Federal Home Loan Banks Annual Conference


Thank you, Mick (Guttau). Good afternoon, ladies and gentlemen. Thank you for including me in your meeting. I especially want to thank John von Seggern for his gracious invitation. I appreciate his leadership, insight, and vision.

I also want to recognize my friend, Al Dellabovi. Those of you who know Al won’t be surprised that he had a lot to say…and he said it! He is a remarkable advocate for New York State.

And, I am pleased to share this time with each of you. The Federal Home Loan Bank System is respected and influential. Your institutions are vital to the housing market and the American economy. So I have followed your work very closely and attended several of the meetings of the Finance Board as HUD’s ex officio member, including the last two meetings. At the April 9th meeting, the other Board members and I voted unanimously to approve a proposed regulation that would enable the Federal Home Loan Banks to use a portion of their Affordable Housing Program set-aside to fund foreclosure prevention efforts by member institutions. This rule, which was published for public comment April 16, is an example of how the Finance Board and the Banks can work together on innovative solutions to meet today’s problems.

I want to acknowledge the way you have stepped forward in our current housing crisis, providing essential increased liquidity at a time when others have reduced their investment efforts.

I also want to recognize the responsible and transparent leadership in the system that has provided 76 years of outstanding positive advances on credit. That is an astounding achievement.

There is an Old Italian saying: “The seagoing should learn to sail in all winds.” Well, over three-quarters of a century, you have encountered the changing conditions of the sea with variable winds. But you have kept a true course, running full sail.

We meet at a time of rough seas in heavy weather, an extremely important moment in the economic history of our country. The housing crisis has affected virtually every bank in every community, and most investors in the global markets. What started as stormy seas with the subprime market has become a larger whirlpool that pulls in investors and lenders working in more traditional housing markets.

For some, it is hard to know which way to steer course. Our housing crisis has created a climate of uncertainty, increased concern, at times even fear. It has led to an open clash of viewpoints and philosophies about the role of the government and the role of the banking industry. And that clash is now being played out in Washington, where the Administration favors responsible, specific efforts to save homeowners, and Congress is moving toward a broader federalization of the housing market. There is much agreement that the Federal Housing Administration (FHA) must be a central part of any lasting solutions. But there are profound differences about how FHA should do this, and about what actions should compliment FHA initiatives.

I think you will hear about some of these differences when you go up to Capitol Hill tomorrow. There are some who believe that the federal government must become more intrusive, must take over functions left to the private sector. Mistakenly, some believe that there is no other choice than government intervention through bailouts or taking over the mortgage industry. They talk as if it is inevitable. I am thinking in particular about a recent editorial in the Washington Post, where David Ignatius referred to America as “Bailout Nation” (April 13, 2008, p. B7). He said that Congress is in the process of “shredding” the moral hazard argument and instituting “special breaks” and “increased regulation.” For him, the only question is whether Congress will have any restraint.

Well, I think the situation remains fluid and nothing is “inevitable.” Americans don’t want to pay for the risky financial behavior of others. And they don’t want to make the Federal government the lender of last resort, with the private sector dumping bad loans on FHA and the taxpayers themselves. Our citizens do not want us to federalize the housing market. We must not harm our economy through solutions that further erode the foundation of the nation’s housing market, hurt homeowners who are meeting their mortgage obligations, or prolong the correction. Many people, including myself, want to avoid the temptation of extensive government intrusion.

I believe that Congress and the Administration can forge a strong working partnership on housing. There is some common ground which should be explored and extended.

For example, the Administration took an unprecedented, and welcomed, step with FHASecure. In August 2007, President Bush introduced FHASecure to help more Americans facing foreclosure refinance into a safer, more secure FHA loan. Since then, more than 170,000 families have been able to refinance with FHA. In fact, if you look at the number of single family mortgages endorsed by FHA in the first quarter of 2008 alone, total FHA endorsements were more than 237,000, which is more than a 100 percent increase over the same period last year.

And I should add that FHA has proven to be a good safeguard against foreclosure for those already insured with FHA. These loss mitigation efforts have been estimated to have saved hundreds of thousands of families from foreclosure. We are prepared to work with families to find a way to avoid foreclosure. In fact, 65 percent of FHA borrowers who fall into serious default are able to avoid foreclosure because of loss mitigation actions. That is a figure I wish we could duplicate or surpass outside FHA.

FHA has also added needed liquidity. Since September 2007, FHA has pumped more than $68 billion of much-needed mortgage activity into the housing market; more than $28.5 billion of that investment came through FHASecure.

Earlier this month, the Administration announced some further administrative steps to extend FHA opportunities to more homeowners. Again, using our current regulatory authority, FHA is targeting homeowners struggling to make their current mortgage payments and who have no other way to refinance their loans as their homes lose value. FHASecure will now serve borrowers in subprime adjustable rate mortgages who are in default as the result of some extenuating financial circumstances which have temporarily hindered their ability to make mortgage payments. These borrowers would still have sufficient income to make payments on the new FHA mortgage, but are stretched or unable to meet the terms of their existing mortgage after the reset rate increase. The refinance will put them in a more sound financial position. In addition, borrowers who meet FHA’s other underwriting criteria, but have missed two monthly mortgage payments, will qualify for a standard 97 LTV loan. For borrowers who cannot meet these standards, FHA will permit up to three months of delinquency. But, FHA will limit the LTV ratio for these borrowers to 90 percent. The 10 percent equity cushion, along with the required premiums, will protect taxpayers against unnecessary risk.

Expanding FHASecure in this way is a good idea. It offers lenders a refinancing alternative that makes voluntary write-downs a viable option. Appropriately reducing the principal amount owed on subprime mortgages helps both troubled borrowers and lenders. Borrowers will reduce their principal payments and keep their homes. Lenders will avoid taking a more significant loss at foreclosure. Neighbors will avoid vacant homes in their neighborhood, depressing their home values. And localities will keep a viable tax base to fund community health, schools, and other valuable services.

I should add that FHA underwriting standards will minimize the risk to taxpayers while being able to help more families use FHASecure to keep their homes. Borrowers must also show a reasonable credit history, show employment history, and have some personal equity in the deal, and fully document and verify their income. Borrowers will be required to pay upfront and annual premiums on their loans, which directly contribute to the soundness of FHA’s insurance fund and protect taxpayers. Since more than 90 percent of FHA-backed loans are 30-year fixed rate mortgages, this gives us predictable, stable income.

The changes we have made with FHASecure will help us reach about 500,000 homeowners in total by the end of this year. We are targeting homeowners who need help, not speculators or risk-takers or those who made poor decisions. The moral hazard argument is a reasonable consideration, and should be on our minds.

Of course, the President’s stimulus package is also making a difference. Part of that package temporarily increased FHA’s loan limits. For the rest of the year, we can back more mortgages in high-cost states and help homeowners hold on to their houses. The new loan limits were announced in March, and I have spoken with many people in the housing industry who believe that this action will instantly assist many homeowners this year.

The reaction to the new, temporary loan limits should again explain the need for immediate passage of FHA Modernization, which we have urged for two years.

In my view, there are two key components that must be part of any final FHA Modernization bill.

First, there must be appropriate risk management. We must maintain FHA's ability to offer a fair and equitable mortgage insurance premium structure that is commensurate with the risk presented by the loans it insures. Any bill must give FHA the tools needed to price for additional risk. To ensure the solvency and continued operation of FHA's single family mortgage insurance fund, flexible risk-based premiums are necessary both now and in the future. FHA currently is self-sustaining. As you know, few government programs can claim the same. We do not want to cross that line, particularly at a time when we are most needed.

Second, we should prohibit down payment assistance from the seller. Any legislation must include a provision to expressly prohibit down-payment assistance from the seller or any other person or entity that stands to benefit from the transaction financially. Insured loans relying upon seller-funded down payment assistance have been demonstrated to have an unacceptably higher risk of default and foreclosure – harming borrowers they intend to help and risking the integrity of the entire FHA program and its ability to help more at-risk low- and moderate-income homeowners. Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments. We simply cannot sustain this kind of business. We want FHA to be here not just for this generation, but for generations to come.

FHA Modernization has bipartisan support. It is the appropriate next step to address the housing downturn. Congress needs to make this important bill an immediate priority over other housing proposals that are under consideration. As a first order of business, a good FHA Modernization bill must be sent to the President.

The actions I have outlined by FHA show us the best direction to address the housing crisis. I think some of the proposed Congressional actions take us in the wrong direction.

For example, we don’t need the proposed auction process. Some have argued for efforts that would allow lenders to sell bad loans to the taxpayers through an auction process, clearinghouse, or some other wholesale mechanism. We don’t think taxpayers should pay for these bad loans. And that rewards those who made a risky loan in the first place. This is the very definition of “shredding the moral hazard” and “Bailout Nation.”

Also, we don’t need taxpayer purchase of foreclosed homes. Some want to spend taxpayer money for the purchase and rehabilitation of vacant, foreclosed homes. As a former mayor, I understand the urge to fill empty homes. But this is not the way to do it. The principal beneficiaries of this type of plan would be private lenders, who are now the owners of the vacant or foreclosed properties, not the homeowners. In addition, it may have the unintended consequence of making foreclosure a more attractive option for lenders, which is the last thing we need to encourage. While community stabilization is a worthy goal, using Federal resources to purchase properties from lenders who could already be helping to prevent the foreclosures represents a clear moral hazard.

As well, FHA should not insure all subprime loans. There are some who want FHA to pick up all the potentially delinquent 2 million subprime loans. That would swamp FHA, capsize the boat. FHA is designed to help stabilize the economy, operating within manageable, low-risk loans. It is not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans. We don’t want to effectively double FHA’s portfolio, with half of the portfolio problematic, high risk loans. That would turn a viable, workable housing solution for some into a situation in which all hands drown.

Let me put it this way: some of these proposals put us on a slippery slope, rapidly moving in the direction of a federalization of the mortgage industry.

Clearly, when faced with possible new government regulation or intervention, the industry should step forward and pro-actively implement change. That has happened with the HOPE NOW Alliance. As of April 7th, there are 27 loan servicers in the Alliancewho represent over 90 percent of the subprime market. In addition, there has been strong participation from respected non-profits including all HUD-approved intermediaries, led by NeighborWorks America, the Homeownership Preservation Foundation, and the Housing Partnership Network, with their networks of trained counselors.The Alliance has implemented a plan that could help up to 1.2 million homeowners avoid foreclosure over the next two years by providing systematic relief that includes modifying or refinancing existing loans, moving borrowers into FHASecure loans, and implementing a five-year freeze on interest rate resets for subprime loans. This is the sort of industry action that will quickly help those in need.

I would like to see more industry efforts to help the almost 9 million Americans underwater. We need to see more efforts by the industry to write-down a portion of the loan. We also need to see more efforts to set aside money to help people with foreclosure problems. I just don’t see any alternative if heavy-handed government regulations are to be avoided. The reality is clear for anyone to see: hundreds of thousands of homeowners are in trouble and investors and lenders will have to take a hit. And we know that delay will only make things worse. There are new resets for hundreds of thousands of subprime loans in either this year or next year. We need to act ahead of the resets, not after. This is the time for industry to have a strong and effective response that will quickly help to stabilize housing prices.

In fact, we need to stabilize housing prices as quickly as possible. That is how we will know that the end of this crisis is at hand. If we are looking for a beacon to guide us through these rough seas and dangerous undercurrents, we need a light that shows us the way. And I believe that illumination comes from the price of homes. When homeowners stop going underwater, then we will know that we are coming into a safe harbor.

I believe that the Federal Home Loan Bank System can lead the way. You have given this nation tremendous economic leadership decade after decade. At this moment in history, you are making your presence felt. As yesterday’s Wall Street Journal indicates (online, April 28, 2008, 9:24 am), you have already committed $89 million in the first quarter to the affordable housing program. That is a 27 percent increase over the previous year.

So, your opinion matters; the advice you give will be decisive. I believe the Federal Home Loan Bank System is an example of a government entity ideally designed for times like these. Congress will listen to your organization and to your membership. Your ideas matter. They will influence Congress. And they will help set the course for years to come.

For myself, I will continue to try to convince our lawmakers that we need wisdom, not over-reaction, fine-tuned efforts, not federalization of the lending industry; and recognition that remaking FHA into a new home loan agency would be a titanic disaster.

We can do better. This is the time for vision and prudence. We must give the American people real solutions to the housing crisis, not multiply problems. I think we can do that with your help.

Thank you.


Content Archived: January 24, 2012