Prepared Remarks for Secretary of Housing and Urban Development Shaun Donovan at the Mortgage Bankers Association National Policy Conference

Washington, D.C.
Tuesday, April 13th, 2010

Thank you for that generous introduction. It's a pleasure to be with the Mortgage Bankers Association. Whether it is strengthening our nation's residential and commercial real estate markets, promoting sustainable homeownership, ensuring access to affordable housing for all or educating consumers through financial literacy, the Mortgage Bankers Association has been - and will continue to be - an influential voice when it comes to ensuring the strength and stability of our housing markets and neighborhoods alike.

This afternoon, I want to discuss the progress of our housing recovery - where we were only a few short months ago, the comprehensive response that has taken us to where we are today, and the steps we're taking to ensure this type of crisis never happens again.

I want to speak frankly about the challenges that lie ahead of us - where we've succeeded to date, where we've fallen short, and how closely the fortunes of our economy and housing market are intertwined.

And I want to set the record straight as well about the totality of the Administration's housing efforts since we took office 15 months ago.

Without putting too fine a point on it, too often here in Washington we tend to focus on one program or indicator, whether it is permanent mortgage modifications or foreclosure starts.

But viewing the Administration's efforts through a single lens fails to capture the full scope and results of our efforts to date. It also distorts the very real challenges that still lie ahead to protect American families and our economy.

And so, what I want to do today is step back and talk about all our efforts - how they are working together and share some of the numbers that tell the broader story.

A Very Close Call

And to be sure, those efforts have been needed. Allow me to remind you of where we were just 15 short months ago as President Obama was sworn into office.

We were in the midst of a crisis that had devastated homes and neighborhoods across the country, leading economists across the political spectrum to warn of a Second Great Depression.

We lost an average of 753,000 jobs a month in the first quarter of last year.

Credit - the lifeblood of our economy - was frozen nearly solid.

And house prices were in freefall - having peaked in August of 2006, they fell every month for 30 straight months. Home prices fell by nearly a third in that time - and were expected to decline by another 5 percent by the end of 2009 by leading macro-economic forecasters.

Indeed, to understand the pain that this crisis has inflicted on families and our economy, you only need look at the rapid decline of home equity in the two years prior to our taking office.

By the end of 2008, homeowner equity - the principal source of wealth for most American homeowners - had declined by nearly 50 percent from its 2006 peak to $6.6 trillion - which translates into a loss on average of over $80,000 for each American homeowner.

That's $80,000 less in retirement security for older Americans.

That's $80,000 less to send a child to college.

That's $80,000 less to start a small business.

With all this happening, it's no surprise that consumer confidence fell to an all time low in December 2008 and that the vast majority of Americans believed that the economy was heading in the wrong direction. They were right.

A Comprehensive Approach

Those were the grim realities we faced a little more than a year ago.

I'm not here to point fingers about how we got to this point - about loan brokers and loan officers who pushed loans that borrowers didn't understand and couldn't afford, and investment banks who often "turned a blind eye" to these practices, packaging these loans into securities they sold to investors who were, to be charitable, less than fully informed.

How some borrowers used their home like "ATMs" based on the assumption that home prices would go up.

Or how we had a national housing policy that pushed homeownership while marginalizing affordable rental housing.

So let's be clear: there is plenty of blame to go around for the crisis we ended up in.

Rather, I want to talk to you today about what the Obama Administration did to respond swiftly and comprehensively to address this crisis immediately upon taking office - and the steps we've taken since to restore stability to our housing markets.

At the macro level, both the Federal Reserve and the Treasury intervened to keep interest rates at historically low levels for more than a year. This helped stabilize housing markets and the broader economy, as spreads between mortgage-backed securities and benchmark Treasuries returned to more historic norms.

But as everyone in this room who has originated jumbo loans during the last year knows, low interest rates only benefit consumers if there are mortgages available at those rates.

That's why the Administration moved to stabilize the housing market by restoring confidence in Fannie Mae, Freddie Mac, and the FHA, which have enabled a robust refinancing market to emerge, while supporting more than 90 percent of all new mortgages last year.

There was also the Recovery Act - passed soon after we took office. Through that historic legislation, we extended and expanded the $8,000 First-Time Homebuyer Tax Credit, which helped create 700,000 homeowners in 2009. This has buoyed demand for housing and given the market time to recover.

And recent data is encouraging on this front. While home sales stalled during the first few months of the year, pending home sales rose 8.2 percent in February - suggesting that spring sales should show a rebound from the winter lull.

At the same time that we took steps to ensure market capital was available at low rates and to stimulate demand, we also worked to help families keep their homes, which further helped to stabilize the market by reducing the number of unnecessary foreclosures and to limit the supply of homes on the market.

In partnership with the White House, the Department of Treasury, and other federal regulatory agencies, HUD helped develop the Making Home Affordable plan.

Did the Administration underestimate how prepared servicers would be to respond to the volume of homeowners needing assistance? Absolutely.

But while the complexity of the programs challenged the capacity of servicers, it's also true that many institutions were too slow to make the investments in systems and staff needed to process applications at the scale that was necessary. So we have moved to simplify documentation and establish clearer performance timelines, while also making homeowners with FHA loans eligible for HAMP.

Still, let's remember the substantial number of families that we have worked to help with this program.

As of the end of February 1.1 million families at risk of foreclosure have benefited from HAMP trial modifications, saving these households an average of over $500 per month in mortgage payments. Permanent modifications accelerated in recent months - the latest information that we will be releasing tomorrow will show more than 200,000 permanent modifications.

We've also helped three and a quarter million people receive counseling on their mortgages.

Nor should we forget the additional 650,000 FHA homeowners experiencing financial difficulty who were assisted through FHA's variety of loss mitigation options in the last eighteen months. This is at a scale comparable to HAMP, but an effort that has largely flown under the radar screen to this point.

Indeed, tying many of our efforts together to stabilize the housing market and help families keep their homes has been the FHA, which has insured approximately 30 percent of purchases and 20 percent of refinances in the housing market over the last 18 months, all of those securitized through Ginnie Mae.

During that time, FHA helped close to 1.1 million homeowners refinance into stable, affordable mortgages. FHA also insured loans for over 1.4 million homebuyers - more than 80 percent of whom were first-time homebuyers. During that same period, Ginnie Mae has raised more than $620 billion in the private capital markets to fund FHA and other government loans.

Had FHA not fulfilled its historic responsibility to be a temporary countercyclical source of liquidity - a role established during the Great Depression - there's little doubt that this housing crisis would have been far more severe - that more families would have lost their homes, fewer new homeowners would have been created, more jobs would have been lost, and the overall economy would be in much worse condition.

Some have expressed significant concerns about this role - particularly given the decrease in FHA reserves. In fact, we're concerned, too - which is why we put in place a series of reforms to protect the taxpayer and ensure FHA has the strength to see the housing market through to a lasting recovery.

And today, I want to give you the first glimpse into FHA's March numbers, reflecting the second quarter of the fiscal year. Our serious delinquency rate has risen to 9.1 percent versus 7.4 percent a year ago, which mirrors a trend we are seeing in the prime mortgage market as well, as delinquencies are increasingly driven by unemployment.

But you will also see that our early delinquencies are better than expected - that the number of FHA loans in early default and claim has declined 15 percent since December 2009, a strong indicator that loan quality continues to improve.

Admittedly, we need to see more evidence of this trend. But what is not in doubt is that little of this would have been possible had FHA not rolled out a series of measures over the last year to strengthen its risk and operational management. FHA Commissioner Dave Stevens hired Bob Ryan, FHA's first chief risk officer in our entire 75 year history, tightened its credit standards significantly and expanded its capacity to rein in or shut down lenders who commit fraud or abuse.

Indeed, in a single year, FHA's Mortgagee Review Board took six times as many enforcement actions as it did in the entire previous decade.

I recognize that some of you are concerned that our efforts to strengthen enforcement and oversight, not only within FHA but also RESPA and SAFE, will impact your bottom lines.

But I would argue that every responsible lender benefits when we hold those who don't play by the rules accountable. And if this crisis has taught us anything, that was long overdue.


But as important as their roles have been, FHA and Ginnie Mae are only one piece of our comprehensive strategy to stabilize the housing market.

Consider what all these actions together have meant to American families and communities.

First, home prices stabilized last year. Indeed, instead of dropping another 5 percent as predicted, the Case-Shiller index has now shown house prices improving or holding steady for 8 consecutive months.

This in turn has reversed the erosion of home equity. According to the Federal Reserve Board, home owner equity started to grow again in the second quarter of 2009 and, to date, has increased by over a trillion dollars, or $13,000 on average for the nation's nearly 78 million homeowners - bolstering seniors' retirement security, restoring an important source of college tuition support, and helping entrepreneurs start small businesses.

Second, lower rates have put money in families' pockets and in state and local coffers. The more than 4 million borrowers who have refinanced in the past 15 months have saved an average of $1,800 per year on housing costs - pumping over $7 billion annually into local economies and businesses, generating additional revenues for our nation's cities, suburbs, and rural communities.

Third, as I noted, it's begun to restore the confidence we need to get our economy moving, creating 162,000 jobs last month - the best jobs report in three years.

New Challenges Require New Solutions

None of this is to say that we are out of the woods. The housing recovery, as you know all too well, is still fragile. We still may see further declines. Not only does the market still struggle with uncertain house prices, but more importantly, families still struggle to stay in their homes.

This is in part because, since we took office, new challenges have emerged which have reminded us just how intertwined our housing market and our economy are.

That's why we've adapted to changing circumstances.

Where the challenge a year ago was increasing defaults and foreclosures due to risky loans, today it is the ripple effects of those bad loans on our communities and our economy. As I mentioned earlier, job losses and price drops have meant that we see increasing foreclosures and defaults in prime loans as well.

In fact, today two of the biggest threats to our housing recovery are unemployment and underwater borrowers.

Foreclosures are increasingly being driven by homeowners who find themselves unemployed or underemployed and can no longer make payments that were once affordable. Making matters worse, these borrowers often can't move to find a new job because they can't sell their homes due to owing more on their house than it is worth.

But the Administration and the market are responding. We have made changes to HAMP so that unemployed borrowers can get up to six months of relief while they look for work.

We also see investors and lenders increasingly come to the conclusion that it is in their interest to write down the value of underwater mortgages rather than incur the substantial cost of foreclosure.

The Administration also recognizes the importance of principal reduction to underwater homeowners, their communities and the broader housing market, which is why we've recently introduced additional options to HAMP and FHA refinances that will leverage this private sector interest to catalyze significantly more principal reduction than government ever could alone provide.

As a result, some borrowers, who are now in mortgages that place them dangerously close to default, will have their loans modified or refinanced into more sustainable loans. By lowering their risk of default, these efforts will also lower the likelihood that their community suffers from another foreclosure and the housing market suffers a double dip.

By creating a framework for expanded FHA refinancing that relies primarily on loan originators as opposed to servicers, we believe there will be greater capacity to process these applications than homeowners experienced with previous efforts.

And by lowering barriers to principal writedown, the vast majority of the burden of writing down these loans will fall where it belongs, on lenders and investors, not on the taxpayer.

But you don't have to take my word for it.

Just last month, Bank of America announced that they are independently beginning to expand the use of principal writedowns for their borrowers. And Wells Fargo, Citibank, Bank of America, and JPMorgan Chase also expect to offer the FHA refinancing option when it becomes available.

Analysts like Amherst Securities' Laurie Goodman have said that helping underwater borrowers is key to stemming the tide of foreclosures - and that our HAMP and FHA changes represent a very important development.

Mark Zandi of Moody's has said that helping another million homeowners could be the difference between a double-dip in house prices and continued stabilization - and believes that our changes have a very good chance of helping us reach that goal.

And we continue to make additional changes to stabilize the housing market. I am pleased to announce today that beginning in October or November, Ginnie Mae will allow lenders to securitize single loans and will issue pools on a daily rather than on a monthly basis. This will help smaller lenders access Ginnie Mae and FHA directly.

And with new resources for state Housing Finance Agencies to develop innovative ways of stopping foreclosures in the hardest-hit markets, we believe all these actions will help to stabilize housing prices, the overall market, and strengthen our economy.

I've attempted to explain the comprehensive nature of our approach, why our strategy is evolving, the impacts it's had, the data that demonstrates our progress - and where we have more to do. In a sense, to provide a "scorecard" of the Obama Administration's housing efforts.

Toward that end, I want to announce today that starting early next month, we will regularly release a public scorecard of the Administration's housing recovery efforts, so that people can learn more about the Administration's comprehensive response - and see what this means for American families, to the communities they live in and to our economic recovery.

The housing scorecard builds on the Obama Administration's commitment to open and transparent government. With this housing scorecard, we not only expect to be judged for the Administration's successes and failures - we want to be judged, and held to a high standard for all our efforts.

Other Steps

But some who agree with these actions have asked why we aren't doing more. Our answer is simple:

Because there are limits to what the public sector can do - and should do.

Taxpayers have already paid a very heavy price for the irresponsible and sometimes unethical behavior of those that precipitated the crisis.

They should not be asked to absorb the substantial costs associated with writing down underwater mortgages, which could run in the hundreds of billions of dollars.

And let's not forget, as the President said in the early months of 2009, "We can't stop every foreclosure."

The truth is, not all borrowers at risk of losing their homes to foreclosure can be helped - or should be helped, including investors who were looking to make a quick profit.

That's why at the same time we're stopping foreclosures where we can, we're also minimizing the damage.

Where someone can't stay in their home, we're going to help them make the transition out of homeownership as smoothly as possible. Our Home Affordable Foreclosure Alternatives program went into effect earlier this month and will help to prevent costly foreclosures by providing incentives for servicers and borrowers to pursue short sales and deeds-in-lieu.

Through $6 billion in two rounds of Neighborhood Stabilization funding, we're helping localities work with non-profits and CDCs to turn tens of thousands of abandoned and foreclosed homes that drag down property values into the affordable rental housing communities need.

With this comprehensive but balanced approach, the Administration is providing responsible homeowners opportunities to prevent avoidable foreclosures and, for some homeowners, helping them make the transition into rental housing while also helping communities hardest hit to avoid falling back into a spiral of oversupply and price declines.

We believe the result will lay the groundwork for more sustainable homeownership, for more stable communities with fewer foreclosures, and for a stronger housing market - to make home an asset families can rely upon once again.

The Way Forward

So, where do we go from here?

All along, we've said that as our housing market recovers, the Federal government will step back and encourage the private market to step back up. Given the continuing challenges our economy has faced, some have questioned when that might be - if at all.

But in some ways, it's already happening.

Just recently, the Fed discontinued its MBS Purchase Program - Treasury recently announced that it would be doing the same. And while there was a tick up in rates, most observers attribute that to the good recent economic news.

Indeed, we've even begun to see the first signs of the re-emergence of a market for mortgage-backed securities. Without government backing, a $200 million jumbo mortgage securitization offering may be launched by Redwood Trust as early as this week. Keep in mind that there have been essentially no such offerings since late 2007, a drastic drop from the peak in 2006, when issuance of private label MBS topped $1 trillion. And securities analysts such as Jefferies have cited an increasing investor interest in private label securities. This is an additional encouraging sign that private capital is beginning to return to the housing market as the government carefully steps back.

Of course, much work still lies ahead.

But let's be clear that the Administration is working with Congress to reform our financial architecture and regulatory process so responsible lenders, who played by the rules and offered consumer safe products, are no longer placed at the disadvantage that they were during the housing boom - effectively losing business to unregulated or unethical lenders. Michael Barr will be speaking in more detail on this after my speech.

The Obama Administration is absolutely committed to enhancing protection of ordinary Americans in the housing finance arena - but make no mistake: consumers won't be the only ones to benefit. Regulatory reform can also level the playing field for responsible lenders and investors by putting an end to a system that encouraged putting short-term profits before the high standards we need.

Tomorrow, I will testify before Congress on the process the Administration is undertaking to reform the GSEs to ensure we have a housing finance structure that is transparent, accountable and meets the needs of families and communities alike.

While some have called for hasty action, we are committed to taking a responsible approach marked by care and deliberation so that we don't needlessly alarm investors around the world and spark a significant pullback of capital from our still fragile mortgage markets.

During this time of economic crisis, we have appropriately focused on the issues in the single family market. But we have not, and will not, neglect the important role of rental housing. We are paying attention to the impacts of the recession on FHA Multifamily insurance products and we're taking steps, as we have in single family, to shore up our underwriting criteria.

But most importantly we have continued to be a counter-cyclical backstop in this arena as well. FHA Multifamily has already done more business in the first six months of this fiscal year than in all of last year- filling the void left by the absence of the MBS market. We have also taken significant policy steps to assure the availability of credit for multifamily - including enabling recently completed developments to use our refinancing product and a major administrative change which can help increase a mortgage amount by more than 20 percent by taking the cost of the land out of the mortgage limit.

At the same time we are working hard to put in place a set of broader reforms - from the new Choice Neighborhoods program and proposed transforming rental housing initiative - with a renewed focus on affordable rental housing - to interagency efforts to green our homes and reduce how much families need to spend on transportation simply to live in areas where housing is more affordable.

In all of these efforts, we need your support. No one understands better than the Mortgage Bankers that when we work together in a comprehensive way to protect our homes, we protect our families and the underlying economy.

No one better understands that transparent markets are strong markets - that when institutions operate under clear rules of the road to protect consumers and provide affordable housing, we all benefit.

And above all, no one better understands that one size doesn't fit all - that when it comes to housing, different markets need different tools to solve what are sometimes very different problems.

Providing a comprehensive set of tools that stabilize our families and communities and support our housing recovery - and putting in place a housing finance system that ensures a crisis of this magnitude never happens again - those are our goals. And in the days, weeks and months ahead, may we work to meet them together. Thank you.


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