Thank you, Jarvis (Hollingshead). Good morning.
I would like to thank Credit Suisse, Bracewell and Giuliani, and the Jones Graduate School of Management (at Rice University), for sponsoring this important conference.
I am delighted to see Credit Suisse expanding opportunities for women and minorities in your small and emerging manager programs. This program is a great credit to your institution. It is vital that small and emerging managers reflect the diversity of our melting pot. It is extremely important to have a diversity of perspectives in the meetings and conversations that bring investment into our cities. But there is more. I have found that women and members of our minority communities remember their own. They feel a deep sense of responsibility to remove the barriers that hold back gender and racial progress. Through your dedication and social conscience, you become agents for change, builders of bridges to freedom and opportunity.
We need your individual and collective talents more than ever. We meet at a time of great concern in the housing industry. The sub-prime situation demands our attention and our best efforts. How we react now...what we do...will literally determine the future for millions of people in this country and worldwide.
I strongly urge a sober perspective. There are some who are counseling panic. I think we need wisdom and clarity, not fear and over-reaction.
Of course, the sub-prime situation is unfortunate for many people and a challenge to all of us. In response, we must restore confidence in lending practices, top to bottom.
We can begin by exposing and ending predatory lending. There is no place for it in the housing industry or as an investment practice. Predatory lenders and mortgage fraud harm everyone in the home purchasing process.
In fact, I believe we must create an extremely high expectation of transparency and honesty for lending on all levels and by all lenders.
And I know all of you agree. This must be part of our common cause.
As you know, my department has worked to address predatory lending. We have already acted to restrain or stop several companies engaged in questionable practices. I am committed to using every possible means to end predatory lending in America.
At the same time, we must address the sub-prime problem itself. I believe there is a place for the sub-prime industry, provided that it acts responsibly. I know you agree, as Credit Suisse showed with the purchase of ResMae in February. There still is a role for sub-prime lending, under appropriate circumstances. Americans who are turned away from the prime lenders still deserve a chance at the American Dream.
We must look at ways of fixing the problem and I have a few ideas about that.
The President's new budget will be of great assistance. For example, the President and I are strongly encouraging Congress to pass legislation that modernizes the Federal Housing Administration (FHA). Over the past 72 years, the FHA has helped more than 34 million families become homeowners. And we have helped families stay in their homes. For example, since October 2006, here in Texas, we have helped almost 7,500 families avoid foreclosure and stay in their homes. Nation-wide, since October, we have helped 36,000 families avoid foreclosure.
However, reforms must be made for the FHA to adapt to today's marketplace. We have modernized FHA as much as we can but need legislation to truly bring the FHA into the 21st Century. A new FHA could be an anecdote for predatory lending and for sub-prime difficulties.
For example, the President believes that FHA's loan limit in high-cost areas should rise from 87 to 100 percent of the Government-Sponsored Enterprise conforming loan limit. This change is important because in many areas of the country the existing FHA limits are lower than the cost of new construction. The current loan limit eliminates FHA financing as an option for many buyers of new homes. We should create a new, risk-based insurance premium structure for FHA that would match the premium amount with the credit profile of the buyer. This would replace the current structure in which there is a standard premium amount for all borrowers, while still protecting the soundness of FHA's Insurance Fund. So FHA would still have the flexibility to charge a lower premium for low-risk buyers. High-risk borrowers, most of whom are currently unable to participate in FHA due to its outdated pricing structure, would be charged a slightly higher rate. But they would still enjoy the benefits of prime rate financing. This type of structure would help more families participate in the American Dream, while also protecting the taxpayers against risk.
We should also revisit the current three percent minimum down payment. Most first-time home buyers put down two percent or less. We need to change FHA to offer a variety of down payment options. We are prepared to help some homeowners refinance to avoid a sub-prime problem. With expanded authority to set insurance premiums commensurate with risk, FHA could potentially assist tens of thousands more borrowers who need an exit strategy from their sub-prime mortgages.
FHA could be one answer to some of our sub-prime problems. Right now, FHA refinancing could help tens of thousands of families who currently have sub-prime loans. But, we could help more families, if Congress expands our authority. Unfortunately, under today's restricted premium limits and maximum loan amounts, FHA simply cannot reach all the borrowers who need the "safety-net" that FHA can provide. For millions of Americans, refinancing with FHA could be a sound move. Sub-prime borrowers are paying interest rates up to 10 percent or more. Refinancing into an FHA-insured mortgage can, on a $200,000 mortgage, save a qualifying borrower $3,000 to $4,000 in the first year. Thus, FHA could save borrowers substantial money and do so in a financially sound manner.
As you can see, I think there are structural adjustments that could be extremely helpful. But I don't think we should use the government to somehow cover bad investments.
I know there are some who are calling for a sub-prime bailout. I disagree. I don't want companies rewarded for risky investment ventures that fail. It's the moral hazard argument: government should not ultimately reward bad behavior. And the American taxpayer shouldn't foot the bill for risky ventures.
There are issues that go beyond the sub-prime problem. For one thing, the industry must do a better job of policing its own. I know you agree. When one company becomes reckless, the consequences scar all companies in the industry. So this is a time for the industry itself to step forward with appropriate, non-regulatory answers to the sub-prime situation.
I said earlier that this is the time for clarity. It is also a time for a realistic assessment of the facts. We should be more realistic about the housing market. Yes, there is a short-term down-turn. But the market continues to grow. The American population continues to grow. People still keep coming to this country. I believe the down-turn is only an adjustment...a needed correction. Housing prices were becoming out of reach for far too many people.
Despite some worries, most of the sub-prime loans will remain viable. Even given the difficulties of the past few weeks, most of the loans written before mid-2005 are probably secure.
They have either been reset or owners can use increased equity. Banks are working with most borrowers to help them keep their homes. As some commentators have noted, there is also a great deal of liquidity for people looking for mortgage loans.
I believe a majority of sub-prime lenders will ride out the flux and turbulence of an adjusting market. After all, we are at virtual full employment, real income is up by almost $3,000 per American since President Bush took office, and half of that increase in real income has taken place in the last year. Credit is tightening, but not to a point where the market is strangled. All the elements for continued growth are there. And with even stronger economic recovery, we can expect a future boom in housing.
I believe we can have confidence in the housing market.
We must also work to address problems related to recent natural disasters. A few days ago, I was pleased to approve a $429 million disaster recovery plan to help Texans whose homes were destroyed by Hurricanes Rita and Wilma. The plan will offer grants of up to $40,000 to qualified homeowners. It will restore rental housing and repair critical infrastructure. And it will be an important way to assist thousands of people to overcome tragedy.
Today, I have spoken of diversity, investment, expansion of FHA, and disaster relief. Addressing each issue, we can make America stronger, nobler, and better. That is the wonderful thing about the housing market. It unites Americans, brings them together, and creates a neighborhood. It is one vital way we build a community.
Former South African President Nelson Mandela has a good way to describing housing efforts. He calls housing a "joining of hands." Indeed, it is. Investments that lead to home ownership are a partnership. Each one of you helps to shape our nation's future, one investor at a time, one homeowner at a time. Your efforts provide jobs, equity, opportunity, and hope. You help make the American Dream possible for millions of Americans. Through your work, you become the guiding hand that creates successful urban partnerships. Through your vision, you make American more inclusive, just, and fair.
You have a unique chance to help America make great strides that will increase wealth across the board and secure equal opportunity for all Americans. If we step forward, working together, we can vastly improve lending practices and create a more enviable investment environment.
Yes, we have our work cut out for us. But, Credit Suisse and its investors can help lead the way to a brighter future.
Thank you for inviting me to attend.
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