Prepared Remarks for Secretary of Housing and Urban Development Shaun Donovan at the Women in Housing Finance Public Policy Luncheon

Washington, D.C.
Wednesday, April 21st, 2010

Thank you, Faith, for that generous introduction -- for your friendship, and for your partnership through HOPE NOW.

It's a pleasure to be here with Women in Housing and Finance. Whether it is developing policy or promoting the advancement of women in the housing and financial services fields, Women in Housing and Finance is a key voice when it comes to ensuring the strength of our homes, neighborhoods and communities.

That is always important -- but particularly so today.

And certainly, at HUD, we are very much attuned to the difference women are making in this field. Sandi Henriquez, our Assistant Secretary for Public and Indian Housing, comes from the Boston Public Housing Authority, while our Assistant Secretary for Community Planning and Development, Mercedes Marquez comes from the Los Angeles Housing Department. Before coming to HUD, Helen Kanovsky, our general counsel, was with AFL-CIO's Housing Investment Trust for 13 years.

And with industry veterans Carol Galante and Vicki Bott heading up FHA's multi- and single-family housing efforts, at this critical moment in our history, let there be no doubt that women are reshaping housing finance for the decades to come.

This afternoon, I want to discuss with you 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 and fallen short.

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.

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 -- and how they are working together.

A Very Close Call

Allow me to describe 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 many economists to warn of a Second Great Depression.

We were losing average of 753,000 jobs a month.

Credit was frozen nearly solid.

And house prices were in freefall -- falling every month for 30 straight months since August of 2006. Home prices fell by nearly a third in that time -- and were expected to decline by another 5 percent by the end of 2009.

Indeed, to understand the pain that this crisis has inflicted, 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 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, to send a child to college, or 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

The Administration responded swiftly and comprehensively to address this crisis immediately upon taking office, taking critical steps 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.

But as anyone 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 restore 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. And recent data is encouraging on this front. Housing starts in March were up modestly -- but for the third consecutive month. And while home sales stalled during the first few months of the year, pending home sales in February suggest that spring sales could 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.

In partnership with the White House, the Department of Treasury, and other federal agencies, HUD helped develop the Making Home Affordable plan -- a program that has helped over one million Americans modify their loans to affordable rates and helped thousands refinance their loans.

Now, 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, I know Faith and many of you would agree that many institutions were too slow to make the investments in systems and staff needed to process applications at the necessary scale. That's why we moved to simplify documentation and establish clearer performance timelines while also making homeowners with FHA loans eligible for HAMP.

But we should not ignore the substantial number of families that have received direct assistance through this program.

As of the end of March, 1.1 million families at risk of foreclosure have benefited from HAMP trial modifications, with a median savings of over $500 per month in mortgage payments. Permanent modifications accelerated in recent months to more than 200,000, with an additional 108,000 in the pipeline and only awaiting the homeowner's signatures.

With the help of Faith and so many others, we've also helped more than 3 million people receive mortgage counseling.

Nor should we ignore 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 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.

During that time, FHA helped close to 1.1 million homeowners refinance into stable, affordable mortgages and insured loans for over 1.4 million homebuyers -- more than 80 percent of whom were first-time homebuyers.

Had FHA not fulfilled its historic responsibility to be a temporary countercyclical source of liquidity--a role established during the Great Depression--this housing crisis would have been far more severe. More families would have lost their homes. Fewer would have bought homes. More jobs would have been lost. And the overall economy would be worse off.

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 FHA's second fiscal quarter numbers show that we are making progress. Our serious delinquency rate has risen to 9.1 percent versus a 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 these numbers also show that early delinquencies are better than expected -- that the number of loans in early default and claim has declined 15 percent since December - a strong indicator that loan quality is improving.

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 FHA's first chief risk officer, tightened credit standards and expanded its capacity to rein in or shut down lenders who commit fraud or abuse.

Results

But as important as FHA's role has been, consider what all these actions together have meant to 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.

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 communities.

Third, it has 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 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.

In part this is because, since we took office, new challenges have emerged. 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.

In fact, two of the biggest threats to our housing recovery today 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 because they owe 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.

And with investors and lenders increasingly concluding that it is in their interest to write down the value of underwater mortgages rather than incur the substantial cost of foreclosure, the Administration has 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 provide on its own.

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 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 have previously experienced.

And by lowering barriers to principal write-down, 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 write-downs for their borrowers. And Wells Fargo, Citibank, Bank of America, and JPMorgan Chase also expect to offer the FHA refinancing option when it comes online.

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 Economy.com 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 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 market, and our economy alike.

Other Steps

To those who 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.

As the President said in the early months of 2009, "We can't stop every foreclosure." 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.

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 hard-hit communities avoid falling back into a spiral of oversupply and price declines.

Collectively, we believe the result will lay the groundwork for more sustainable homeownership, for more stable communities and for a stronger housing market that makes 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. And 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 -- the first such offering since late 2007. And securities analysts such as Jefferies have cited an increasing investor interest in private label securities, which suggests private capital is beginning to return as the government carefully steps back.

Of course, much work still lies ahead.

The Administration is working with Congress to enact Wall Street reform.

The Obama administration is absolutely committed to enhancing protection of ordinary Americans in the housing finance arena -- but consumers won't be the only ones to benefit. Wall Street reform will also level the playing field for responsible lenders and investors by putting an end to a system that put short-term profits before high ethical standards.

At the same time we are working hard to put in place a set of broader reforms -- including a renewed focus on affordable rental housing and 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. You understand that when we work together in a comprehensive way to protect our homes, we protect our families and economy.

You understand that transparent markets are strong markets and 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 weeks ahead, may we work together to meet them.

Thank you.

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