Prepared Remarks of Secretary Shaun Donovan at the National Multi Housing Council's 2010 Board of Directors Advisory Committee Meeting

JW Marriott, Washington, DC
Wednesday, September 15, 2010

Thank you, Peter, for that introduction, for your leadership with the Council and most of all, for your friendship over the years.

Let me also thank Senator Jack Reed -- who brings an extraordinary commitment and effectiveness to housing policy. Also, Congressman Jim Himes -- thank you.

It's a pleasure to be back before the NMHC -- before the leaders responsible for the ownership, development, management, and financing of America's apartment industry.

Today, I want to speak with you about the Administration's support for multifamily housing development, our commitment to a balanced national housing policy, and some of the steps we are taking to lay a stronger foundation for the future.

Meeting the Need

Five years ago, I spoke to you when I was in a different job in New York, where we were focused on harnessing the private sector to ensure that there was a mix of affordable housing in what was one of the hottest real estate markets in the country.

What a difference a half decade makes.

Since that time, we've seen our housing market pull our entire economy into recession that has left no neighborhood or segment of our economy untouched. And we've seen the gradual stabilization of that market play an important role in the beginning of a recovery.

You know the single-family story -- how by the time President Obama took office, home prices had fallen every month for 30 straight months, by nearly a third. And how home equity had been sliced in half, translating into a loss on average of over $80,000 for each American homeowner.

And so, immediately upon taking office, we took swift and comprehensive action to stop the bleeding.

While the outsized role the single-family market had played in the crash has caused the press to focus on our efforts to stabilize that sector--and while you and I know that the multifamily rental sector is still suffering from a crisis it didn't cause--you and I both know that many of the steps we've taken have been critical to supporting the multifamily market as well.

And none is bigger than our work to stabilize Fannie Mae, Freddie Mac and the FHA -- for the benefit of the single-family and multifamily finance sector.

Across the housing market, 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.

With little fanfare, FHA's programs are providing liquidity to the multifamily market at a moment when other capital sources have disappeared.

Let me provide some numbers to illustrate this. In Fiscal Year 2008, FHA supported the development of about 49,000 rental housing units to the tune of $2.5 billion, which was such a small part of the total rental finance market--less than 5 percent--that it was almost irrelevant.

This year, however, the story is very different. We're projecting that we will support the development of nearly 150,000 housing units, with a total dollar volume of $10 Billion -- almost four times what it was two years ago and now almost 25 percent of the market.

The volume is so great that we needed to ask Congress for an additional $5 billion in commitment authority, and I thank you for your support on that.

And even that understates the growth in market share, because the market shrunk substantially, leaving FHA one of the last men standing when it comes to providing overall liquidity to the sector -- and virtually the only game in town for new construction.

Now, to be clear: we want private capital to come back, so that the government's footprint can once again be smaller.

But right now we have a critical role. And I want to thank Carol Galante, our Deputy Assistant Secretary, who's here, for her leadership of HUD's Multifamily programs. Her team has dealt with a significant increase in demand within tight budget constraints.

A New FHA

But as Carol knows as well as anyone, the critical countercyclical role FHA Multifamily is inherently tempered by the need to protect the fund.

You know as well as I that there are many markets across the country where rental housing has become overvalued and overleveraged, which creates default risk for lenders and insurers including FHA.

That's why we've taken the responsible step to revise our underwriting standards and enhance risk management -- to protect the taxpayer while still providing very ample liquidity to the sector.

These are the first updates to FHA's underwriting standards since the inception of FHA's multifamily programs -- some of which are over 40 years old. A few hadn't been updated since the Housing Act of 1937.

And under the leadership of Commissioner Dave Stevens, FHA also hired Bob Ryan, the first permanent Chief Risk Officer in the agency's history. Managing risk is essential to FHA's ability to operate more like a private business.

For these reasons, we've also begun to make FHA programs more accessible and easier to use. Indeed, having achieved this more sustainable balance between providing liquidity and managing risk, we are turning our attention to modernizing FHA's business practices.

First and foremost, that means adopting best practices in the industry for processing applications and making risk decisions -- modeled on the successful LEAN program for FHA's healthcare finance programs that has reduced processing time from a matter of years to a matter of a few months.

These steps include finally preparing to accept electronic loan applications and standardizing lender submissions.

And for the first time in 25 years, we are updating the multifamily loan documents used to close FHA-insured loans.

In all, the actions we have taken since we took office will insure the long-term viability of the program, align lending practices across all FHA programs and ensure FHA can operate less like a bureaucracy and more like the private sector.

Bringing Rental Assistance into the Mainstream

Not only have we strengthened FHA and FHA Multifamily to provide the capital multifamily developers and owners needed to ride out this crisis, we also took a critical step to preserve one of the private sector's most important tools for affordable housing development and finance.

It's no secret that some have attempted to marginalize the impact of President Obama's Recovery Act on our overall economy.

But I think it is no overstatement to say that the Recovery Act and the Obama Administration saved the market for the Low Income Housing Tax Credit.

The Low-Income Housing Tax Credit is the single most important capital source for funding affordable housing. It was responsible about half of all multifamily production in the 1990s.

And given the economic crisis, you and I both know that losing the tax credit market would have devastated the multifamily sector.

Instead, through the Recovery Act, Treasury's Housing Tax Credit Exchange Program and HUD's Tax Credit Assistance Program are jumpstarting affordable housing developments stalled by the collapse of the Low-Income Housing Tax Credit market.

Together, these two programs will create an estimated 126,000 new units of affordable housing while simultaneously creating tens of thousands of jobs.

These remarkable efforts across the Administration have helped to preserve a multifamily market -- even during these difficult economic times.

But as we shift from managing a crisis to a building new foundation, we need to put the tax credit on fundamentally firm ground for the 21st century.

For the first time, we have a White House interested in bringing new investors into the market. An interagency Rental Policy Working Group led by Domestic Policy Council is looking for ways to increase investment in the tax credit market, recognizing how essential it is to ensure critical funding for new construction and rehabilitation of affordable housing.

But to truly bring all affordable housing into the mainstream, we need to open all our affordable housing programs to these tools and the capacity and talent the private sector offers.

How many of you in this room have completed a project based Section 8 deal? How many of you work with project base vouchers?

Each of you knows what a parallel universe these programs operate in.

Right now, developers and owners of affordable housing have to navigate through thirteen different deep rental assistance programs each with its own rules, administered by three operating divisions that contract with more than 20,000 separate entities.

No one would ever intentionally set up a system this complicated.

Now, I have nothing against lawyers. In fact, my mother's a lawyer. But I think we can all agree that there are better ways to spend our precious housing resources.

The point is that all these rules make it harder for these programs to engage the private sector -- to harness that private capital we need to meet the affordable housing needs of the country.

That's why we've introduced our Transforming Rental Assistance initiative, which would leverage $7 billion in its first year and, ultimately, $25 billion in private and other public capital. And it would simplify HUD's rental programs so that they are governed by a single, coherent set of rules.

It's time to give our public housing authorities the same access to capital markets that any other multifamily property owner has.

As we move forward with TRA, your expertise will be critically important to our PHAs and to those of us at HUD -- and I look forward to the Council's active engagement in that process.

But TRA is not the only way we are seeking to bring all public and affordable housing into that housing mainstream.

Many of you may also be familiar with our Choice Neighborhoods demonstration, which builds on the success of the HOPE VI program that brought to bear private capital and mixed-use, mixed income tools to transform public housing.

The goal of Choice Neighborhoods is not only to transform all HUD-assisted housing in a neighborhood. Just as importantly, it will make the non-profits and private sector that have participated in HOPE VI full partners in this transformation.

But rebalancing housing policy requires not only that we support multifamily and affordable development -- it also requires us to begin thinking about where that development is.

That means providing people with the choices they need to live near job centers, public transportation and good schools for their children.

That's why, in FHA Multifamily, we changed our environmental remediation requirements to facilitate more Brownfields redevelopment.

It's why we found ways to increase our loan limits administratively by excluding the high cost of land.

We've also made the most significant federal investment in planning in a generation.

With the $140 million in regional planning and community challenge grants that HUD's new Office of Sustainable Housing and Communities will be awarding in the coming weeks, we hope to encourage metropolitan and rural regions to plan for the integration of economic development, land use, and transportation investments.

And here I want to thank the Council, for the important work you've done around sustainable communities, particularly as it relates to linking up workforce housing and transportation.

Toward a More Balanced National Housing Policy

To close, let me go back to where we started: to the single-family crisis that got us to where we are today.

In order to truly have a balanced national housing policy--one that supports sustainable homeownership as well as the increased need for rental housing--we are going to need a housing finance system that places an appropriate emphasis on both.

That means ensuring that people who are in a financial position to own a home have access to the capital they need to take that important step.

It means making sure that families are not set up to fail with mortgages that enable them to buy homes they simply cannot afford.

And it means ensuring that financing is available for those who will build the rental housing that we need to provide choices for the growing number of families for whom homeownership may not be the best option.

So, the question today isn't whether we need a healthier, more robust system of housing finance -- it's how we ensure it meets the diverse needs of the country and local markets, both ownership and rental.

To make this possible, we need to work to foster a strong but healthy market for private capital -- to harness the vitality, innovation and creativity in our system in a responsible way, so that consumers and communities gain real benefits without the race to the bottom that we have seen in recent years.

That's exactly what is at stake in Housing Finance Reform. And I want to thank you for taking the time to thoughtfully comment on that process.

I was proud that Doug Bibby was able to join us at the conference last month at Treasury.

In fact, one of your members said to me afterward that he was sure the word "multifamily" had never been uttered so many times within one day in the Treasury Building.

Still, let me be perfectly clear:

I'm personally committed to ensuring that multifamily is a critical part of not only the discussion, but the results of that discussion. Multifamily must be part of the housing finance equation.

And as we work toward releasing a blueprint for housing finance early next year, we not only want to continue to hear from you and your members -- to ensure housing finance works for your markets and meets your needs, we absolutely need to.

Conclusion

I want to open this up for questions. But before we do, let me simply say that I hope it's obvious that this is an Administration that is committed in a way no other has been to a balanced national housing policy -- to providing the rental housing families need and to ensuring we have a vibrant multifamily housing sector with active engagement of the private sector.

Given where we are with the economy, we know we won't solve everything overnight.

But as we work toward solving them, I know we can meet the needs for the American people, our communities and our industries. And I know we can do it together. Thank you.

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