Q&A with Shaun Donovan, Secretary of HUD

Shaun Donovan, Secretary of the Department of Housing and Urban Development (HUD), spoke to a members of the National Association of Real Estate Editors yesterday afternoon in Washington, D.C. A copy of his prepared remarks can be seen here. After he made his prepared remarks, Donovan took questions from the media.

Question: Why Make Preventing Foreclosures the Top Priority?

Q: There’s a lot of emphasis on preventing foreclosures. But if you let foreclosures happen now, perhaps you’re not delaying the inevitable. You’ll also make houses cheaper, which will make them more affordable for buyers. Why make preventing foreclosures the first priority?
Donovan: First, the President has been clear that we can’t stop every foreclosure. Clearly, there are families in homes they can’t afford. We have to do more than just stop foreclosures. We have to encourage other opportunities, like a deed-in-lieu of foreclosures and short sales. These options are better for (the homeowners’) credit, and allow the house to be reoccupied sooner. Second, we got to a point where foreclosures were a self-reinforcing cycle. Fifty percent of home sales were based on foreclosures (in the latest numbers). The concentration of these bad loans because of subprime lending was geographically targeted. It was driving down neighboring property values.

If a house is burning down, it can burn down the whole neighborhood. You’ll see a 5 to 10 percent decrease in the values of the surrounding houses. Foreclosure is part of the problem.

On the $8,000 tax credit, the way we allowed the tax credit to be monetized allowed organizations who could provide down payment assistance – like state housing finance agencies, and others – to use the $8,000 tax credit to offset closing costs, premiums, and down payments above 3.5 percent. The change on seller-funded DP has had positive effect on HUD’s book of bus. Eliminating third-party seller-funded down payments will save taxpayers $2.5 billion. It went from a cost to a savings.

Question: Are You Satisfied by the Response of Lenders to the Loan Modification Program?

Q: Are you satisfied by the response of lenders to the loan modification program?

Fifty percent of loan modifications resulted in same or higher payments. When constructing the plan, we created a standardized approach where mortgage needed to be truly affordable. We chose a 31 percent debt-to-income ratio. We won’t provide benefits to servicers unless they meet this. In a few weeks, we did more loan modifications than any prior effort. The Hope for Homeowners program has refinanced 51
loans since October 2008.

We’ve already underwritten close to 200,000 loan modifications, with 40,000 offers last week. But I’m not satisfied. This is critical moment.

Question: Will You Have to Go to Congress for Funding of Reverse Mortgages?

Q: John Dougan, Commissioner of the OCC, made comments on reverse mortgages last week. Most of the reverse mortgages come from FHA’s HECM program. Dougan indicated he might have to go to Congress for funding.

DONOVAN: Dugan was focused on HECM reverse mortgages, which are not connected to our program. We requested $800 million for HECM reverse mortgages, but overall, even with $800 million, we expect FHA to make money for the taxpayer. We can raise premiums, change the loan-to-value ratio. We’ve also been conservative in calculating the home values.

We want to have a broad housing policy change, including rental housing valued the same as homeownership.

While there are increased resources for low-income Americans, particularly at this point of crisis, one of the little-recognized facts of foreclosure crisis is that 40 percent of those displaced are renters. We have a lot to do to protect families that are renters.
One thing I learned in local government is that the Federal government often stands in the way of local or state governments.

Question: Are You Going to Require Mortgage Lenders Be Paid on Salary with No Bonus?

Q: Are you going to require mortgage lenders be paid on salary with no bonus?

DONOVAN: I don’t think there is a single prescribed way that we’ll lay out for every mortgage broker in the country for how they’re compensated. First, there has to be a duty to provide an affordable mortgage. The fact that you can originate a mortgage that borrowers couldn’t afford cannot be allowed to continue. We’ve laid out principals and broad requirements that will require that to happen. Also, but it’s the retained risk that I talked about on liability and (requiring mortgage lenders to retain) some percentage of ownership. There has to be the ability to continue to tie some responsibility with some ownership of risk and the careful grafting of liability so we don’t have this kind of system again.

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