Prepared Remarks for Secretary of Housing and Urban Development Shaun Donovan at the 6th Annual Housing Policy Council Meeting
Thank you so much. It's great to be here with the Housing Policy Council for your 6th annual meeting. Thanks so much to Mike for the introduction.
Today President Obama announced his FY 2010 budget and we at HUD announced details of our proposed budget. That's why today I'd like to talk to you about the current state of the housing market and how the President's housing plan is starting to work. I'll also share with you how our budget will enable HUD to continue responding aggressively to the housing and economic crises and transform the way that HUD does business, particularly through FHA reform.
Many of you played important roles in putting together the President's housing plan— particularly Mike Heid and President Emeritus Bill Longbrake. I very much appreciate the back and forth and open lines of communication we've had on the plan.
Since we've all been in the trenches on Making Home Affordable for the past few months, let's step back for a moment and recognize just how far we've come with the plan in such a short span of time. Since the President announced his modification plan on February 18th, rates on 30-year mortgages dropped to record lows, below 5%, and refinancing applications are up 80%. A typical homeowner can now refinance and save around $2,000 a year, the equivalent of a major tax cut. And the plan's website has received almost 16 million page views.
14 of the largest servicers, representing 75% of the market, have also formalized their commitments to implement the Obama modification plan and have already begun modifying loans. They have all committed not to foreclose on any one unless the household has been given a real opportunity to qualify for a modification. We are confident that banks and servicers will move as quickly as possible to modify these loans to avert additional foreclosures in the coming months.
Over the next month or so, we also expect to see substantial increase in loan modifications, which we anticipate will happen quickly and will help decrease the foreclosure sales numbers over the next few months. However, due to the buildup during the moratoria, we will likely see a short-term increase in foreclosure sales. It is important to note that these will mostly include loans and borrowers that do not qualify for the President’s plan: investor-owned properties, vacancies, and second or vacation homes.
I do think that we have some early signs that the market is stabilizing. Since January, what we've seen is both home sales moving up and down around a relatively stable number and we are seeing the first signs that the rapid decline in home prices is starting to abate. While I think it's too early to say we are out of the woods until we get a couple more months of data, I am optimistic that housing markets will recover by the end of this year, if not earlier. In short, the President's housing plan is starting to show results and our budget Administration-wide and at HUD will foster these early signs of success.
I know that as an organization you are all very concerned about the viability of FHA. That’s why I am proud to stand before you today to announce that we will not be asking the American taxpayer to support FHA's single family program in the FY 2010 budget.
HUD will be requesting expanded loan commitment authority for both FHA and Ginnie Mae with the expectation that FHA loan volumes will continue to be high while broader credit markets and the private sector recover from the credit crisis.
FHA volume has grown consistently. As recently as 2007, FHA volume for its flagship mortgage insurance program was $60 billion. By 2008, the volume had grown to $181 billion. For FY 2009, we are expecting $290 billion in forwards. For our FY 2010 budget, we are asking Congress for the authority to endorse an even higher volume – up to $400 billion in authorization for FHA insurance. That increased authority will allow HUD to endorse approximately two and a quarter million mortgages. And this comes on top of the $300 billion Congress also authorized last summer for the Hope for Homeowners Program.
As is case with any mortgage insurance operation, in times of severe economic decline, FHA is experiencing an increased level of defaults, which will likely translate into an increased number of foreclosure claims over the next twelve months. While the latest estimate of the capital ratio has dipped to 3 percent, down from 6 percent in the previous year, it remains well above the Congressionally-mandated 2 percent bench mark.
Furthermore, the shift in the ratio is a reflection of the overall increase in FHA volume and FHA's financing account, from which the agency pays out claims, has adequate funds to cover anticipated future losses associated with the new business. You can be assured that we will be watching this closely.
The FY10 budget includes a request to appropriate nearly $800 million for HUD’s reverse mortgage program. Needless to say this program is very sensitive to the projected path of long term house price appreciation. Recognizing the uncertainty surrounding the timing of the housing market returning to full strength, our budget projections are conservative and request that Congress appropriate funds consistent with just a 0.5 percent real inflation adjusted house price appreciation for loans made under HECM. With house prices now already showing signs of stabilizing somewhat faster than was assumed even just a few months ago, this scenario could be too pessimistic, but we think it is better to err on the side of caution.
But there are several positive developments for FHA. The tightened underwriting standards in the conventional mortgage market are resulting in a dramatic increase in borrower credit quality in the FHA portfolio. Over the period from February 2008 through March 2009, the average credit score for FHA-insured borrowers increased from 626 to 678.
That change alone creates a more stable base of borrowers that will help to contain any increase in foreclosure activity on FHA-insured loans in the future.
Despite losses, FHA flagship mortgage insurance program is projected to generate more revenue than it pays out in claims this year. The elimination of the seller-funded down payment assistance will substantially reduce anticipated losses going forward. Note that at the beginning of the current fiscal year, seller funded downpayment assistance loans accounted for 14 percent of all FHA loans outstanding, but generated 31 percent of all FHA foreclosures and 31 percent of all losses on foreclosed-properties. Looking forward, we estimate that without the elimination of this program, FHA would have needed an FY 2010 appropriation of over $2.5 billion. Instead, we project that FHA will return to the tax payer over $1.7 billion.Despite sufficient revenue for the single family program and the elimination of seller-funded downpayment, FHA needs to change. We view FHA reform as key to changing the way that HUD does business. In this budget year and into the future, we will work with Congress to make sure that FHA has the right program mix and pricing structure, is actuarially sound, and has the organizational infrastructure to continue to expand homeownership opportunities to those families traditionally not well served by the private market place.
FHA's market share - which was at just 1.9% in the fourth quarter of 2006 and reached 23.7% in the fourth quarter of 2008 - means that we must continue to ensure that FHA can play its critically important countercyclical role, serving as a backstop to the private mortgage market.
FHA is working to realize its full potential to respond to the current mortgage crisis and cope with growing demand by investing in new technology and devoting additional resources to personnel. FHA was awarded additional funding of $4 million in the FY 2009 supplemental to enhance information technology and we are developing a modernization plan.
Our FY 2010 budget requests funding for IT investments to replace obsolete systems, and invests in infrastructure that can support our core systems in the future. New technology is needed to help improve fraud detection, underwriting, and risk management. This year, HUD will also be able to substantially increase hiring and address some of its personnel shortages.
The HUD budget also requests $100 million for the Housing Counseling Assistance program, an increase of $35 million over the level provided in the FY 2009. The housing crisis has illustrated that many families simply do not understand the complex homebuying process and do not know where to turn when they face foreclosure.
Many families have proven to be particularly vulnerable to aggressive and misleading marketing of risky loan products and foreclosure rescue scams that are not in their best interest. In this environment, the need and demand for mortgage and foreclosure counseling efforts could not be greater. Along these lines, we are also requesting $37 million for an agency wide initiative to Combat Mortgage Fraud and Predatory Practices, which will enhance our ability to detect fraud and monitor lender originations in FHA.
[Two weeks ago, President Obama's nominee to be the Assistant Secretary for Housing/Federal Housing Commissioner, David Stevens, went before the Senate for his confirmation hearings. I believe that Dave is one of the best in the mortgage business with experience ranging from mortgage originations, to secondary markets, to managing a national real estate firm. Dave brings a hands-on systems approach to mortgage origination, and is anxious to see first-hand the status of FHA's systems and programs and to quickly put in place process and technology improvements in all facets of FHA’s operations. He will also help FHA become an important partner with you in driving energy efficiency and achieving savings that will make it possible for average American families to save money over the long-term through lower utility costs. I am looking forward to the Senate confirming Dave Stevens and having him get to work.]
FHA exists to serve American homeownership needs, particularly in times of economic crisis. That's why we at HUD have invested in FHA reforms through our budget and will work with our industry partners like you to transform the way HUD does business and make it a stronger, more flexible partner to you and to the American people.
We have made progress since President Obama came into office, but there is a long road ahead, and our budget is just the beginning of our transformation process as an agency and as a country.
Obviously, as we look forward into the future, we must examine all of the factors in the mortgage industry that led us into this crisis in the first place. We will have serious, and at times difficult, conversations about putting into place common sense structures so that we don't repeat the mistakes of the past and we may not agree on everything. But I do fundamentally believe that there are ways to make our current system simpler and more transparent that can both benefit consumers and financial institutions.
While we are without a doubt in a crisis, I know that together we can be partners in finding and implementing solutions that will help American families struggling to stay in their homes. We rise and fall together and together I know that we can meet our nation's challenges and put our country's economy back on solid ground.
|Content Archived: February 23, 2017|