National Mortgage Banker's Association
National Policy Conference
PREPARED REMARKS FOR
DEPUTY SECRETARY ROY BERNARDI
APRIL 25, 2007
Thank you. Good morning. I want to begin by thanking you for your leadership and thoughtful commentary on the sub-prime problem. When sub-prime loans became a world-wide concern a few weeks ago, many in the housing industry turned to MBA for comment and direction. You were a profound voice of reason. I appreciate the fact that you cautioned people, told them not to over-react, and helped them overcome fear and growing doubt. Yes, it is a serious problem, but a problem that is not helped by hyperbole, panic, or financial stampedes. I know that you helped create a sense of proportion and better perspective. Your calm, careful commentary kept the situation from becoming worse. I thank you for that.
For example, you advised then, and now, that the situation was troublesome and difficult, but that it was not fatal to the housing market, or even to the sub-prime industry itself. I agree with you: a cool down is not a melt down. This is a period of adjustment that highlighted the sub-prime problem with greater clarity.
Fortunately, many of the problems associated with sub-prime defaults can be remedied. But we will need to build closer, more committed partnerships that can engineer the solutions necessary to rocket the housing industry forward in the years to come. We also need to have a vision of our housing market...a vision that stridently rejects inappropriate loans to those who cannot afford them.
Make no mistake: we must reach out and help those who have been hurt. Some people have just had their homes razor-bladed from under them. Others find themselves on the razor's edge. We cannot stand idly by and watch the American Dream turn into the American Tragedy for tens of thousands of people.
But that doesn't mean we act with passionate disregard. We cannot simply throw money at the problem, or reward risk-taking with an after-the-fact safety net. I disagree with those on Capitol Hill who argue for a bailout. 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.
I think we have some better solutions to the problem, both short-term and long-term. We can re-ignite the housing boom if we are prepared to make some important changes.
Let me explain this by turning to an unlikely source, Giuseppe Tomasi di Lampedusa, the 20th Century Italian novelist, author of "The Leopard," one of the greatest works of European Literature. As an Italian American, I hope you will understand my using it as a reference. The most famous line in that book is this: "If we want things to stay as they are, things will have to change."
Wise words, when considered against the backdrop of our current concerns. If we want to continue the progress we have made in housing, we cannot simply sit back and rest. We have just witnessed an unprecedented housing boom and a progressive increase in home ownership. I believe Lampedusa would counsel us: act now to regain the rapid rate of gain. We cannot remain locked in stasis or allow the sub-prime problem to further depress the housing industry. We must explore ways to reignite the housing market.
In my view, we need to be smart and visionary, and responsible. We must implement a solid set of reforms, a coherent plan that addresses several levels of the sub-prime problem simultaneously. If we can do this, we will provide a great service to the industry, turning a sad situation into a lesson learned, and better housing policy.
How can we do this? Well, I suggest four actions simultaneously.
First, we must end predatory practices and continue to enforce the law. We must seek out, expose, and prosecute predatory lenders. There is no place for predatory lending in the housing industry or as an investment practice. Predatory lenders and mortgage fraud harm everyone in the home purchasing process. It is immoral, often illegal, and always reprehensible.
Secretary Jackson and I believe we must create an extremely high expectation of transparency and honesty for lending on all levels and by all lenders. And we must do more to educate potential homeowners to avoid predatory practices.
The department has worked to address predatory lending. For example, we worked very closely with state and local officials in Maryland to end "flipping schemes." Based on our efforts, 104 people were charged with mortgage fraud. Other actions were taken to clean up the Baltimore market...actions that we well coordinated and required steadfast cooperation between various levels of government. That is a good example that shows how predatory lending will not be tolerated by any level of government. In other cities, we have already acted to restrain or prosecute several companies engaged in questionable practices. This must be the beginning of a vigorous, comprehensive, and sustained effort. We must use every possible means to end predatory lending in America.
Second, we must address the sub-prime problem itself. I believe there is a place for the sub-prime industry, provided that it acts responsibly. 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.
The President's new budget can help. We need FHA reform and the President has proposed some extremely helpful solutions. Over the past 72 years, FHA has helped more than 34 million families become homeowners. We have helped families stay in their homes. For example, since October 2006, nation-wide, 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 antidote for predatory lending and for sub-prime difficulties.
Before I outline the reforms we could make, let me suggest that this is a point of common ground for MBA, Congress, and the President. I know that John Robbins (Chairman, MBA) has already testified before Congress about the need for FHA reform. I particularly appreciated the fact that he emphasized the importance of this reform to low-and-moderate income Americans, and its importance to our minority communities. I hope Congress listens...and acts. I know that FHA reform has been discussed by your previous speakers today, and will surely be discussed in some detail over the course of the conference. We all agree that something must be done...and I strongly urge you to help identify and solidify our common ground. There is considerable bi-partisan support on the Hill and wide support in your industry. Now is the time for translating support into legislation.
FHA reform would be a meaningful improvement in home financing. 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.
Third, as we end predatory lending and initiate FHA reform, we must also initiate a package of additional legislative actions that complement reform. We must pass the President's budget request for FY 2008. It has some very helpful features that will address sub-prime issues and encourage greater homeownership.
For instance, you know the HOME Program is a major contribution to the housing market. One component of the HOME Program is the American Dream Downpayment Initiative. This effort helps low-income families with closing costs and down payments on a first home. The President started this program in 2003, and since then more than 21,000 families have used it to purchase their own homes. About half of these homeowners were minority citizens. We need to expand these numbers and the President's budget will help us reach more and more low-income families.
Also, consumers must also be better educated. Studies show that a homebuyer who understands the process and available financing options is more likely to buy a home, and be happy with that home. Such a homeowner is less likely to be taken in by predatory lenders, or end up in default.
So the President has proposed a separate account of $50 million for housing counseling to prepare families for homeownership, help them avoid predatory lending practices, and help current homeowners avoid loan default. Working with faith-based and community organizations, the department plans to assist approximately 600,000 families to become homeowners or avoid foreclosure.
Finally, we must do more than pass legislation: we must do a better job explaining the sub-prime problem itself. There is a lot of misinformation...and half-truths...and panic. This is the time for clarity. It is also a time for a realistic assessment of the facts. Your own spokespeople have repeatedly stressed this. Yes, there is a short-term down-turn. But the market continues to grow. The American population continues to grow.
We must explain that the sub-prime problem does not extend to all sub-prime loans. 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 the regulators recently asked them to do. 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.
You know, we could encourage responsible use of reverse mortgages, within the Congressional caps. The Department of Housing and Urban Development was the first to allow for reverse mortgages. Equity should be available for financial emergencies or to ease the way through difficulty. Homeowners should be able to use their equity. That is part of the freedom of property...it should give us choices.
So I have suggested four simultaneous actions: end predatory lending practices, pass FHA reform, pass the President's housing budget, and help clarify the problem for the American people. We can do all of this...and we can do all of this together.
Allow me to end with another passage from Lampedusa's "The Leopard." The main character, the Prince, is speaking with Father Pirrone, the local priest. They are discussing the changes that are transforming their world. The Father despairs: why can't people see their mistakes? But, the Prince reminds him, "We're not blind...we're just human beings."
Indeed, that's all we are...human beings who try to do the right thing, work hard, often need guidance, sometimes make mistakes, invariably confront criticism and difficulties, and yet somehow keep going.
In the end, the sub-prime problem should give us more insight and greater wisdom. We must build our American housing enterprise on a more solid foundation. FHA reform and other reforms proposes by this administration can do that. But we must have the courage to act...and act now! We cannot dither in a blame game or pursue an ill-advised bailout. We must forge workable, long-term solutions that will benefit millions of Americans for generations.
I ask you to help guide the nation now, to continue your support for FHA reform. Continue to be the voice of reason and calm.
And as we do our best, as human beings, we must remember that this enterprise is one of the most human, and important, services we can render: providing housing for our families, friends, neighbors, and fellow citizens.