Exchequer Club Monthly Luncheon Address
BRIAN MONTGOMERY, ASSISTANT SECRETARY FOR HOUSING
FEDERAL HOUSING COMMISSIONER
DECEMBER 12, 2007
It is a great privilege to be invited to speak to this club and to all the great minds in this room. I follow in the footsteps of many distinguished Exchequer Club speakers, including our own Secretary Alphonso Jackson.
And I arrive at an exciting time. From Bloomberg to CNBC to Fox Business, from [Neil] Cavuto to [Erin] Burnett to [Jim] Cramer, there has never been more attention paid to the economy. Main Street and Wall Street are both well-covered.
And yet, it seems like there's never been less consensus on what to do. I hear hand-wringing and shoulder-shrugging about the subprime crisis and its effects on the economy�even as the economy outperforms expectations. We've seen 51 weeks of uninterrupted jobs growth�1.5 million new jobs created in the last 12 months�and a robust 4.9 percent growth rate from July to September. Still, many voices wait for the worst, as if good news has to be followed by bad, as if a deep correction is inevitable.
I don't believe decline is inevitable�if we act.
Everyone remembers Franklin Roosevelt's admonition that "the only thing we have to fear is fear itself." Few remember why: because, in his words, fear "paralyzes needed efforts to convert retreat into advance."
How true. People facing foreclosure don't want to be told that they are victims of an inevitable cycle, a predestined downturn. People want answers...solutions...and practical steps by their government and the private sector to prevent it from happening again.
That's what we are giving them.
But first, we must see the housing crunch for what it is�and for what it isn't. That is Step One.
Yes, it is a threat to U.S. economic growth and, therefore, global economic health. Reports out of China, Switzerland, Germany, and even rural Finland show that the subprime crisis has sent seismic shock waves through the world's economies.
This week, we saw the problem hit closer to home. The Washington Post Monday ran a front-page piece on troubles in the Washington-area housing market. Foreclosures have risen from 11 per 10,000 homes to 79 in just one year, according to the analysis. "In midsummer, we felt the tide turning," said one housing counselor, adding, "people from all walks are getting hit by this."
At HUD, we saw the tide turning much earlier. For close to two years, FHA has been expressing concerns about the proliferation of subprime and exotic housing loans. Since late 2005, we have modernized FHA as much as possible internally, within our regulatory authority. It was necessary, but not sufficient.
So we then came up with a legislative reform package. It has passed the House more than once with wide bipartisan support, but is again mired in the Senate.
This bottleneck has naturally caused great consternation. Congressman and Chairman Barney Frank recently said that "the increasing inability of the United States Senate to function is becoming a threat to governance."
And so, we decided we could no longer keep Waiting for Godot. We did not have the luxury of wringing hands and shrugging shoulders. With the President leading the way, we decided to act.
President Bush's package of housing reforms�starting in August with FHASecure, continuing with our call to modernize the FHA, the groundbreaking HOPE NOW Alliance, and what's become known as the "Teaser Freezer"�is designed to restore clarity and sanity to the housing market.
It's an ambitious package. We expected to hear criticism of it, from both the left and the right. We expected voices from the left to call for a bailout of consumers, even for those speculators trying to "flip" multiple homes. And we expected voices from the right to decry any government action in the free market.
We heard them. But we heard from many more agreeing with both our diagnosis and prescription. The Washington Post wrote this about FHASecure: it "appropriately focuses government resources where they are likely to do the most good: on subprime borrowers who are behind on their payments but have the means to handle modified loans at reasonable terms." The Baltimore Sun added: "The Bush proposals won't bail anyone out of his or her problems, but they will help thousands of homeowners help themselves."
They understand that the problem is not too little or too much government intervention. It's not our job to pick winners and losers. That's the job of the marketplace. But when it is not able to do so, we must help the marketplace identify risk and responsibility, and make rational decisions based on it.
Step Two was solving what I call, to quote the movie, a "failure to communicate." Mortgage companies took advantage of the housing boom by steering borrowers into risky and exotic loans, many of them subprime. To be fair, the vast majority of subprime loans were sound then, and are sound now. Their growth has helped many families, including many minority families, become first-time homeowners. And that is a good thing.
But some brokers wanted to push the envelope. They enticed buyers with low "teaser" interest rates into choosing adjustable rate mortgages (ARMs) they didn't understand and couldn't afford. Last year, about half of subprimes went to borrowers who did not fully document their income�what is now known as a "liar loan." One lender even bragged about his "NINJA" loans�"No Income, No Job and No Assets."
Now, of course, the bill is coming due�more than $1 trillion in interest rate resets in the next several years, according to some estimates.
This hurts families. It also hurts the economy by distorting the marketplace and denying investors the information they need to make rational decisions.
So we acted to identify and help those families who wanted to do what it takes to keep their homes�something that many lenders should have done, but failed to do.
Three months ago we launched FHASecure. For the first time, it permits borrowers delinquent on their subprime ARMs as a result of interest rate resets to refinance into FHA loans. We also allowed lenders to use the FHA's backing to help borrowers who were "underwater" on their existing mortgages. And we will even help people who are in the process of foreclosure.
While we continue to help those current borrowers looking for the safety and security of an FHA loan, these changes were designed to help many more families take advantage of the FHA's chief benefit�access to market-rate financing. They also perfectly compliment the "teaser freezer"�FHA picks up where the freezer leaves off.
Are there rules? You bet. A history of on-time mortgage payments under the original interest rates is required. So is a sound debt-to-income ratio. We also verify income levels�what a concept! We wanted to encourage responsible decision-making, not reckless speculation. And property "flippers" need not apply. This product is only for a family's primary residence.
Already we've seen results. Since early September we have received more than 127,000 refinancing applications. We've closed more than 40,000 transactions, placing homeowners into a safe, affordable, FHA-backed loan. By year's end, we anticipate that number will be closer to 50,000.
Overall, we expect our FHA programs to help hundreds of thousands of families in the coming year. We could help many more, as many as 250,000 more. But it will take action by Congress.
So Step Three is FHA modernization. The FHA was created during the Great Depression to bring stability to the real estate market. It's helped 35 million Americans buy homes, the vast majority of them first-time homeowners. But it needs to be updated for the 21st century.
We've been working with Congress to modernize the FHA. The proposed bill would increase access to home loans by lowering downpayment requirements. It would allow FHA to insure bigger mortgages in high-cost states such as California and New York and even Northern Virginia, which FHA currently does not serve too often because it is priced out of the market. Under the Senate bill, the loan limit in these states would rise from $362,000 to $417,000; it would rise even higher in some areas in the House bill.
The bill would also enhance the FHA's ability to fairly price insurance through "risk-based premiums." Together, these changes can help us break the cycle of foreclosure and price depreciation, and bring much-needed liquidity to the market. Investors deserve it. And so do homeowners.
Step Four is education of those homeowners.
As you know, communication is a two-way street. Foreclosure often comes as an unpleasant surprise to homeowners. Surveys show that about half of the borrowers in foreclosure did not discuss it beforehand with their mortgage counselor or servicer. This should be shocking news to all of us.
Many families do not read their prospectus, which might be dozens of pages long. Do you blame them? When homeowners do try to communicate with their lenders, they often found themselves talking to total strangers. So many mortgages are sold, resold and repackaged, it can be difficult to tell who's in charge and who can help.
The humorist Finley Peter Dunne once noted that "You can always read a doctor's bill, but you can never read his prescription." Here, the opposite has occurred. Some lenders tell homeowners the benefits to their faces, while the costs are buried in the fine print.
Our job is not just to respond to the housing downturn, but to shorten the cycle and prevent another one from occurring. A good way is to improve communication between lenders and borrowers.
Several weeks ago, Secretary Jackson and Treasury Secretary Paulson asked the mortgage industry to come together, to identify homeowners with past due accounts who want to do what it takes to stay in their homes. The result was the creation of the HOPE NOW Alliance.
Companies representing 60 percent of all mortgages came together to help. After a nationwide mailing campaign, they announced an industry-wide plan to provide relief in one of three ways: refinancing an existing loan into a new private mortgage; moving a homeowner into an FHASecure loan; or freezing the current interest rate for five years�the "Teaser Freezer." The Alliance estimates that up to 1.2 million American homeowners could be eligible.
The markets responded positively to the President's announcement last week. So did homeowners. Call volumes to the HOPE NOW hotline reached record highs, with a tenfold increase in the four days following the announcement.
The HOPE NOW effort is a perfect complement to our own housing counseling program. This is a real success story. There are more than 2,300 HUD-approved counseling agencies in this country, helping families determine if a loan is affordable while learning their rights and responsibilities. We want consumers to understand the fine print before they sign on the dotted line.
President Bush has increased funding for housing counseling by 177 percent since 2001. That's money well spent. The President's FY 2008 Budget requests another $50 million for the program, plus $120 million for NeighborWorks, a non-profit agency that helps prevent foreclosures. Groups like this really help us get the message out.
Finally, we're making a major, government-wide push to improve America's financial literacy. Our new HUD brochure, targeted to potential homebuyers, is entitled "Home Economics." It will be out very shortly. We've also posted foreclosure prevention tips on our website, www.hud.gov, on www.fha.gov, and in Parade Magazine. Our message can be summed up as, "Buyer, Be Aware."
I'm reminded of the advice of one of America's greatest money managers. When Benjamin Franklin started out, he was in debt. He used to bring home reams of paper in a wheelbarrow through the streets of Philadelphia, so his creditors knew he was working hard. He said, "The sound of your hammer at five in the morning or nine at night, heard by a creditor, makes him easy six months longer."
We want all homeowners to realize that the key to recovery is in their hands. No lender wants foreclosure�we've seen proof of that. And no one wants our strong economy to weaken, including President Bush and Secretary Jackson. I think we've taken the hardest punch from the housing crunch�and we at FHA are still standing. We aren't on the mat. Far from it.
I believe, to paraphrase FDR, that we have nothing to fear except inaction. Rest assured that's the one course we at FHA refuse to take. Wall Street and Main Street deserve to see results from both ends of Pennsylvania Avenue! And so do the homeowners on every street.