HUD Secretary Andrew Cuomo
Grant Hyatt Hotel, Jin Mao Towers
U.S.-China Colloquium On Housing Finance
May 21, 2000
CONSUL GENERAL HENRY A. LEVINE: Before introducing our speaker, I would like to emphasize on behalf of the American Consulate General here in Shanghai, the value of the colloquium that you all are involved in. As someone who has worked on U.S.-China relations a long time, I know there always are those in both countries who question the value of strong and friendly U.S.-China relations. But it seems to me that the area of housing and this colloquium, in fact, is just an excellent example of the way that cooperation between our two countries can benefit the people of both countries. And for that, on behalf of the Consulate, I would thank all of you for participating and your strong efforts in this area.
I am very honored to introduce our luncheon speaker, Secretary of Housing and Urban Development, Andrew Cuomo. Andrew Cuomo was sworn in as the Secretary of Housing and Urban Development in January of 1997. And I must say, he represents, to me, one of the great strengths of the U.S. political system, and that is the ability of young, talented and energetic people to serve as senior officials in the U.S. government and to bring with them new approaches to solving the country's problems.
Secretary Cuomo has had many successes, but I think he is perhaps most famous for bringing the best practices of the U.S. private sector to the Department of Housing and Urban Development. Through these efforts, he has reduced the size of his Agency, and increased its efficiency. As someone who works for the U.S. State Department, I can tell you I know that this is not an easy task. In fact, I would say that Secretary Cuomo has been so successful that to my knowledge, until recently, he has had only one shortcoming. He had never been to Shanghai [laughter]. However, he has now eliminated that final flaw and I am pleased and honored to introduce to you the Secretary of Housing and Urban Development of the United States of America, Andrew Cuomo. [applause]
SECRETARY CUOMO: Thank you very much. Hank Levine is doing an excellent job here as the Consul General. Thank you for the kind introduction. It is mostly accurate. I am a relatively young person in general, actually one of the youngest Cabinet members ever appointed. One of the younger Cabinet members was Robert Kennedy who was appointed by his brother, John F. Kennedy, as Attorney General. So I don't count his appointment as competition with mine because that was nepotism in the case of Robert Kennedy [laughter], but I was young when I started this job. When I started this job as a Cabinet minister, I was 39 years old. That was about three years ago. I'm now 74 years old [laughter] however, because my job is a very difficult one and it's increased the aging process.
I want to thank once again our hosts, Minister of Construction, the Vice Mayor of Shanghai, Metropolitan Life, Mr. Nicholas Latrenta, and Vincent Reusing, for putting this colloquium together -- all of the American companies who came, and all the Chinese officials in this area. I also want to thank the people from my delegation who have worked very hard to put this together: Mr. Gary Eisenman, whom you will hear from this afternoon, is our Deputy FHA Commissioner, and FHA -- Federal Housing Administration -- is the main engine of housing in our nation; Carla Koppell who heads up our International Division; and we have Mr. Robert Daly with us who is a consultant to me who advises us on China.
I have mixed feelings about Mr. Daly today. We were just on a walking tour. We were in Pudong and we were on a walking tour, and many people along the streets were noticing me as I was walking by. I was getting this very favorable crowd reaction, and I thought, "boy look at this; they know who I am here." This is a great reflection on me and my ego and my confidence swelled. It was only later on that I was informed that they weren't really noticing me whatsoever. They were noticing Mr. Robert Daly who is an actor on Chinese television. So my ego has now been deflated after he inflated it.
The presentation in Pudong was very impressive -- the master planning that they had done and the intelligence of the master planning before they have developed, and then the explosion of development -- the capacity to develop and develop quickly -- is really something that we can learn from.
I want to take a couple of minutes and talk about the topic of the day which is the secondary market, and what you are going to be discussing this afternoon, and give you a brief context overview of it, if I can. The secondary market is probably the thing the United States does best. We get requests literally from around the globe, all different countries, saying "Can you come talk to us about how you've done your secondary market?" In the housing field we have certain strengths and certain weaknesses, the United States, and very much we've learned by trial and error, and we're still working our way through some of the errors.
One thing that we have done well is the secondary market. Now the secondary market means something different in the United States than it means in China. The secondary market in China, the reference is more to the resale of housing. That is not what we refer to as the secondary market in the United States. Secondary market refers to the sale of mortgages -- securitization and resale of mortgages. The reason it was such a tremendous breakthrough when the United States started this is, before you had a secondary market, you obviously just had the original market, which meant a bank, a lender, would lend to a homeowner, $50,000, $80,000, whatever the cost of the house, and then the lender would repay the loan over a period of time, 20 years, 30 years. But the bank, the lending institution had the money in that home, in that piece of land, and literally had to wait the 20 or 30 years to get that capital back from the house. They would be making interest on the money, but they could only lend the money once. They made the loan to the home, the home was built, and the bank's loan stayed in the home.
What the secondary market said was "What if we could take the money back out of that house and circulate it?" What if we could sell the loan to someone else so the bank could get their original capital back and the bank would then be able to lend that same amount of original capital again? So if the bank made the $100,000 loan, the bank then sells the loan, gets the money replenished and makes an additional loan.
The concept was right. The question was "who would do this?" Who would buy this loan, buy this mortgage, when it had never been done before? The federal government said "we will" because it was in the national interest. And the federal government literally went in an area where the private market itself had not gone and really forged a new private market. It has been a tremendous benefit for the United States. In housing, yes, but more as an economic development generator, because it just took that capital and recirculated it and recirculated it and recirculated it.
We have, as I mentioned this morning, the highest homeownership rate in history now, 67 percent. Twenty percent of the GDP is running from housing, housing-related industries, the highest percent of the GDP ever. Why? Because we've been recirculating the capital. It has worked extraordinarily well.
One of the downsides that we found is it works so well that the government now has a tremendous exposure in all of these mortgages. The feeling is, as real estate is such a large component of the American economy, as goes the economy, so goes real estate and vice versa. As goes the real estate, so goes the American economy. But the federal government, as it was the one who orchestrated this entire secondary market, there is a sense of the private market that the federal government stands behind the security that they are purchasing -- that the federal government would guarantee this. This has never been said explicitly, but it is an implicit sense of the market. Because of that, we just now, as this secondary market has gotten so large in the United States, are putting in place something we call the "stress test" which is a test on the entire secondary market to make sure that we are not overextending ourselves. And that is also working well.
So the secondary market has been a tremendous boon to the United States. And many countries say "Well, help us replicate the secondary market." The trick is there's nothing especially difficult about the secondary market. The most difficult thing about establishing a secondary market is establishing the primary market. Once you have the primary market, you can have a secondary market. The bad news is it's very hard to establish a primary market. Because all the secondary market is saying is "We will bundle and sell like instruments; we'll take mortgages, we'll bundle them, we'll securitize and then sell them." Yeah, but the question is "What is a mortgage?" And when I say, "Well, a mortgage is 'X,'" -- is a mortgage in the northeast United States the same thing as a mortgage in the western part of the United States, the same thing as a mortgage in the southern part of the United States? And when I say a mortgage is a loan to an individual for a home, how did I define "individual?" And is my mortgage more risky than someone else's mortgage? And it really prompted us -- the secondary market in the United States prompted -- the creation of a standard primary market.
It has worked out well, but we had to literally back into the process. If you had to do it all over again, you would first establish a uniform primary market -- the optimum model primary market -- and then lead your way into the secondary market. And you'll discuss this in further detail this afternoon, but it requires a standardization of terms, laws, and policies that truly govern housing and the resale of housing. And it must be national in scope, it must be national in scope. The legal standardization is what we would call risk ratio. What percent of the loan would you make for a sale? What was the underwriting? What was your calibration of a person's credit worthiness? What is the insurance? Did you require insurance on the property? What happens when the person doesn't repay? How do you get it back? How do you foreclose? All of these questions have to be answered and it has to be a standard answer.
One of the complicating facts is, as the housing in China and the housing in the United States is very much a collaboration of governments at all levels, public and private, federal, regional, local. This standardization is often seen at odds with that, meaning on the one hand we're saying we have to have many different approaches to housing. Federal government, national government, cannot dictate what housing must be done. But on the other hand, we're saying, "if you want a secondary market and a primary market, you must have a standard template." They sound at odds, because to a certain extent they are. But if you're going to arrive at a secondary market, there must be a standard, primary market that exists. And the definition must be the same in Shanghai as it is in Beijing.
Yes, Shanghai will have its own customization of housing policy. And the needs in Beijing are different, and the needs in rural China are certainly different. But at the same time, there must be a common foundation, a common denominator, where everybody agrees -- when you buy a mortgage, this is what you're buying. And a mortgage in Shanghai is the same as a mortgage in Beijing is the same as a mortgage in rural China. And when they are bundled, when you buy a batch of mortgages, it doesn't matter to you if the mortgage was from Shanghai or Beijing or wherever else, because it is essentially the same document put together by the same assumptions.
The conflict is the local desire not to be imposed upon by the federal government and that is a tension whether you're in China or whether you're in the United States. The localities believe they know best. The government closest to the people knows best. How can the federal government come and possibly understand the situation that exists here in this local area? We must have that standardization, not only among governments, but also between the public and the private sector. And one of the partners in the United States housing arena, which is a very recent phenomenon for us, maybe the past 20 years, and it's just developing in China now, is the use of what we would call not-for-profit organizations, NGO's, in China -- organizations which are neither purely government or purely private sector, but are tremendous developers of housing and urban development in the United States.
This year, I'm very excited, that we are going to be able to complete a pilot demonstration of a secondary market example here in China. We're going to work hand-in-glove, the United States and China, to develop a model pilot of a secondary market program and we're trying to get the first project completed by the end of the year. It's a very aggressive timetable. The end of the year is a relevant timetable to me personally in the United States because that is the end of the term of this Administration and I very much would like to see this completed during our Administration.
My last point is this: While we believe we have a value added in speaking to the Chinese about our secondary market, there are certainly many challenges that remain in our housing system. For all our success, we have corresponding, glaring failures. The primary provider of housing in the United States is the private market. It is market-driven housing. The private sector builds it because people can pay for it. The question we have yet to answer adequately in my opinion is "And what happens when the private sector can't pay?" What happens to those people who can't afford, by the pure market, housing? You can't say that they're out of luck, because you have a certain national obligation, certain social obligation. But how do you serve those people who the private market will not reach? We're still working through that. What is the role of government, what is the responsibility of government to those people? Do we say, "Well, the market didn't work for you, therefore, you're on your own?" If we say we do have some obligation, well then what does government do, what does the private sector do? Who will actually subsidize the ownership, who will develop it, who will manage it?
Also, we would call this public housing in the United States, when you do that. How do you make sure that the residents, the tenants, have enough investment in the housing so that they feel a part of it and they work to maintain it and upkeep it? We have had subsidized housing where the tenants, the residents, have no real connection to the project and were never invested in the project, and it did not work out well. How do you make housing work within an overall comprehensive framework? Because housing doesn't exist alone. What Pudong has done so well in that master plan, how do you fit housing together with economic development, with environmental development and make it all work? How do you get the community part of the development process, what we now call empowerment -- bringing the community into the planning process so that they feel a part of it?
The two single largest symbols of how much more we have to do in America in terms of housing are, number one, we have about 600,000 homeless Americans still. These are people who are homeless, literally without a permanent place of residence. The word "homeless" would suggest that it is purely a housing problem. It is certainly a housing problem but it very often goes beyond just a housing problem. Many of these people are mentally ill, many of them have family problems, or have social problems. People -- victims of domestic violence, spousal problems, mental health problems -- so we have a very significant problem with a population. It's so transient that it's hard to estimate, but the best number is about 600,000. Whatever the number, it is a real problem. It cannot be dismissed in the United States, of people who are literally still on the streets. This is a problem that exists in the midst of the most sophisticated housing market on the globe, in my opinion.
So you have this great success story, and you also have as desperate a situation for some as you can have. We also -- the second symbol of how much further we have to go is -- we have more people who need affordable housing in the United States than we have ever had before. The population that needs affordable housing is higher than ever, 5.4 million families -- affordable housing being defined in the United States as more than 50% of their income is going to rent or they live in substandard housing.
That percentage of Americans is at an all time high. Why? Because the economy is so strong in the United States, it's driving up the rents and the lower income people can't find affordable housing. So they have to pay a higher percentage of their income to rent, and the highest number, 5.4 million, over 50% of their income. Our rule of thumb is that a family should spend about one third of their income for their housing costs. Certainly over one-half is well above.
All this to say that some things we do well, some things we do less well, and this relationship is truly a relationship that I believe can be mutually beneficial. Let us share with you the lessons that we have learned -- some of them the hard way. One of the lessons that we believe we can be of value added is on the secondary market. And maybe we can learn from you the reciprocal -- trying to meet those needs that we have yet to meet, especially the needs of those of low income, where the private market doesn't serve. How do we bring people into the process of making their housing not just a functional unit of habitation, and not just an economic generator, but also their point of inclusion in society? Housing -- where people live when they own it, literally -- can be the metaphor of their stake in society. It can be the point where they connect to society, where their relationship with everyone else, with the country, to the community, is manifested. And that is something that we can work on together.
Again, I'm excited about the possibilities. I'm excited about what we have done already. I'm excited about what we're going to do together. Thank you for having me. Enjoy the afternoon. I'm going to be touring some residential units while you are getting into the details of this. I'm excited about being able to get this done by the end of the year and have the first pilot demonstration on the secondary market. And again, thank you for having us. I thank my hosts. I thank Metropolitan Life for all that you've done. Enjoy the afternoon. Thank you.
(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
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