Prepared Remarks by David H. Stevens Assistant Secretary for Housing and FHA Commissioner at the Standard and Poor's Housing Conference

Orlando, Florida
Thursday, February 11th, 2010

Thank you, Steve (Murphy). Good morning.

The title of this conference is "Defining the New Normal." And that topic is preceded by the question "Are We There Yet?" I would not call the current situation "the new normal." We are headed in the right direction. But we are in a period of transition, recovering from a turbulent housing market and an economic recession. We are building a new financial landscape and moving toward new conditions of practice. Our current situation is not the "new normal." Nor should it be.

Let me explain. At the moment, about 95 percent of new mortgages are coming from Freddie, Fannie, and FHA. Private capital has virtually abandoned the market. This situation cannot continue, and it would be economically unhealthy for the federal government to dominate the housing market over the long term. No one wants to federalize the mortgage market. Rather, we have stepped in to stabilize the market, a short-term, countercyclical effort that is not intended to become permanent. Already, you see signals from the Fed and other sources that this dominance must gradually taper back to allow private liquidity in. And it is private liquidity that will help to establish the "new normal."

That liquidity will operate in a new context. There will be new incentives to guarantee transparency, responsibility, accountability, and good practices. There will be a greater emphasis on clear information, greater communication between lender and borrower, higher levels of assets and more security behind lenders, and more utilization of housing counselors to make sure families find the house they can afford. There will be more safeguards and tools to help the housing market remain stable, to have sustainable growth without overheating or overextending itself with shifty, questionable mortgages that crumble under the weight of default and foreclosures. We will be more vigilant to protect the housing market, finding a more appropriate balance between ownership and renting. We will have more options for affordable rental housing.

In the past year the Obama Administration has put in place a comprehensive set of responses to address problems at every stage of the mortgage process. A year ago our financial sector was on the brink of collapse and house prices were falling rapidly. Many were predicting a second Great Depression. A year later, with home prices up for two quarters in a row, interest rates near five percent and home sales rebounding, the nation's housing market is returning to stability. The Housing and Economy Recovery Act of 2009 is providing $11 billion in new bond authority. The American Recovery and Reinvestment Act of 2009 has an $8,000 first-time home buyer tax credit. The coordinated efforts of the Treasury and the Federal Reserve have combined to maintain mortgage interest rates near record lows for nine months. This monetary policy is helping first-time homebuyers enter the market, has assisted over 3.8 million homeowners refinance, and is pumping $13 billion into our local economies and businesses every year - generating additional revenues for our nation's cities. We have extended offers for trial modifications to more than 1 million American homeowners - and over 900,000 have entered the trial modification period. Through the Neighborhood Stabilization Program (NSP), communities across the country have been using $4 billion in HUD-administered funds to reclaim foreclosed homes and place them back into productive use, stabilizing neighborhoods and property values alike.

This comprehensive effort has been swift and helped save the financial system, first and foremost the housing market. And we will keep working to shore up that process. But as the futurist H.G. Wells said in another context, this is "the twilight of the dawn." This is not the "new normal," only a necessary prelude to the dawn of new era of a stronger, more sustainable housing market.

For example, FHA is in the midst of a powerful countercyclical presence in the housing market. FHA was started in the 1934 to provide opportunities for those with low-and-moderate incomes to have an opportunity to own a home...a home financed with a fixed rate, 30 year mortgage backed by the full faith and credit of the federal government. FHA has a countercyclical role too...expanding its market share when there are problems in the housing market.

Three years ago, when the housing market went into a slow, shattering downward dive, FHA was only about 2-3 percent of the housing market. Three percent!!! We had been shoved aside in favor of wild, novelty mortgages that were an savings, no security, no stability. The modifications and adjustments, the balloon payments and the hidden costs surprised and then overwhelmed millions of borrowers. There were also a series of poor decisions made in the private sector though out the industry, where short-sighted greed placed major corporations and lenders in jeopardy, and some of our most established companies were lost because of the turbulence in the housing market. And rampant fear set in, a profound loss of business confidence, drying up liquidity and undermining the financial stability of our economy and economies around the world.

Now, we are on the way back. One reason: over the last three years, FHA reacted by increasing its market share dramatically, helping those in need, especially those with low incomes and homeowners from minority communities. I would hate to think of where the housing market and the economy would be without FHA. There would have been hundreds of thousands more foreclosures without our efforts. And because we provided liquidity at a time when it was desperately needed, we may have saved hundreds of thousands more homeowners and the many industries involved in the housing market, especially homebuilders and those who service new homes with furniture and appliances.

The seismic shift in FHA's market share is a vital part of our recovery. FHA insured nearly 30 percent of the single family mortgage market in 2009...a vast increase from marginalization less than 1,000 days ago. FHA insured 1.9 million loans in 2009 - up from 1.1 million in 2008. Now, in 2009, more than 50 percent of first-time buyers used FHA; nearly 80 percent of our purchase loans are to first-time homebuyers. In 2009, approximately 835,000 borrowers refinanced into lower interest rate FHA insured loans, saving them an estimated $1.3 billion.

And we have helped hundreds of thousands of homeowners keep their homes through a vigorous, pro-active loss mitigation effort. We require our lenders to utilize loss mitigation tools. These efforts have saved 400,000 homeowners from foreclosure. And there are loan modifications possible through under FHA/HAMP. We have been working with Treasury through the "Making Home Affordable" program to help troubled borrowers with mortgages not insured by the government. Recently, we added another option at FHA by providing guidance for those facing imminent default - loss mitigation can begin immediately - before trouble arrives!

Our market share has raised worries about FHA solvency. When I came on board in July, I immediately examined our funds and discovered that we were slipping under the 2 percent capital reserve ration mandated by Congress. This was confirmed in November in the latest actuarial report.

But FHA remains solvent at the moment. The Federal Receipt Account and the MMI Fund, in combination, hold $31 billion in cash reserves. This is 4.4 percent higher than ever before. Yes, capital reserve ratio is below 2 percent. The surplus funds paid from capital reserve account to financing account are more than enough to meet expected future losses.

In fact, the portfolio looks good. The FICO scores have risen: 693 now v 633 two years ago.

Our most difficult loans were made in book years 2006 through 2008. Looking ahead, as private liquidity re-enters the market, and FHA steps back, we will have higher quality, less risky mortgages, which will be appropriately underwritten.

So, at the moment FHA is doing well, although we have stretched it to the limit to help stabilize the housing market. But we need to stay ahead of any potential problems. That is why Secretary Donovan and I have taken several steps to further protect FHA and better manage risk.

For example, I hired a Chief Risk Officer, the first in the history of FHA. His name is Bob Ryan. Many of you know him. Bob will oversee a single division devoted solely to managing and mitigating risk to the FHA's insurance fund - across all FHA programs. He will oversee the most extensive examination and coordination of risk management in the history of FHA.

And, three weeks ago, in a speech before the Exchequer Club in Washington, I announced new policy changes that were the most sweeping and significant steps to improve FHA soundness in decades, if not in our entire history. The changes will insure the long term viability of the program and increase FHA's capital reserves. They will help reduce risk in our portfolio, ensuring fiscal soundness and enabling FHA to remain a stabilizing force in the market. These changes will require more skin in the game from borrowers. There will be greater accountability and transparency from lenders. The new policy changes will not disrupt the housing market. In fact, they will contribute to future sustainability in the housing market.

Here is what we are doing:
First, there will be new loan-to-value and credit score requirements. Loans to borrowers with a credit score of less than 580 will require a minimum 10 percent downpayment. Loans to borrowers with a credit score of 580 or above will require the traditional minimum of 3.5 percent downpayment.

Second, the up-front mortgage insurance premium will increase to 2.25 percent. We will also pursue legislative authority to increase the statutory cap on the annual Mortgage Insurance Premium. We will ask for conditional authority, triggered either by a decline in the capital ratio below the two percent requirement, or by a certification by the Secretary that the higher cap is necessary to ensure the health of the MMI fund. When we receive legislative approval, the upfront annual premium structure will be adjusted, with some of the upfront premium shifted to the annual premium. This shift will allow for an increase to the capital reserve with a lower up-front cost to the consumer.

Third, we will reduce allowable seller concessions from six percent to three percent to conform to industry standards. This will also reduce potential value inflation.

Fourth, we will increase enforcement efforts to ensure compliance with FHA guidelines and standards. We will use a scorecard system to evaluate and report lender performance. This will compliment the current information available from the Neighborhood Watch data. This change will make the information more user-friendly.

We will also enforce indemnification provisions through section 256 of the National Housing Act. This is in addition to changes announced in December by Secretary Donovan. He asked Congress to apply section 256 to require indemnification provisions for all Direct Endorsement Lenders. This would require all approved mortgagees to assume liability for all the loans they originate and underwrite.

These changes will be implemented through the regular notice and comment process, or, wherever possible, in-house. We hope for full implementation of all changes by early summer.

These actions are in addition to new requirements to better manage brokers, such as new requirements for audited financial statements and adequate capitalization.

Added together, these changes significantly, vastly strengthen FHA, allowing it to better fulfill its mission. And, as I said before, they help us better manage risk in our portfolio.

We are also committed to a balanced housing policy. This Administration has given renewed attention to rental housing. This nation needs affordable rental housing...for teachers, nurses, transportation workers, service providers...the very people who make a city function and thrive. Not everyone wants to be a homeowner...not everyone is prepared to be a homeowner. Our balanced housing policy works to offer an accessible and affordable supply of safe rental housing.

The new budget reflects our commitment. President Obama is asking for $19.6 billion in Fiscal Year 2011, which is a $1.4 billion increase from the 2010 Consolidated Appropriations Act. This will allow us to assist 2.2 million families, or 200,000 more than in the current fiscal year. These funds will go to the Section 8 Tenant-Based Assistance or Housing Choice Vouchers Programs to help provide decent, safe, and sanitary housing. We also remain strong supporters of the Housing Finance Agency Risk Sharing Program - 542c. Participating qualified State and local Housing Finance Agencies may originate and underwrite affordable housing loans. These include loans for new construction, substantial rehabilitation, refinancing, and housing for the elderly. The program provides full FHA mortgage insurance to enhance HFA bonds to investment grade.

I mentioned earlier that FHA has been an important source of liquidity throughout the entire housing market. Nowhere is that more true than in the health care industry. FHA has been a key source of funding for health care infrastructure. FHA is the main source of funding for assisted living facilities and nursing homes.

We have done all of this, and we will do more. We face enormous and difficult challenges in the weeks and months ahead. But we will get the housing market back on track. This country has done it before. I spoke earlier of the FHA's countercyclical effect on the housing market. But there is another affect: the way that FHA is a leading indicator of the structure of the housing market. When FHA was created in 1934, in the dark days of the depression, only four out of every ten Americans lived in their own home. Down payments were around 30 percent, balloon payments common. Mortgages were scarce because local banks had limited capital. Interest rates on mortgages were 8 percent. Mortgages had to be paid within five to ten years. In short, there were tremendous dis-incentives to home ownership.

Historian David Kennedy argues that FHA changed that, especially in combination with other actions. FHA insurance made lenders less nervous. Business confidence increased. Interest rates went down. Lenders and homeowners knew that an FHA-insured loan was solid. And many lenders modeled themselves after FHA: 30 year loans, fixed payments, fully amortized mortgages. Lenders even dropped down payments to around 10 percent. The conditions for investment became more favorable. Capital started flowing out of the cities into the suburbs and rural areas, and from the Northeast to the South and West. Kennedy argues that FHA and other actions, in his words, "built structures of stability." He said that, "The New Deal...put in place an apparatus of financial security that allowed private money to build postwar suburbia and the Sun Belt. Private money built private homes."

That is what we need now...private money building private homes...and affordable rental housing. FHA has helped to stabilize the market. Now it is time for FHA and other federal entities to slowly step back and let private liquidity flow in. There is a lot of liquidity sitting on the sidelines. That liquidity needs to be! The conditions for investment are increasingly favorable...low interest rates, housing tax credits, more affordable prices, an administration committed to urban development, a stabilizing housing market, and signs of reductions in inventory. We have witnessed the worst of the recession. There is still a lot of volatility in the market for individual indices. But we are well past the point of all of the indices falling together quarter after quarter.

Kennedy said that the New Deal "liberated capital." And, that liberated capital led to almost six decades of growth in the housing market. It needs to be liberated again, right now!

Thank you.


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