Prepared Remarks of Secretary Shaun Donovan at the Real Estate Roundtable State of the Industry Meeting

Mandarin Oriental Hotel, Washington DC
Wednesday, January 26, 2011

Thank you, Bill -- for that introduction. And thank you all for inviting me. It's a pleasure to be with so many leaders in real estate -- and to be part of this year's State of the Industry meeting. 

And while each of you brings different interests and perspectives to the Roundtable, whether you lead an office, retail, hotel, or multifamily firm or are a managing director of a major financial institution, what brings each of us here today is the same:

The commitment to fostering a strong, vibrant housing and real estate market in this country.

I think in most years past, you wouldn't have had a HUD Secretary here.

But this isn't just any year -- as we emerge from a crisis in the single-family market that nearly sank our country into a Second Great Depression.

And so, today, I want to discuss with you the various ways this Administration is working to keep our housing market afloat.

I want to discuss the tools we are providing to catalyze private investment -- and the barriers we are tearing down to innovation and investment.

And I want to elaborate on what President Obama said about "winning the future" in his State of the Union last night -- on what it will take to not only rebuild America, but rebuild it stronger and smarter, and why so much of that work begins with those of you in this room.

Rebuilding the Housing Market

But first, a few words about where we are. We all know how difficult these last few years have been for our real estate sector -- and I don't need to repeat the grim realities we faced two years ago. 

Suffice it to say that whether it was the Fed and Treasury keeping mortgage interest rates at record lows, providing critical support for Fannie Mae and Freddie Mac, for the Federal Housing Administration to step in to play a larger role or setting the standard for mortgage modifications to help families keep their homes, we stepped in aggressively -- and we had to.

The results of these extraordinary but necessary actions are clear.

Nearly 4 million borrowers have received mortgage modifications since April 2009 -- more than twice the number of foreclosures completed during that time.

We stopped the 30-month slide in home prices.

And most important of all, we stopped the 22-month slide in job losses -- and have now seen 12 straight months of job growth in the private sector.

None of which is to say we are out of the woods -- particularly in the construction sector where over 20 percent of workers lost their jobs. 

High Impact, Job Creating Tax Cuts

That's why the bipartisan tax cut package signed into law by the President was so important.

Like each of you, this Administration understands the extent to which our housing and real estate markets are inextricably linked to our economy.

It's a story simply told by the charts behind me -- the first of which demonstrates that when unemployment rises, so do mortgage delinquencies.

The second is perhaps even more pertinent to the concerns this audience -- demonstrating that when unemployment rises, housing construction falls.

And so, if we are going to improve our housing market and create jobs, we have to do something about reducing unemployment.

The bipartisan tax package's focus on high impact, job creating tax cuts will have significant benefits for our housing market and construction industry.

Because of this package, the 15 percent tax rate on capital gains has been extended through 2012.

Businesses now have new tax incentives to make the investments in research and development and buy the equipment they need to hire and grow.

The extension of the 15-year timeline for depreciating leasehold improvements alone, retroactive to January 1st of last year, could generate more than $50 billion in additional investment in the U.S. in 2011 -- helping our construction industry buy the new equipment it needs to create jobs.

The package also extends a tax credit of up to $2,000 for builders of residential homes that are more energy efficient.

And I would note that the extension of the Gulf Opportunity Zone tax credits, which will ensure that more than 6,000 affordable housing units are able to be completed, was a real victory for the affordable housing construction industry -- supporting some 13,000 construction-related jobs.

These responsible, temporary measures will not worsen the deficit over the medium or long term -- and because of them, independent experts now expect another 1.5 million jobs or more will be created in 2011, lifting your industry and our economy.


Still, we have a lot of work to do. Having stopped the bleeding and taken real steps to catalyze job creation, our job now is to build a 21st century housing market.

Indeed, while the outsized role the single-family market had played in the crash has caused many to focus on our efforts to stabilize that sector, you and I both know that many of the steps we've taken have been critical to supporting the multifamily market as well.

I mentioned the role of the FHA earlier. Across the housing market, tying many of our efforts together has been the FHA, which has been every bit the countercyclical force for housing 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.

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.

Now, however, the story is very different. In 2010, we supported the development of nearly 150,000 housing units, with a total dollar volume of $11 billion -- almost four times what it was two years earlier and now almost 25 percent of the market.

The volume is so great that we needed to ask Congress last year for an additional $5 billion in commitment authority.

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 for her leadership of HUD's Multifamily programs. Her team has dealt with a significant increase in demand within tight budget constraints.

And she's now turning her attention to modernizing FHA's business practices.

Under her leadership, FHA Multifamily has been adopting best practices in the industry for processing applications and making risk decisions.

In fact, Carol's not here today because she has the field leadership all here in town working on how to implement a set of immediate actions to deal with the log jam created by a recent surge in applications that has resulted in about $17 billion of applications in the pipeline.

Looking toward the long-term, Carol's team has just awarded a contract to more broadly study business process re-engineering -- similar to 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.

Other 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.

Whether it's insuring the long-term viability of the program, aligning lending practices across all FHA programs, or bringing on a team of real professionals run by a major multifamily housing developer in Carol Galante, the actions we have taken since we took office are all designed for with the same goal in mind:

To ensure that FHA operates less like a bureaucracy and more like the private sector.

Tearing Down Barriers to Neighborhood Investment

At the same time we have strengthened FHA to provide the capital multifamily developers and owners needed to ride out this crisis and prepare for the future, we have also taken a critical step to preserve one of the private sector's most important tools for affordable housing development and finance.

It's no overstatement to suggest that the Recovery Act and the Obama Administration saved the market for the Low Income Housing Tax Credit -- which I know is important to the portfolios of many in this audience. 

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 jumpstarted affordable housing developments stalled by the collapse of the Low-Income Housing Tax Credit market. 

Together, these two programs are creating an estimated 126,000 new units of affordable housing while simultaneously creating tens of thousands of jobs in the construction sector when they have been needed most.

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

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.

Now, I would venture to guess that many of you have never even thought of public housing as an opportunity to you.

It's not hard to understand why. 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.

Now, I have nothing against lawyers. In fact, my mother's a lawyer. 

But these rules haven't just stood in the way of building housing. They have also stood in the way of building in the neighborhood around that housing -- the grocery stores, schools and retail businesses that are the bread and butter of our nation's construction industry.

To be clear: only the private sector has the capital and the tools we need to transform these neighborhoods -- many of which would be attractive to you for a variety of reasons, from their proximity to urban centers to their access to public transportation. 

But the barriers government throws up to private investment in these communities give developers like yourselves no reason to even try. 

And that needs to change. 

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 capital. 

It would simplify HUD's rental programs so that they are governed by a single, coherent set of rules -- and it would create an estimated 312,000 construction jobs.

Not only would TRA give our public housing authorities the same access to capital markets that any other multifamily property owner has, it would give the private sector the opportunity to bring jobs, businesses and hope to those neighborhoods.

Congressman Keith Ellison of Minnesota is preparing to re-introduce the Rental Housing Revitalization Act, which builds on our TRA proposal -- and I encourage each of you to study it.

TRA is not the only way we are seeking to bring all affordable housing into the 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.

Ultimately, our goal is to ensure that affordable housing isn't a barrier to economic development -- but a catalyst for it.

Green and Sustainable Housing

Of course supporting multifamily and affordable development also requires us to begin thinking about the kinds of homes we're building.

As President Obama made clear in his State of the Union last night, green jobs are the future of the American economy -- to not only rebuilding America, but to competing with the likes of China and India.

Green jobs and construction already support more than 2 million jobs and generates more than $100 billion in GDP and wages.

Over the next four years, the green building industry will support nearly 8 million jobs and generate more than a half trillion dollars in economic activity.

That's one reason why we made a big commitment through the Recovery Act to greening America's homes. 

Thus far, we've greened 245,000 homes with a range of energy improvements. Another 35,000 have received deep green retrofits that will save up to 40 percent in energy costs -- with thousands more newly constructed homes being built to green standards.

Of course, real change requires a market transformation with leadership, solutions and capital from the private sector.

In a few weeks, HUD will be selecting lenders to offer a product called FHA Powersaver -- the first federal financing program focused on single-family home retrofits.

Powersaver will allow homeowners to borrow up to $25,000 to make energy efficiency and renewable energy improvements to their homes -- stimulating demand for jobs and for contractors to do this important work. 

For the 15 million households who live in multifamily apartments, we are preparing to launch the Green Refinance Plus program, through which FHA will provide additional insurance coverage and Fannie Mae will offer more flexible loan underwriting to generate additional loan proceeds to make green improvements. 

Through Green Refi Plus, owners of older affordable housing properties will be the first to go green in connection with refinancing their mortgages at today's historically low interest rates.

Both PowerSaver and Green Refinance Plus will take advantage of the data we gather on performance by tracking energy saved, bills reduced and value created.

It's only through proving that these investments pay for themselves and provide real benefits to families that we can catalyze change on the scale that is truly transformational -- driven not just by the public sector but more importantly through massive private investment.

At the same time we're improving the quality of housing itself, this crisis has affirmed the need to provide 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.

And it's why we've made the most significant federal investment in planning in a generation.

With the $170 million in regional planning and community challenge grants that HUD's new Office of Sustainable Housing and Communities awarded this fall with the Department of Transportation, we are encouraging metropolitan and rural regions to plan for the integration of economic development, land use, and transportation investments. 

When it comes to development--to housing, land use and transportation policy--it's time the Federal government spoke with one voice.

Toward a More Balanced National Housing Policy

To close, let me go back to where we started: to the housing 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.

Meeting the diverse needs of the country and local markets, both ownership and rental requires 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.

As you know, in the coming weeks, the Administration will release our white paper proposal on the future of housing finance and the GSEs. 

And while we are still in the final drafting stages, I can tell you that there are four key reasons why rental housing finance must be part of the equation.

The first is because we need to rebalance our housing policy. And rental options require a functioning rental finance market. 

Secondly, because rental housing serves families and households with both low and moderate incomes. Rental housing provides workforce housing to a broad cross-section of the country and in this increasingly mobile world--particularly in this economy--it allows families to move and seize new job opportunities. And so, the new system of rental housing finance must ensure that these moderately priced rental developments have access to appropriate financing as well.

Third, because we need liquidity for our multifamily sector. Whether it's the relatively short terms of multifamily loans or the fact that the financing availability tends to be more at risk during downturns, multifamily construction and lending pose the unique financing challenges -- and we need to recognize them.

And fourth, because of the relatively small scale of the sector. I've just describe the benefits of rental housing. And with the total outstanding multifamily mortgage debt less than 7.5 percent of all residential mortgage debt in the country, government involvement in the sector doesn't create any kind of systemic risk.

Obviously, we will be providing more detail in the coming weeks. But today, I want to affirm for each of you here today that I'm personally committed to ensuring that multifamily is a critical part of housing finance reform.

A New Era of Partnership

It would be a mistake to see any of these issues as a choice between big government and small government. 

As the President said last night, this isn't a contest between parties or a battle between the public and private sectors.

It's about whether we can win the future -- and unleash the talent and imagination of the American people.

Whether it's job creating tax cuts that revive our construction industry, creating a home energy retrofit market where there never has been one--whether it's tearing down barriers to private sector investment in public housing or building a next generation system of housing finance--it's about fostering an environment in which the public and private sectors can work together to catalyze the private investment we need to compete in the 21st century.

I hope it's obvious that this is an Administration that is committed to a balanced national housing policy, rooted in a vibrant multifamily housing sector -- led by the private sector and with rules that are compatible with the commercial real estate sector and recognize one size doesn't fit all.

Will we solve everything overnight? Of course not.

But as we work toward solving them, I know we can build a stronger foundation for the future – one that meets the needs of the American people, our communities and our industries. And I know we can do it together.  Thank you.


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