"Promoting and Protecting Homeownership"
"PROMOTING AND PROTECTING HOMEOWNERSHIP"
JUNE 4, 2007
Thank you, Jerry (Zremski). Good afternoon, ladies and gentlemen.
It is fair to say that homeownership is the embodiment of the American Dream. The history of this country is one of settlement of cities and towns and the construction of housing on a vast, historical scale. From the early settlement at Jamestown four hundred years ago to the most recent township incorporation, across a continent that is geographically, ethnically, and economically diverse, homeownership remains a vital community asset.
Ownership is one of the common themes - maybe the greatest theme -- of the American experience, and homeownership is one path to upward mobility, wealth creation, and a secure retirement. A home is where we live, grow up together and grow old together. It is our place...a reflection of ourselves. It is where we find solitude and shelter.
Housing is also about equality, fairness, justice, and rights. I know this first-hand. Housing issues were central to the civil rights movement. This was one of the places where civil rights were won and freedom secured.
Along with food, water, and education, housing is one of the most basic essentials of life.
In short, I think housing is very important! And housing has been part of my life's work!
So it is an honor to speak about the state of American housing, and to do so in this forum.
The State of Housing is a topic under much discussion at the moment. You might say that it is a daily dialogue. The booming rates of U.S. homeownership mid-decade were greeted with astonishment and pleasant surprise. This led to investment opportunities in American housing on a global scale. And those investments brought wealth and money back into this country.
But the boom didn't last...booms never do!
A red-hot housing market couldn't generate heat forever. There had to be a return to normalcy or balance, and corrections needed to be made. I believe that we are in such an adjustment period now. But there is no reason to believe we can't re-ignite the market. We are at full employment. Real income is up by over $3,000 per person since President Bush took office. And the population keeps growing. We have a high workforce participation rate. More and more people still want to buy homes. That means gains in housing are real and can be sustained. It's also good news for American homeowners.
The recent problem with exotic subprime loans has generated great concern, however. It has exposed problems that must be addressed. The Federal Reserve last week indicated it had worries about the housing market, saying the correction of the housing sector will continue to "weigh heavily on economic activity through most of this year -- somewhat longer than previously expected."
The good news is that we continue to see gains. Also, last week, we announced figures showing home prices continue to appreciate. They do so at a modest rate, but the appreciation continues to outpace inflation. So I am here today to tell you that the sky hasn't fallen. But we do need to take measures not just to promote homeownership but to protect it for the long-term.
In other words, I think it is time for a clear assessment of what has been accomplished, what is happening now, and where we need to go in the future.
Let's start with homeownership. Homeownership stands near the all time high...at historic levels. Nearly 70 percent of all American families own a home. We should view that fact with pride. America has become what President Bush has termed an "ownership society," with homeownership at its core. While we will always have a need for rental properties, homeownership still continues to inspire the American Dream.
And we have made significant gains for our minority citizens. But we have a long way to go. Today, more than 50 percent of our minority families own a home. But compare this figure to non-minorities, where the homeownership rate is 74 percent. It's troubling that we have a 24 percent point gap between minority citizens and the non-minority population. We have to accelerate our progress and close the gap. So the President set in 2002 a goal of 5.5 million new minority homeowners by the end of the decade. We are already half way there. I am confident that goal will be reached, in spite of the problems in the subprime market.
Our near-record rates of homeownership have a personal financial advantage. While as a people we may not be big "savers,"; as defined by some economists, the value of our investments in our homes has been growing. American home equity has grown from $6.6 trillion in 2000 to $10.9 trillion in 2006, a 66 percent increase over 6 years. Six years! What astounding growth!
However, the growth came with three problems. The first is predatory lending. There is no place for it in American housing or lending practices - no place at all!!! Predatory lenders have targeted homebuyers - especially minorities -- and successfully manipulated many of them into unwarranted, illegal, or unethical loans. For minority citizens, in particular, affordable loans are hard to come by. So, when affordable loans are difficult to find, slick and sinister predatory lenders often appear to be the only option.
Consumers must also be empowered with the tools to know when to spot a sham. The key is to be able to read and understand the fine print, and also to know when to ask for help. Last month, we convened a summit with leading stakeholders in the housing community to discuss the impact of risky, high-priced loans on the American homeowner. Our goal was to bring together investors, lenders, consumer advocates, and decision-makers to assess the current housing situation, and to offer up ways to help those facing difficulties. We learned that half of all homeowners facing foreclosure are afraid to pick up the phone and contact their lender for help. That's right - people are so fearful that instead of picking up the phone and asking for help, they lose their house. We also learned that while most people facing foreclosure are afraid of their banks, they are much more open to talking to a local non-profit counseling agency about their problems.
I believe we can stop predatory lending by working together - government, the private sector, and homebuyers. Such cooperation must remain a persistent priority.
Let’s talk about a second problem, which is really problem we face today: the prevalence of exotic sub-prime loans. Let me explain that term, "exotic." An exotic loan, for me, is one that didn't take into account the financial situation or the ability of the borrower to pay back the loan. It is the loan with initial low teaser rates and payments that increase dramatically when the interest rate resets after the initial period, or when the loan balance increases. It is exotic because it is financially irresponsible. I’ve also heard them called "suicide loans." Now, most sub-prime loans don't fall into that category. Most of the sub-prime loans remain viable and will not result in foreclosure. But some are problematic, especially as home prices slow down or decrease.
Subprime loans taken out in 2005 and 2006 have begun to experience increased payments. My department believes that 80 percent of sub-prime loans are sound. As you know, the Chairman of the Federal Reserve recently confirmed that most sub-prime loans will remain secure. But the other roughly 20 percent of these subprime loans are headed for trouble. These borrowers are, or will, have difficulty affording the new higher payments. And another round of loan adjustments are due in 2008.
We can help some of these people through HUD's Federal Housing Administration. There are tens of thousands of homeowners whose reset rates are about to hit like a ton of bricks who could benefit from refinancing into federally-insured mortgages."Our lenders" foreclosure rate of 1.3 percent is half the subprime average. FHA and its lenders actively work with people who are running into financial difficulty. They do this by extending their loans terms, temporarily reducing their payments, or making a partial claim through the FHA insurance fund.
The third problem is a loss of confidence by citizens and by some of our financial experts. The lesson they draw from the subprime situation is that homeownership shouldn't be for everyone and that the homeownership rate hit a ceiling. I strongly disagree. Despite the problems in the market right now, homeownership as a goal is a good thing. I recognize homeownership is not for everyone. But it should be an available option for all families. When we have problems, like the exotic sub-prime loan market, we cannot retreat from our homeownership commitment. We can't just say, "Well, some people just shouldn't own a home." We can't abandon the American Dream.
Americans who are turned away from the prime lenders still deserve a chance at the Dream. So you will never hear me say that all subprime lenders are bad. As Alan Greenspan said, the subprime market further "democratized" access to credit, which has helped expand opportunities for a wider array of people.
But we must have enough foresight to head-off future problems by acting now. In other words, we can address upcoming subprime problems if we have the wisdom to get ahead of the curve. And we had better get ahead of the curve!!!
One way to do this is through legislation to modernize the FHA. We need this reform now!!! President Bush and I have repeatedly urged Congress to act.
The FHA is a mainstay of the American housing enterprise. Over the past 73 years, the FHA has helped millions of families become homeowners. Later this month, we will celebrate our 34 millionth FHA customer. And we have helped families stay in their homes. I mentioned earlier that refinancing with FHA could help tens of thousands of families with sub-prime loans. If Congress passes FHA reform, we could help hundreds of thousands and we could do so without cost to the taxpayers.
Let me give you an example. Mr. and Mrs. Antion Downs live in Landover, Maryland. They had a non-prime loan with a rate of 9.25 percent and wanted to refinance. They could not quality for another non-prime loan because their credit score was below the minimum threshold. Yet, this was a couple with a perfect mortgage history and good job stability. Through FHA, we were able to approve them for a 30-year, fixed rate mortgage at 6.5 percent, saving them over $330 a month.
The loan consultant told us, "This is one extremely happy couple." And Mr. Downs is with us here today. Please stand up Mr. Downs.
We were happy to help. There are many people like the Downses. That story has been replicated thousands of times.
FHA's ability to help is limited without statutory changes. We have fixed as much of the process that we can internally and reduced red tape to make FHA more user-friendly. And I want to thank Brian Montgomery for his leadership in making these changes.
But we need to be able to help more first-time homeowners and low-income Americans - the groups we were designed to serve, and to serve safely. We need legislation to be able to do that - so we can help more people like the Downs. If Congress allows us to set insurance premiums commensurate with risk - which makes a lot of sense - FHA could help those thousands of borrowers who need an exit strategy from their suicide mortgages. Imagine that - risk-based premiums for an insurance company! Who could argue with that?!? 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.
I would also like to say something about New Orleans. It is a great city, with great people. Hurricane Katrina was an unprecedented national disaster that kept almost an entire city underwater for 6 weeks. We have all learned from this experience. We will continue to work to bring New Orleanians back home. And they will return to a better place than the one they left.
I have always said our goal is to make sure that anyone who wants to come home does...which is why HUD is committed to providing better, safer, more secure affordable housing. We are not going to simply renovate apartments that should be condemned. We are not going to merely replace the dilapidated public housing that already existed. We have to do better than that, and that was our plan before the hurricane hit.
Later this week, I will be going to New Orleans to announce the redevelopment of more than 500 affordable rental housing units in the 9th Ward. This reaffirms HUD's investment in the rebirth of the 9th Ward -- an area of the city hit particularly hard by Katrina. I will also be opening up nearly 100 new units in the city's downtown area.
So amid the shouting, finger-pointing, blame game, charges of racism and, headline-grabbing lawsuits against HUD that is Post-Katrina, we are making progress. But we clearly have more to do. I want to thank those who are working together, cooperatively, diligently, with vision and dedication, to bring the city back into the swing of its culture and tradition.
We have a responsibility as a people to care for those who are less fortunate. As an agency, it is our mission to serve the most economically disadvantaged. That's why we believe public housing residents deserve something BETTER than what they had -- new homes and a future in a socially and economically integrated environment. It would be irresponsible to simply give up on these residents. We cannot confine them to a life of hopelessness and deep poverty.
I worry that this is what public housing in New Orleans and elsewhere has become. I think the Washington Post editorial page said it best: "If [New Orleans] residents can go home to apartments better than the ones they fled, that should be applauded, not denounced in court."
What public housing needs to become is housing that works. It must be responsive to a families needs. Healthy families make healthy neighborhoods. Healthy neighborhoods create healthy communities. It's time that we move into a better future. Except for a few who have escaped, public housing has not been a springboard to a brighter future. It has not been an environment which allows families to thrive and become self-sufficient. Instead, it has failed those communities. What may have made sense in Depression-era America does not make sense today. Over time, I worry that our public housing policy has been an abject failure.
It must not be a trap...a process that creates a permanent underclass of people, generation after generation, warehoused like second-class citizens, producing despair and engendering a poverty of spirit.
Years ago, I sat on the commission that designed the HOPE VI Program. Our goal was to deconcentrate poverty. The program has been a remarkable success in places like Atlanta, Chicago, and Seattle - cities that have the courage to do what needed to improve the lives of its public housing residents. But many more cities are sitting on funds, letting another generation stay mired in destitution. Many cities want to perpetuate failed past approaches...not step into a more liberating and positive future.
Well, today I say, enough is enough! The America I know can do better. We have the resources and the tools. We simply need the will.
In my view, the American housing enterprise is so important to our economy that we must dream large and then make those dreams a reality. Our global financial leadership and strength will demand such an effort. I believe our children and their children will look back and thank us for our vision and wisdom.
As I said earlier, housing is more than a leading economic indicator. It is also where we shelter our loved ones, our possessions, and our memories. We have a personal stake in housing that goes beyond money. This is about our ability - each one of us - to live with a place of our own, secure in the knowledge that we own this...it is ours...it is our home!!! That feeling of ownership and security is felt by the vast majority of our citizens...it is a feeling shared by the vast majority of people around the world.
Our commitment to homeownership must remain steadfast. It is unfair to say that the American Dream shouldn't be for everyone. We must recognize that problems in the market are not problems with the Dream itself.
We need to promote and protect homeownership to keep the American Dream alive today and for many years to come.
Thank you again for inviting me to address the Club.
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