Prepared Remarks for Secretary of Housing and Urban Development Shaun Donovan at the National Association of Real Estate Editors Annual Conference
Thursday, June 18th, 2009
Thank you, Ken (Harney) – for that introduction and for the terrific work you do at the Washington Post.
It’s great to be with you here today. I appreciate the role that you play in covering what is clearly the most important economic issue facing Americans: the housing crisis.
I know these are tough times for people all across the country – and the newspaper industry is no exception.
Either that or I’m not the draw I thought I was.
But the truth is, the work you do reporting on housing, mortgage finance and credit issues is extraordinarily important.
Whether it is exposing predatory lending, ensuring we in government are living up to our commitments we’ve made to provide affordable housing, or providing insight and analysis into issues upon which our communities and economy depend, you play an essential role in ensuring there is accountability and transparency in our housing markets.
If we’ve learned anything from the current crisis, it’s that we need you now more than ever. So, I appreciate this opportunity to share some thoughts with you today as we work toward tackling these challenges together.
I’d like to speak with you today about the work HUD is doing as part of the Administration’s response to the housing and economic crisis. I’d also like to use this opportunity expand a little on yesterday’s announcement regarding the President’s vision for modernizing the nation’s market regulatory structure and how that will impact our work at HUD.
And I want to speak a bit on how I see how all this figuring in to the larger role the President and I see HUD playing to lay a foundation for sustainable growth in our communities over the coming decades.
HUD: At the Center of the Administration’s Response:
Obviously, we meet at a critical moment – and with the housing crisis at the root of the economic crisis, HUD has been quite literally at the center of the Administration’s response.
So, our first responsibility is to stem the tide of foreclosures sweeping the country and help people keep their homes.
That work began with the Recovery Act, with which HUD is pumping some $14 billion into nearly 12,000 communities across the country.
I’m proud that within the first week of receiving Recovery Act funds, HUD allocated nearly 75 percent of that money.
I’m equally proud that we have made the highest amount of competitive funds available in HUD’s history – encouraging state and local governments to develop new and innovative ways to improve public housing, rebuild communities, and increase energy efficiency.
These competitive grants are essential to fostering the kind of innovation and cross-jurisdictional collaboration we need in the coming years.
One of the most important investments in the Recovery Act is the additional $2 billion we’ve invested in the Neighborhood Stabilization Program to help communities purchase and convert foreclosed and abandoned properties into new affordable housing, land banks, or other options that preserve neighborhoods. In all, the program is providing nearly $4 billion to communities across the country.
HUD is also providing up to $50 million in technical assistance grants to help communities better manage their neighborhood stabilization programs – and here again we’re working in close partnership with other government agencies, state and local officials and community organizations to ensure that the funds are reaching the most effective projects and meeting the most urgent needs.
This second round of NSP funds will also be allocated by competition – not only to turn foreclosed properties into homes again, but to also ensure that our communities go about the rehabilitation and purchase process in a smart, collaborative, and, above all, sustainable way.
Central to helping our economy recover will be the President’s Making Home Affordable Initiative to help 7 to 9 million homeowners keep their homes – and I know so many of you are monitoring its progress very closely.
Sixteen servicers have now signed contracts and begun modifications and refinancing, representing more than 80 percent of the mortgage servicing market.
Nearly a million homeowners have received information about the plan. And participating servicers have extended offers on nearly 200,000 trial modifications, including 40,000 last week.
Over the next few months, we expect these numbers to grow significantly, and we already have some early signs that the overall housing market is stabilizing – particularly in the area of construction, where total starts in May increased 17.2 percent from the previous month.
We’re also allowing homebuyers to apply the Administration’s new $8,000 first-time homebuyer tax credit toward the purchase costs of an FHA-insured home.
State Housing Finance Agencies and many non-profits will be able to “monetize” up to the full amount of the tax credit, so that borrowers can immediately apply the funds toward their downpayments. This is particularly important to low-and moderate-income families whose access to special affordable housing programs relies on FHA financing.
Homebuyers using FHA-approved lenders can apply the tax credit to closing costs which average about $5,400 or to any downpayment of 3.5 percent or more.
We want to make sure that homebuyers still have some skin in the game.
The National Association of Homebuilders expects this revamped tax credit to stimulate 160,000 home sales across the nation –100,000 of whom will be first time homebuyers and about 60,000 of whom will be existing homeowners who are able to buy another home because a first time buyer purchased their old house.
Given FHA’s current market share, we expect thousands of families to purchase a home by allowing this tax credit to be applied toward their FHA-insured mortgage.
FHA Reform: Essential to the Viability of our Housing Markets
As the new tax credit illustrates, FHA is once again playing a critical “countercyclical” role during a downturn in our housing markets – just as it did when President Franklin Roosevelt created it 75 years ago during the Great Depression. And while today’s circumstances are very different, FHA is again stepping in to ensure access to homeownership for families when banks can’t – or won’t.
And if we needed any evidence of that, we need only look at FHA’s share of the mortgage market. As of 2006, it was less than 2 percent – today, it’s 23.7 percent.
Obviously we’d prefer the private market to be playing a bigger role than it is today. And even though we’ve seen a substantial uptick in FHA borrowers’ credit quality—from 626 a year ago to 692 today—we will continue to monitor the situation very closely.
That said, given that our expectation that FHA loan volumes will continue to be high until the credit crisis passes, while we have requested expanded loan commitment authority for both FHA and Ginnie Mae, we will not be asking the American taxpayer to support FHA’s single family program in the FY 2010 budget.
We are asking Congress for the authority to endorse up to $400 billion in authorization for FHA insurance, in light of the substantial increase volume we’ve seen in the last two years.
We expect that increased authority will allow HUD to endorse approximately two and a quarter million mortgages.
Regardless, I’m committed to reforming and modernizing FHA – the viability of which is essential to the long-term stability of our housing markets.
That means investment in new technology.
It means additional resources for personnel and monitoring capabilities.
And it means products and pricing structures that drive innovation.
It was FHA that pioneered the 30-year mortgage – today, they need to do the same with energy-efficient mortgages, which I’ve spoken with Ken about.
When you buy a car, you know very clearly what the energy efficiency of it is because there’s a sticker on the window – we need the same thing for our homes and our buildings.
If in the long run there’s a cost of $5,000 to upgrade a house that will produce $10,000 in savings over time for utilities, the perfect tool to realize those savings is a mortgage.
My hope is that FHA once again can be a leader in developing innovations that can become industry standards.
But for me the bottom line is this:
Changing the way FHA does business is essential to changing the way that HUD does business – and it is essential to building the strong communities we need in the 21st century.
A New Foundation of Consumer Protections
At the same time we reform FHA and implement the Recovery Act and Making Home Affordable plan, we need to take steps to ensure the kind of behavior that got us into this situation never happens again.
Yesterday, I stood with the President as he introduced his plan to modernize the rules governing our financial system.
And it comes not a moment too soon. With Americans across the country struggling with unemployment, layoffs, falling home prices, and declining savings, we need to act with urgency to fix a system that is, fundamentally, broken.
We can’t allow promising signs of economic recovery to encourage complacency.
The Administration’s plan will build a new foundation of for our financial system rooted in protections for consumers.
The financial crisis revealed devastating inadequacies in consumer protection across a wide range of financial products – but nowhere was that clearer than mortgages.
To give you but one example, the Wall Street Journal reported in December of 2007 that 61 percent of those in subprime mortgages could have qualified for prime mortgages but were pushed into riskier mortgages by lenders and brokers.
That’s why I’m so pleased that the President’s plan will create a federal regulator – the sole focus of which is to look out for ordinary Americans.
Instead of the patchwork of regulations spread across multiple agencies we saw in the run-up to the crisis that allowed so much bad behavior to go unchecked, the Consumer Financial Protection Agency will have broad authority to protect consumers from unfair and deceptive practices.
I believe it will promote fairer, more efficient and innovative mortgage products for consumers, and improve access to financial services in general.
The Consumer Financial Protection Agency will have the authority to reform our mortgage laws. Those reforms will be based on five fundamental principles.
The first is requiring transparency. Every consumer will receive a single, simple, integrated federal mortgage disclosure that is reasonable, clearly written, and concise.
Communications with consumers will be required to adequately present risks and benefits of a mortgage product. It also require the timely collection and publication of data on how loans perform, so the agency can quickly learn what steps to take to protect consumers.
Whether we are regulators or consumers, we can only make informed choices if we have all the information.
The second principle is promoting simplicity – simple products that make consumer choices easier. Firms will be required to offer consumers a “plain vanilla” mortgage product with straightforward terms, such as a 30-year fixed mortgage. The consumer will be free to opt-out for other products, but for the first time those will be subject to stringent protections.
The third principle we will see in our mortgage markets is fairness, which we will demand. That means requiring mortgage brokers to owe a “duty of best execution” to avoid conflicts of interest between themselves and the homeowners. They will also be required to determine whether the mortgages they sell to borrowers are affordable.
Unfair practices such as “yield spread premiums”—those side payments from lenders that encourage mortgage brokers to push consumers into riskier, higher priced loans than they qualify for—will be banned outright. Brokers will be required to be paid over time based on continued loan performance rather than in a lump-sum at closing.
We will also restrict or ban prepayment penalties, which we’ve learned can trap borrowers in bad loans.
One of the most important restrictions will be to require loan originators and sponsors of securitizations to retain 5 percent of the credit risk.
Bundling and packaging mortgages to sell on Wall Street not only fed the housing boom – it also led to an erosion of lending standards that deepened the housing bust.
With this plan, brokers and loan originators will have a vested interest in the performance of the loans they make, rewarding responsibility, not recklessness. No longer will homeowners and investors be the only ones with skin in the game.
Fourth, we will require real accountability. That means leveling the playing field so that financial players—banks, nonbanks, independent mortgage brokers—all play by the same rules. The days of lenders and brokers shopping for the most lenient regulator will be over.
And lastly, the plan will increase access. Access and inclusivity are part of HUD’s core mission. And this plan will insist that we strongly enforce the Community Reinvestment Act and fair lending laws, ensuring that underserved consumers and communities have access to financial services, lending and investment.
Obviously, this is just one component of what is a robust, comprehensive reform plan to modernize and protect the integrity of our financial system.
But with the failures to properly regulate the mortgage markets devastating to Wall Street and Main Street alike, I’m optimistic about what the President’s plan means for HUD, for our housing markets in general and for the confidence we need to get our economy moving again.
And I look forward to working to ensure it is passed in to law as soon as possible.
Building Stronger, More Inclusive, Sustainable Communities:
Collectively, what all these efforts mean is this:
Whether it’s helping our nation recover, modernizing and reforming our regulatory architecture, or laying out a broad vision for building strong communities, HUD has never been more important to America’s immediate and long-term success than it is at this moment.
And seizing this moment requires transforming the way we do business at HUD.
That means better research, evaluation and accountability measures – to figure out how we can do more with less and give the marketplace the information its needs to make informed choices.
It means partnerships and collaboration with other agencies and at all levels of government to drive energy efficient housing and sustainable growth.
It means a balanced national housing policy that recognizes homeownership and affordable rental opportunities alike are indispensible to our efforts to build the strong, sustainable communities America needs to prosper in the 21st century.
Those are the priorities I’m fighting for at HUD.
And while our work has only begun, I’m confident we have taken important steps down that path today.
Thank you for this opportunity – and I’d be happy to take your questions.