November 19, 2008
Thank you, Sylvia. I want to thank the Club for inviting me, and congratulate your members on the one hundredth anniversary of the National Press Club.
Thank you all for coming, especially my wife, Molly, and former HUD Secretary Jack Kemp.
Before I jump into some thoughts on where we've been and where we are headed, I want to begin by celebrating a recent achievement at HUD-the new rule under RESPA, the Real Estate Settlement Procedures Act.
At the center of the crisis we face are the millions of individual decisions made by borrowers at the closing table, many of whom, unfortunately, did not have the tools to make responsible decisions. As I have spoken with dozens of housing counselors and distressed borrowers around the country, I have consistently heard stories of people who did not understand the real terms of the agreement they were making or the true cost of their mortgage. It is not surprising. Loan structures became complicated. The lending process became more automated. Lender behaviors often focused little attention on the borrowers.
Up to now, there hasn't been a standard disclosure requirement for lenders that is complete and consistent, so it has been difficult for borrowers to make fully-informed decisions and to compare different loans.
RESPA requires loan originators to provide a new standardized Good Faith Estimate which is complete and consistent once and for all.
- Borrowers will know their closing costs, interest rate and monthly payment amount.
- They will know whether or not the rate a principle balance can increase over time.
- They will know if there are prepayment penalties or any balloon payments.
The Good Faith Estimate will provide a clear statement that itemizes closing costs and limits increases in certain charges at settlement. This will offer greater transparency and certainty, allowing Americans to shop and compare.
This rule was developed with input from consumer groups and industry after a long, rigorous, and sometimes contentious review process. The rule was first announced right here, in this room, in 2002, by then-HUD Secretary Mel Martinez. I was pleased to call Senator Martinez when it was finalized last week.
I arrived at HUD 166 days ago - and before now I never knew how much could transpire in 166 days. At that point, the nation was already facing an expanding crisis. Foreclosures were on the rise, as more and more subprime adjustable rate mortgages reset to unaffordable levels. Loan origination was at its lowest level in seven years. And home prices continued to fall. We're all familiar with the deadly spiral that led to an unprecedented state of financial turmoil, as large financial institutions were unable to secure liquidity so desperately needed to oil the wheels of our economy.
Certainly, there has been intervention by the federal government on an unprecedented scale:
- Treasury has designated $250 billion to infuse equity capital into our financial institutions;
- The Federal Reserve is injecting hundreds of billions in liquidity into the marketplace; and
- The FDIC has provided sweeping guarantees for bank deposits and obligations.
More specifically, the mortgage markets have remained open almost entirely due to government support.
- Today, the U.S. government supports about 90 percent of new mortgages through the Government Sponsored Enterprises (GSEs) and HUD's Ginnie Mae and Federal Housing Administration (FHA).
- By placing the GSEs in conservatorship, Treasury has authority to inject up to $200 billion to support their equity needs. It can also help them with liquidity by guaranteeing lending and purchasing Mortgage Backed Securities.
These responses as well as other Federal programs have been critical for American families who need a loan to purchase a new home or refinance out of a mortgage they cannot afford... I will discuss this in more detail in a moment.
The private sector response has also made important progress to reduce foreclosures, specifically to help families facing foreclosure. One such program is called HOPE NOW, which is a voluntary, private sector effort to contact homeowners in trouble and help them stay in their homes, often by renegotiating the mortgage. Nearly 2.5 million loans have been reworked since July, 2007.
Earlier this month, this alliance announced a new plan to speed up loan modifications for hundreds of thousands of borrowers. It includes all the HOPE NOW partners which represent 94% of subprime loans in the country and the GSEs - - in other words the vast majority of the industry. This is a further migration away from working one loan at a time to a faster, more streamlined process to modify mortgages in bulk. As a result, this agreement has the potential to help a large number of borrowers at one time.
In addition, a few HOPE NOW partners -- Bank of America, JP Morgan Chase and Citi -- have recently announced additional steps that their firms are taking to help homeowners.
Even though the response from Washington and from private industry has been extensive, saving millions of families from foreclosure, there is still a gap between expectations and results for two reasons.
First, the response has not kept up with the need. Many Americans who should be getting help are not. Borrowers and housing counselors all over the country have expressed concerns that servicers are difficult to reach or unwilling to help them. Some have not added enough capacity of well-trained people to help borrowers on an individual basis.
Many servicers have been reluctant to act because of ambiguous servicing arrangements with investors. As a result, borrowers are falling through the cracks. The measures I just mentioned are designed to address these issues, and we are watching closely to see if they bear significant, tangible results helping people who so desperately need them.
Second, even as we continue to expand our response, expectations often are unrealistic. Many people have not accepted the implications of a large supply-demand imbalance in many markets driven both by foreclosures and overbuilding. In addition, some foreclosures cannot be prevented. Many people have much more debt of all kinds than they can actually afford.
Moreover, many homes were built on speculation, and owners are walking away because the homes are now worth less than they owe on the mortgage. Nonetheless, I believe we can take a bigger step forward than we have.
So how has HUD changed in response to the crisis?
As I said, I arrived at HUD 166 days ago, and I have only 62 days to go. I knew my time was short and the list of priorities was long.
From day one, it was clear that I needed to listen hard to customers, employees, legislators and other stakeholders, and work with my team to chart a path forward very quickly.
In doing so, we launched an aggressive 200-day plan called iMPACT 200, which is a set of focused, results-oriented initiatives that engage the entire organization. While iMPACT 200 addresses opportunities in a number of our programs, the overwhelming focus has been to ensure HUD serves the needs of American homeowners during a time when they are either losing their homes or have few options to finance new homes.
Within the last year, FHA has helped more than 435,000 families refinance into fixed-rate, 30-year, FHA-insured mortgages. Many of these people had been trapped in the strangle hold of a mortgage which had reset or was about to reset.
Over the past year, FHA has provided over $200 billion in loan guarantees. This is more than three times the $62 billion for the same period last year.
HUD began expanding FHA insurance to allow delinquent borrowers who were late on some of their payments to participate in the program in August 2007. In addition, FHA loans limits have increased significantly so that families in high cost areas can refinance into mortgages.
We further expanded our efforts with the HOPE for Homeowners program, which was established in the Housing and Economic Recovery Act that was signed into law in July. This program is designed to provide additional help to those who wouldn't have previously qualified for FHA, many of them seriously delinquent. Borrowers who use the program must structure the refinanced loan to ensure there is equity in the home, the loan is affordable to the borrower, and there are no remaining second liens.
The program is less than two months old, and many lenders and borrowers have expressed interest. However, because of strict guidelines and a number of unique and specialized requirements in the original law, few lenders have actually signed up and few borrowers have submitted applications. Clearly, meaningful changes are needed.
The Emergency Economic Stabilization Act of 2008 passed in September provided us the authority to make those changes. So today, I am pleased to announce changes that will help us reach more families in need.
First, the program requires lenders to write the loan down to no more than 90 percent of the home value. We have heard from the industry that the size of the required principle write down was a barrier to participation in the program and in many cases made foreclosure more attractive.
We will increase the acceptable loan-to-value ratio (LTV) on the H4H loan from 90 to 96.5 percent for borrowers whose mortgage payments represent no more than 31 percent of their gross income and whose total household debt payments are no more than 43 percent. We will, however, continue to require a 90 percent loan-to-value ratio on the H4H loan for borrowers with higher debt costs. This will include borrowers with debt-to-income ratios as high as 38 and 50 percent.
Second, currently subordinate lienholders must release their liens in return for a share in the appreciation when the home owned by the borrower is sold. It is confusing for the borrower and the lender, creates uncertainty for the lienholder, and is difficult to manage. We will offer subordinate lienholders an immediate payment in exchange for releasing their liens, to permit more borrowers access to the program.
Third, we allow lenders to extend the mortgage term from 30 to 40 years. Extending out the amortization period will reduce monthly payments enough to make loans more affordable to people who can't qualify otherwise.
These changes will not perfect the HOPE for Homeowners program, but they will improve it greatly. The program is expensive to use which will limit its reach. As a result, we continue to look at options to reduce the fees in the program.
We will urge Congress to give HUD flexibility to manage this program more effectively.
As recently as 2006, it looked as if FHA had become all but irrelevant, insuring about two percent of new mortgages. New loan products with scant information requirements, lax underwriting standards and enticing teaser rates made FHA's fully documented, 30-year fixed-rate mortgage from FHA look like a product from the Stone Age. But all that has changed. FHA is insuring more than 20 percent of all new mortgages. Today, the volume of FHA business is almost 3 times what it was last year at this time.
When I came on board, it was clear that a massive increase in loan volume was taxing the capacity of HUD. So we have worked aggressively to streamline inefficient business processes, hire more people quickly, and expand our IT infrastructure in order to handle the dramatic load increase.
So I'm proud to say our team, led by FHA Commissioner Brian Montgomery, has moved quickly to bolster FHA's capacity to handle all this new business.
This financial crisis has also highlighted the need for more housing counseling. Good counselors can take borrowers from a state of confusion and despair to a state of clarity and hope. Housing counselors are equipped to help people in financial difficulty figure out how to manage their finances and plan a path forward, which may include a loan workout with their lender. The President has been prescient here - steadily increasing funding for housing counseling by 150 percent since he took office. And thanks to the economic stimulus and housing legislation this year, there are now about $410 million available for housing counseling. We know it works.
Moreover, FHA has been a leader in loss mitigation, contacting FHA-insured homeowners at the first sign of trouble to work out solutions. In 2008, FHA servicers completed approximately 100,000 loss mitigation actions, keeping nearly all of those people out of foreclosure. In fact, a much lower percentage of families with delinquent FHA loans end up in foreclosure relative to the rest of the industry.
Finally, through the Neighborhood Stabilization Program, HUD is providing almost $4 billion in targeted emergency assistance to state and local governments to acquire and redevelop foreclosed properties that might otherwise become sources of blight within their communities. I announced the allocation of this money in September.
Communities and states are drafting plans for these targeted funds to be used to purchase foreclosed homes at a discount and to rehabilitate or redevelop them in order to respond to rising foreclosures and falling home values. We expect the recipients will begin putting the funds to work by January 1.
So where do we go from here?
Let me turn now to some of the issues we need to address as we move forward.
Most of our public discussion has necessarily been focused on the crisis in front of us. But we have learned a tremendous amount about our system of mortgage finance and the institutions that support it. We need to incorporate that understanding as we establish our goals and chart a path forward.
First, HUD will certainly continue its aggressive efforts to provide a set of tools to address this crisis. FHA insures half a trillion dollars in mortgages. Ginnie Mae guarantees $600 billion in securitized loans, much of which comes from FHA. Both are increasingly important to Americans who need mortgage capital. To that end, FHA needs ongoing reform in a number of areas.
We must maintain FHA's financial stability, and ensure that it remains a self-funded program. Congress took a big step forward in banning a practice that was fueling two-thirds of our delinquencies - namely, loans where sellers were providing down payments for borrowers. As we work through these loans, we will continue to see losses which result in a reduction in FHA's capital account. However, the path forward will include a stronger portfolio driven by new, higher-quality loans being underwritten today.
Unfortunately, unlike other insurance companies, Congress prohibited HUD for at least one year from adjusting its premiums based on the credit risk of borrowers. The most surprising thing about Congress's rejection of risk-based pricing was our evidence that on average shows low-income borrowers would pay less under a flexible pricing structure because they often have higher credit scores than higher income borrowers who need mortgage insurance. So the people who can least afford it are charged higher fees than their credit history warrants. Congress needs to eliminate this prohibition or let it lapse.
I mentioned the important progress FHA has made to improve its operations. There is much more work to be done. FHA must continue moving into the 21st Century on the operations front, with a focus on modernizing critical information technology systems that support FHA's core business functions.
Currently, we have a patchwork of IT systems. The core loan processing system, believe it or not, is still written in COBOL. The President requested an increase in HUD's IT budget last year, but Congress cut that number by $65 million. This is on top of a $40 million cut to our request in Fiscal Year 2007.
Our government institutions, especially those that operate large financial operations, need to have the infrastructure, tools and technology, to run efficiently, to serve their customers effectively, and provide proper oversight to protect the taxpayer. Congress must step forward and provide HUD with the funding it needs to modernize its systems and deliver better services to the millions of people who rely on FHA for a mortgage.
HUD must continue to drive forward in reengineering business processes designed to speed assistance to customers and provide employees with tools to do their jobs more effectively. We are already taking big steps forward. For example, in a major area of our business that is labor intensive, we are reducing the time it takes to process a loan from as much as 9 days down to one. We are developing an e-mortgage plan that permits the entire FHA loan process to be handled electronically.
In addition, we are working hard to complete a detailed operations and technology roadmap to support the incoming administration. We must continue this important progress.
The greatest solution to the problem lies here and there is a strong economic incentive for lenders and servicers to act. Lenders generally lose 25 - 40 percent of the value of that loan when it goes to foreclosure.
I mentioned private industry's response thus far - it has been very important.
Many industry players have taken bold moves and others have announced an intention to take bold moves. We need to see those announcements yielding tangible results - real people getting real help in large numbers.
If we don't see those results, then I fear either the Congress, or, as we've seen, states attorneys general will move to force the issue. By taking a "wait and see" approach, there is a genuine risk of government reaction that could have a negative impact on our long-term prosperity.
For example, there has been a renewed push to allow bankruptcy judges to modify the mortgages of troubled borrowers, effectively breaking the contractual relationship between a second lender and a borrower. At a time when we need more buyers in the market, this change would increase the cost of lending, and make it harder to afford a new home. Lenders would raise rates or require higher downpayments and closing costs to accommodate for the risk that a judge could unilaterally modify a loan.
As we look to the longer term, the first thing we should do is take a deep breath and realize that owning a home can still be part of the American Dream. When homeownership is responsible, it is sustainable.
Homeownership anchors us to our communities, and helps provide stability for our families.
- It should provide a nest egg of equity, whether it is saved for a rainy day or retirement.
- It should not be drained away by a cash-out refinancing every few years.
So while it's not popular to talk about the benefits of homeownership just now, we need to make sure that we don't throw out the baby with the bathwater in this crisis.
As we consider our homeownership policies going forward, we need to start by continuing to advance a system that provides American families with affordable mortgage financing alternatives on terms they clearly understand. RESPA reform is a big step forward, and a perfect example of the kind of progress we need to bring clarity and transparency to the marketplace. It puts power in the hands of the consumer.
But more RESPA reform is needed.
- Our statutory ability to enforce the rule is limited to relying on other agencies or regulators.
- We need Congress to give HUD Civil Money Penalty authority to enforce the delivery of Good Faith Estimates to prospective borrowers and ensure lenders adhere to the original terms provided to borrowers.
- We also need a statute that requires lenders provide borrowers with at least the most important closing documents sufficiently before closing so that they can review what they are signing.
In addition, consumers need the tools and the education to make responsible decisions. I believe we should continue to step up our efforts to educate and assist consumers through housing counseling and financial literacy programs. As we have learned, housing counseling works, and we have expanded our support each year. Together with the efforts of the President's Advisory Council on Financial Literacy, counseling is being used to better educate Americans about their finances and how to keep their homes. I urge the next administration to build on our efforts to expand the progress we have made on both fronts.
In the near term, the GSEs and government mortgage insurance programs like FHA will continue to be the overwhelmingly dominant source of mortgage finance. But during this time, we must also develop a thoughtful, more sustainable path forward that clarifies our objectives relating to homeownership and ensures that our institutions and policies are the most effective means to reach those objectives. Very few people believe that the GSEs should return to their former structure. They had conflicting objectives, they presented massive risks to our financial system and the taxpayer, and led to unhealthy behavior that sadly will have repercussions for many years.
One of our first steps going forward should be to bring mortgage liquidity back to the marketplace through institutions that are not dependent on government support.
It may seem difficult even to think in those terms, considering the massive rescue missions and failures that occurred recently. It is all far beyond what anyone could have predicted and much of it is based on breakdowns in our most sophisticated financial institutions.
But I am undeterred in my confidence that well-functioning private markets must be the answer. The path forward will require greater trust among investors who need confidence and transparency into the assets they purchase. 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.
If that trust is not restored, then investors will not re-enter the market to provide the capital needed for the long-term growth of the housing sector.
In considering the future role of the GSEs, Chairman Bernanke put forward a number of thoughtful considerations in his comments at a policy forum in Berkeley. He said that key objectives for reconsidering their role "include both minimizing systemic risk and putting in place the most efficient mechanism possible for providing the mortgage credit necessary to sustain homeownership and a healthy housing sector."
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. The part of the market that is unaided by government has all but gone away, and we need it to come back stronger than ever.
Lastly, as we look to the future, we need to be clear about our goals for low and moderate income homeowners, and determine the best way to support those goals. I think they are important goals. Many of our programs have made all the difference in peoples lives and in our communities - - and they continue to.
I grew up in a family that moved between renting and owning a home. Our first home was bought with a VA mortgage. I recall when we ultimately moved into the home where my family would live for many years. It was a small three bedroom ranch, and there was significantly more sweat equity in that house than financial equity. It was a source of stability for our family and it anchored us in our community. I hear a version that story retold time and again, when I travel the country and talk with people who have been helped by HUD.
We have a difficult road ahead of us. But I honestly believe we have a better understanding today than we ever did before about the challenges Americans are facing and ways the private market and federal government must work together to address those challenges.
Thank you very much. I look forward to hearing your questions.