Prepared Remarks of FHA Commissioner David H. Stevens at the American Bankers Association Summer Leadership Meeting

JW Marriott
Washington, DC
Tuesday, July 20, 2010

Thank you, David, for that very kind introduction. It is a pleasure to be here. One of the things I quickly learned after becoming FHA Commissioner is that I get invited to speak at a lot of places. However, I must confess, I most enjoy speaking at industry events, because you are on the front lines. You understand the challenges we face. And you know the difference between people talking about progress and making progress. So thank you for inviting me.

And the truth is, today progress is being made -- and so is history.

By the end of this week, Financial Reform will be the law of the land.

By the end of this Congress, I hope that legislation to reform and strengthen the Federal Housing Administration for generations to come will be as well -- it already passed the House last month.

And even though too many are still hurting from a recession that was unprecedented in modern times, America has been creating jobs in the private sector for six straight months.

These are unprecedented times. This housing finance system nearly brought the US economy to its knees. We know how it happened and how we got here. Whether it was by providing exotic mortgages to gain market share or pushing the limits of underwriting standards, housing as a means of shelter became almost secondary to housing as an investment strategy. As the housing bubble got bigger and bigger, the system was increasingly built on a house of cards. And we all know what happened next.

So, today, I would like to tell you a little about how we got to where we are, what the Administration is doing to lay a new foundation for the future, and describe how our newest "housing scorecard" is helping to hold us accountable for results.

First – Stop the Bleeding

Indeed, the first step this Administration took upon taking office was to stop the bleeding.

When President Obama was inaugurated, the financial system was on the brink of collapse. We were losing an average of 753,000 jobs a month. Credit was frozen nearly solid. And, house prices were in freefall -- having fallen 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. A second Great Depression looked inevitable to many.

And so, the Administration had no choice but to intervene -- first by stabilizing the banks, which was as unpopular as it was absolutely necessary.

Federal Reserve and Treasury mortgage-backed securities purchase programs have helped to keep mortgage interest rates to record lows for more than a year -- creating a short in the market.

The Administration also 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.

Indeed, tying many of our efforts together has been the FHA, which has been every bit the countercyclical force for our housing market it was designed to be when FDR created it.

Three years ago, when the housing market went into a slow, shattering downward dive, FHA was only about 2-to-3 percent of the housing market. We had been shoved aside in favor of wild, novelty mortgages that were an illusion…no savings, no security, no stability.

But then, after the housing market crashed, FHA helped maintain affordability and stability by stepping in to support home purchase and refinance activity at a time when private capital fled the mortgage market.

Over the last three years, FHA increased its market share dramatically, helping those in need, especially those with low incomes and homeowners from minority communities -- insuring 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.

Because we provided liquidity at a time when it was desperately needed, we have saved hundreds of thousands homeowners and the many industries involved in the housing market -- realtors, homebuilders, lenders and those who service new homes with furniture and appliances.

Collectively, these initiatives have resulted in the affordability of mortgage credit across the market. As the housing scorecard we released today indicates, low interest rates have helped more than 7.2 million homeowners to refinance, resulting in more stable home prices and $12.9 billion in total borrower savings.

In addition, homeowner equity started to grow again in the second quarter of 2009 and, to date, has increased by over a trillion dollars, or close to $14,000 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 – Addressing the Crisis

The second step the Administration took was to address the housing crisis -- by increasing the supply of mortgage capital, increasing demand for housing and by protecting responsible homeowners in distress.

While tools like the expanded First-Time Homebuyer Tax Credit have helped more than 2.5 million Americans purchase a home during these difficult times, we have also been working with Treasury through the "Making Home Affordable" program to help troubled borrowers.

Now, the program wasn't perfect -- partly because we wanted to get it up and running as quickly as possible.

While our monthly housing scorecard once again shows a strong month-over-month increase in permanent modifications through HAMP--which remains on pace to help 3 to 4 million Americans by 2012--many borrowers who were offered trial mortgage modifications in the early months of the HAMP program were ultimately not eligible for a permanent modification.

Even so, nearly half of all homeowners unable to convert from a HAMP trial modification to a permanent modification have entered into an alternative modification. Fewer than 10 percent of these canceled trials have moved to foreclosure sale.

At the same time HAMP has helped "right size" mortgages for borrowers who can afford reduced monthly payments, FHA has helped more than a half million more through 760,000 loss mitigation actions.

In all, since April 2009, servicers report that 2.8 million borrowers have received restructured mortgages -- more than twice the number of foreclosures completed in that time.

However, 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.

At the end of last year, more than 11.3 million, or 24 percent, of all residential properties with mortgages were "underwater," with more than half of these homes concentrated in five states -- Arizona, California, Florida, Michigan and Nevada.

But the Administration is responding -- making changes to HAMP so that unemployed borrowers can get up to six months of relief while they look for work.

And so is the market. 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 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.

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 as well 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 have helped to stabilize housing prices, the market, and our economy alike.

Where someone can't stay in their home, we're going to help them make the transition out of homeownership as smoothly as possible. The 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--and an additional $1 billion on the way as a result of the recently-passed Dodd-Frank bill--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.

This month's housing scorecard shows includes early results from HUD's Neighborhood Stabilization Program (NSP).

Grantees report that NSP funds have been used to construct or rehab more than 21,000 units of affordably priced housing, demolish nearly 12,000 blighted properties, and provide over $180 million for down payment assistance or non-amortizing second mortgages putting sustainable ownership within reach for thousands of families.

And just last week, we announced the new FHA First Look program which will give communities and partnerships who received funds from the first and second rounds of NSP the first crack at buying foreclosed homes that were insured by the FHA.

Third – Laying a Foundation for the Future

The third way the Administration has responded to the housing crisis is by laying a foundation for the future -- and I see the impact of these efforts every day at the Federal Housing Administration.

I mentioned earlier that the FHA's market share had increased tenfold in the absence of private capital as it used every resource to help as many qualified homeowners as possible during this crisis.

Of course, that increased market share comes at a price.

As many of you know, last fall an independent review showed the FHA capital reserve ratio had fallen below the congressionally mandated 2 percent threshold to 0.53 percent.

And, while our fund has over $32 billion in total reserves spread between two accounts, we have continued to take necessary actions to continue strengthening the FHA fund. This is a new FHA.

And a new FHA means protecting the homeowner and the taxpayer alike.

It means managing risk -- putting mechanisms in place to keep FHA fiscally sound.

And we are. We hired the first permanent Chief Risk Officer, Bob Ryan, in the agency's history. The Risk Officer will provide the most thorough and comprehensive risk assessment we've ever undertaken.

Our efforts are comprehensive and we have engaged lenders as we work to ensure the quality and sustainability of new loans, increase FHA capital, and conduct proper enforcement against fraud.

Since taking office, we have announced and implemented new policies, increased enforcement reviews and established a risk management protocol that will strengthen FHA to better serve the American people. These actions are the most sweeping and significant steps to improve FHA soundness in decades, if not in our entire history.

These changes will insure the long term viability of the program and increase FHA's capital reserves, require more skin in the game from borrowers and greater accountability and transparency from lenders.

But for FHA, building a strong foundation for the future must include passage of HR 5072 -- the FHA Reform Act of 2010. This bipartisan bill will provide FHA the ability to hold lenders accountable for the loans they underwrite and gives FHA the flexibility to respond to changes in the marketplace by granting additional authority to adjust the annual mortgage insurance premium and, in turn, reduce the upfront mortgage insurance premium paid by borrowers.

If these changes are adopted during the current fiscal year, the estimated value to the MMI fund would be approximately $300 million per month, which would replenish FHA's capital reserves even faster than if this authority was provided through the annual appropriations process.

Two additional steps to ensure transparency and consumer protections in the marketplace include the new RESPA rule and our work to actively engage the public and private sectors through the SAFE Act. We are working with industry and state and local officials to ensure these efforts strike a balance between operational challenges and protections they provide.

And, of course, all of this is taking place in the context of Wall Street Reform.

This week, President Obama will sign the strongest consumer financial protections in history into law -- 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.


Today, I've outlined the Administration's comprehensive, balanced approach to tackling the housing crisis -- how we stopped the bleeding, addressed the crisis head on and are laying a strong foundation for the future. We are doing what it takes to provide responsible homeowners opportunities to prevent avoidable foreclosures and, for some homeowners, helping them make the transition into rental housing. You can see the results in our housing scorecard -- and how far we still have to go.

I'm confident that the vast changes we have experienced in the housing market will result in a changed industry once we come through this crisis. But it requires you to be more accountable and responsible -- an industry with more integrity, more transparency and more of a commitment to looking out for the consumer.

You should expect no less -- and you should demand no less.

It won't be easy. Some of the actions we take will be strongly opposed by some. But we must continue the process we began with Wall Street Reform -- and join together to oppose predatory lending, fraud, and irresponsible business practices that threaten the housing industry, the financial security of homeowners and people trying to save for retirement.

If we do, we will create a climate of trust and confidence that will attract investors and free liquidity.

If we do, the market will be healthier and more secure in the future.

Creating a solid, sustainable housing market -- built on a secure foundation based on trust and integrity for the future. That is our charge today. And in the weeks and months to come, may we build it together.

Thank you again for inviting me here today.


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