your energy and engagement to stabilize and restore trust in our markets. Thank you.