City Club of Cleveland


Thank you, Lee (Friedman). Thank you all for coming. I congratulate the City Club for its memorable history and commitment to public discourse.

Ninety-six years ago, in 1912, when Newton Baker was Mayor of Cleveland, the year the City Club was founded, the nation was in a housing slump. Homeownership rates stood at 46 percent of households in 1900. Slowly, surely, that rate declined for the next twenty years. The slump was felt in Cleveland and Ohio as a whole, and was a topic more than once at early meetings of the City Club.

Even then, Americans could see that housing was a central, vital part of our economy. So housing rates were scrutinized and carefully watched, because housing was a barometer of the health and stability of our economy.

But Ohio and the nation recovered, and, by the turn of this century, homeownership stood at 66 percent for the country.

And, in 2000, homeownership took off, with an historic boom of growth that went well beyond anything experienced by this nation before, rising to about 70 percent nationally mid-decade, and over 73 percent in Ohio. This rate of growth was unprecedented…staggering really.

And this boom in housing was accompanied by a growing national and international investment in American housing. By 2005, one of the five-star attractions for international investment was the American housing market, especially the lending and mortgage market.

As the world's economy became more inter-dependent, the American housing market became more international, an important part of the economic progress of our country and the economies of other nations. A home in Cleveland might be a part of the investment portfolio of several international corporations and more than one government; the mortgage payment rippled through many hands with a powerful multiplier effect.

But the boom didn't last…booms never do. And just as this nation experienced a downturn in 1900 and again thirty years later, we meet today at a moment of severe market correction. And this correction has been severely felt in Cleveland and throughout the state. And just as speakers discussed housing during the founding years of this club, we again examine housing all these years on.

Today I want to talk about the reasons for our current housing crisis and the ways we are addressing it. I also want to talk about the future, about how we can smooth out the housing cycle and create a more stable foundation for future growth in homeownership.

We have learned some valuable lessons this time around. For one thing, we have discovered that the business practices common in 1912 are still common today. Back then, some people just signed contracts without understanding them…frankly, in some places immigrants didn't even speak English, and didn't have the contract explained to them. We have learned many people still do that…they don't read the contract or don't have it explained to them. They don't know what they are committed to or the terms of the contract.

Then, as now, some people took advantage of the situation with predatory lending practices, exploiting the economic ignorance of the signer.

Then, as now, when unable to pay a mortgage, the homeowner often didn't seek help from the lender and quietly defaulted.

Then, as now, lenders often approved loans without proper collateral, or without a sufficient down payment. The sub-prime loan had its antecedents in pre-credit lending practices, buoyed by the belief that the home itself was a stable source of equity and profit. And, speaking frankly, there is still some truth to that, because about 70 percent of the subprime loans will not result in foreclosure and made homeownership possible for people with less than perfect credit.

But, unlike 1912, we must respond pro-actively. We cannot wait for the housing cycle to turn of its own accord, as if housing is like the turn of the seasons. And we are not headed into another Great Depression by any stretch of the imagination. I don't believe a recession is forthcoming. The fundamentals of the American economy are sound and we are still the envy of the world.

This time, we must address the problem head-on, with solutions that confront each of the variables that encourage this market correction.

And we are in the process of doing that, both at HUD and through cooperative efforts with consumer groups and the mortgage industry.

For example, the President's new budget requests $65 million for housing counseling. We have learned that housing counseling makes a powerful difference in homeownership and foreclosure avoidance. As I said earlier, many of the failed loans were a surprise because the homeowner didn't read the fine print or didn't understand the contract. The nation's 2300 HUD-approved housing counselors could have helped the homeowner gain a better perspective about affordability and balanced expectations. Families must buy homes they can afford. Prospective homeowners must have a prudent mortgage, not a "suicide loan." We must remove the mystery, confusion, and vagueness from the process. There must be full disclosure, understandable information, and a transparent process.

That's why we need housing counselors to be fully engaged in the process. Housing counselors are an important first line of defense against foreclosure. They can enlighten homeowners and help prospective owners determine the affordability and appropriateness of a mortgage. Housing counseling is an important step in homeownership process.

The President has also requested a substantial increase of $263 million for our HOME program. This would bring the funding level up to nearly $2 billion for the nation's largest block grant program specifically designed to produce affordable housing. This request includes $50 million for the American Dream Downpayment Initiative, which provides flexible housing assistance, and increases affordable housing and minority homeownership. Since the inception of the HOME program 16 years ago, almost 812,000 units of affordable housing have been created.

We also need to maintain current homeownership and stimulate new purchases in other ways. So, in August 2007, the President and I used our agency's regulatory authority to introduce FHASecure, an effort to help more Americans facing foreclosure refinance into a safer, more secure Federal Housing Administration (FHA) loan. This initiative is helping many families avoid foreclosure. There has been a noticeable increase in the number of closings with FHA. For example, in January 2007, 632 Ohio families refinanced into the FHA. One year later, in January 2008, more than twice as many did, 1,400, which represents a 122 percent increase. By year's end, we expect FHA will be able to help more than 300,000 families nationwide refinance into affordable FHA-insured mortgages.

I strongly urge anyone who faces foreclosure to look at FHA.

Two weeks ago, we took another action at HUD. We mailed letters to hundreds of thousands of at-risk homeowners to urge them to refinance with safer, more affordable FHA-backed mortgages. These letters are being sent to homeowners who already have or soon will confront the first reset of their adjustable rate mortgage, and are currently living in locations subject to FHA loan limits. More than 15,000 letters were sent last week to Ohioans and more are on the way. We will eventually be sending these letters out to about 850,000 at-risk homeowners.

But we could do so much more with legislation to modernize the FHA. Congress needs to quickly complete work on legislation that will immediately give us authority to expand FHA's ability to serve the very type of people who were lured into high-cost, high-risk loans. FHA must be competitive with the home-buying needs of Americans now, not the needs of Americans in 1912. We need to make the minimum down payment more flexible, create a fairer insurance premium structure, and permanently increase FHA's loan limits. This will allow more families to use FHA, perhaps hundreds of thousands of families. We need FHA modernization as soon as possible. Every day of delay places qualifying homeowners at unnecessary risk. Our estimates indicate that FHA modernization could help as many as 250,000 more families by the end of 2008.

The mortgage industry has also stepped forward to help. Treasury Secretary (Henry) Paulson and I have worked closely with the industry to develop a program called the HOPE NOW Alliance to help homeowners at risk of foreclosure. The Alliance has implemented a plan that could help up to 1.2 million homeowners avoid foreclosure over the next two years by providing systematic relief that includes modifying or refinancing existing loans, moving borrowers into FHASecure loans, and implementing a five-year freeze on interest rate resets for subprime loans. The industry has already assisted 370,000 homeowners. HOPE NOW contacted more than half a million homeowners in the second half of 2007.

And, last week, Secretary Paulson and I announced "Project Lifeline." This is another powerful way to address the housing crisis. Six Hope Now Alliance members launched an effort to temporarily pause the foreclosure process long enough to find a way out. Loan modifications could follow. And, this program is not only available for subprime mortgages, but for people with any kind of home mortgage.

Based on these initiatives, I suggest that anyone in foreclosure call their lender right away, even if you have already spoken before. The lender dynamic is changing, the lending environment more cooperative and flexible.

Fair housing practices are an important aspect of homeownership. This year marks the 40th anniversary of passage of the Fair Housing Act. Our budget provides $51 million to protect the right of all Americans to be free from housing discrimination based on race, religion, gender, sexual orientation, family status, or disability.

Recently, at HUD, we created a new Fair Lending Division. This office will examine questionable mortgage practices and investment complaints from homebuyers. It is an important addition - a new way to directly address unfair practices. Recently, HUD awarded grants for the development of strategies to address lending discrimination. These grants were awarded to your state agency in Ohio, and to state agencies in Massachusetts, Colorado, and Pennsylvania, states with some of the highest rates of foreclosure in the nation.

And we have to let mortgage companies know that the laws against predatory lending are going to be enforced. Some companies have already been successfully prosecuted for mortgage fraud and other predatory practices. I am pleased that the Justice Department, the Securities and Exchange Commission, and others have opened investigations into the practices of some other companies, particularly in the secondary mortgage industry. They are examining the possibility of accounting fraud, insider trading, and other illegal practices. We need to know if and when the law was compromised. And we need to have strong deterrence to make sure it doesn't happen again.

We need to do all of this and more. If we can make housing counseling a standard part of home buying, then we can eliminate much of the risk of later foreclosure. If we can make FHA more competitive, then we will open it up to millions of future homeowners, and think of what that will mean in terms of the stability of the housing market and affordability of loans. If we can maintain industry cooperation, both within the industry and with homeowners, we can change the culture of lending. If we can deter predatory lending, then we will build greater trust in the home buying process. We must put in place a process of actions and incentives that eliminate the highs and lows, or at least condense the cycles into something more predictable and less severe.

And this will help us retain homeowner equity, which grew from $6.6 trillion in 2000 to $10.9 trillion in 2006, a 66 percent increase over 6 years. Domestic investment in housing is a major part of our gross domestic product, about 7 percent of GDP - 20 percent if you include housing services.

Through these actions we will remain attractive to international investors. That means more money flowing into the United States, more jobs, more business, and greater economic growth.

Housing is still a powerful road to wealth creation and future economic prosperity. That was true in the days of the founding of the City Club; it remains true almost one hundred years later.

I thank you again for inviting me to the City Club.


Content Archived: January 19, 2012