76th Annual Meeting U.S. Conference of Mayors
PREPARED REMARKS FOR
BRIAN MONTGOMERY, FHA COMMISSIONER
FRIDAY, JUNE 20, 2008
Thank you. In 1934, two years after the Conference of Mayors was established in 1932, newly elected President Franklin Roosevelt engineered passage of legislation to create the Federal Housing Administration (FHA). The role of FHA was to stabilize the economy and to help low-income Americans obtain an affordable mortgage.
Both of our organizations were founded to help Americans and to make our cities livable, viable communities. In fact, because you are on the frontlines of the housing crisis, you know the value of FHA. It can make affordable mortgages available to those who need them. Often I remind people that the first FHA payment is the same as the last. That's a good selling point. And what that means for you is a homeowner building equity and creating wealth, with the benefits to your city of income, taxation, and community building, because homeowners have a strong stake in the community.
I believe that you and I are in the same business, with the same goals, and much common cause. As I noted in my remarks at your Winter Meeting in January, we both want to help hardworking families who are struggling. It is natural that we turn to each other at a time of turbulence in our housing market. We can help each other.
Many of you may be surprised that FHA is central to the recovery of the housing market. For a long time FHA was forgotten, marginalized in the minds of many Americans. But now, to quote the Philadelphia Enquirer (August 26, 2007), we are "back in vogue." The reason is obvious: FHA is a powerful source of stability and correction in our housing crisis. Using FHA's current regulatory authority, the President Bush created a new refinance product known as FHASecure. He expanded FHA's reach in August of last year and again starting this July 14th to enable us to reach about half a million people facing foreclosure by year's end.
This helped people like Michael Hardisky of Telford, Pennsylvania. Mr. Hardisky is a 29-year-old high school science teacher. He wanted to get married and buy a home. So, he looked at a number of subprime loans, but his parents and his finance's parents said "Go FHA." And he did.
I should add that Michael was smart, very smart, to listen to his prospective in-laws.
Michael's loan was part of resurgence in Philadelphia, where from July 2006-July 2007, FHA insured 30 percent more loans than the previous year.
That is a story being repeated throughout America. Let me give you a few examples about the increase in applications we witnessed in 1st quarter calendar year 2008, compared to the same period last year: Florida 163 percent, Maryland 323percent, Minnesota 288 percent, and Nevada: 343 percent. The list goes on and on.
In addition to helping struggling homeowners, the program has added much-needed liquidity to the real estate market. Since September 2007, FHA has helped pump more than $76.1 billion of mortgage activity into the housing market; more than $30.3 billion of that investment came through FHASecure.
But we need to do more. The President's Economic Stimulus Package helped because it raised FHA loan limits. This instantly helped many Americans...we think at least 100,000 of them by the end of this year. Across the country, we've refinanced nearly 10,000 loans in just three months thanks to the higher limits. That is good news. But the loan limits end on January 1st.
So we need FHA Modernization right now! It will provide permanent higher loan limits at an acceptable rate. You may remember, two years ago, the U.S. Conference of Mayors was one of the first groups to endorse modernization. And you have been a steady source of support ever since. I thank you for that. Modernization will help us remain competitive in the current housing market and for years to come.
But, two years on, after passage by both houses of Congress, twice in the House alone, Congress has yet to send to the President. It is past time for the Congress to pass this law, not pass the time.
The bill they send must have two key components.
First, it must maintain FHA's ability to offer a fair and equitable mortgage insurance premium structure that is commensurate with the risk presented by the loans it insures. Any bill must continue to allow FHA to price for additional risk. Without this, homeowners with good credit could be forced to pay higher premiums through no fault of their own.
To ensure the solvency and continued operation of FHA's single family mortgage insurance fund, FHA has already announced implementation of a flexible risk-based premium structure. It's the first time in FHA's 74-year history that we have had different prices for premiums. The change is very well timed, allowing FHA to reach more troubled families without placing excessive risk on the insurance fund or on taxpayers.
The modernization bill must preserve this authority, consistent with the goal of fiscal solvency.
What's interesting about risk-based pricing is that it will actually benefit lower-income American families. We did an analysis of our borrowers and contrary to conventional wisdom, FHA families with the lower incomes have higher FICO scores. These are hard-working American families who live within their means and pay their bills. That's why we need legislation to do risk-based pricing beyond what we've done in rule-making. We need the authority to go beyond the current statutory cap.
Second, legislation must address the down-payment assistance that comes from the seller or any other person or entity that stands to benefit from the transaction financially. I know that the Conference of Mayors disagrees with me on this point.
I hope you will change your position. The IRS, GAO and our own Inspector General have expressed concerns with these circular financing schemes. Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments. No private mortgage insurance companies will back these loans. They now account for one third of our portfolio.
We are concerned about this business because the substantial losses affect FHA's bottom line and FHA's ability to serve American citizens who need access to prime-rate home loans. In its entire 74-year history, FHA has been self-sustaining. That means that our income has exceeded our costs and we have not needed an appropriation of taxpayer dollars to cover FHA's operations. That's pretty unique for a federal program.
Currently, FHA is solvent. In fact, we have a reserve of about $16.4 billion. This reserve would have been higher, except, as a result of our annual re-estimate, we had to absorb about $4.6 billion in unanticipated long-term losses, mostly due to the increased number of certain types of seller-funded loans in the FHA portfolio.
This rate of loss must be stopped, not accelerated. No insurance company can sustain that amount of additional costs year after year and still survive.
As you know, we have tried to ban these downpayments before, only to lose in court.
Earlier this month I announced that we are reopening public comment on our proposed rule. We plan to proceed as far as we can with our regulatory authority. But the ideal resolution would be Congressional legislation. So we are pursuing that, too.
Now I know we disagree on this. But we must not only put people in homes, but keep them there.
There are other actions we can take. For example, in an effort to stabilize declining home values in certain neighborhoods, this week we announced a temporary policy that will extend government-backed mortgage insurance and allow for the immediate sale of vacant foreclosed properties.
Historically, FHA has prohibited insuring a mortgage on a home owned by the seller for less than 90 days. This prohibition was intended to prevent property "flipping," a predatory practice that strips a home of its equity before being quickly resold at an inflated price to an unsuspecting buyer. But, for one year, FHA will insure foreclosed properties marketed and sold by property disposition firms on behalf of lenders. The properties, which must purchased by owner-occupants, will no longer be subject to the customary 90-day waiting period. This action will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes in neighborhoods across the country. This new policy will permit the immediate sale of foreclosed properties to legitimate borrowers wishing to use FHA-insured financing.
Another action we can take is to make mortgages simpler, easier to understand. That's why we are pushing through new regulations to reform the Real Estate Settlement Procedures Act (RESPA) to require all mortgage lenders and brokers to clearly display an estimate of all settlement services, fees, and charges. They must not be hidden in the fine print. The rule will require a clear statement that would itemize closing costs and lock in certain charges at settlement. This would offer greater transparency and certainty, allowing Americans to shop and compare.
Frankly, RESPA reform will help in many ways. We estimate it will save about $700 per person in closing costs. It will help avoid changes in the mortgage that contribute to foreclosure. It will help the lender too, by making sure that the mortgage is affordable and more likely to be paid on time.
There are several things you could do to help make FHA more viable for those facing foreclosure.
For example, you could work with FHA and HUD to host foreclosure workshops. Already we have helped with hundreds of such workshops around the country. But we need to make sure they are available in every city facing problems with the housing market. And we need to make sure to host more than one - as circumstances change we may need to reach new people or those who should have attended previous workshops, but didn't.
Also, FHA's education and outreach efforts continue to increase. In the next few weeks, FHA will be sending letters to 625,000 people who we think might need help. But we need to send this lifeline information through a variety of mediums through a number of sources. Your city could help us get the word out: FHA is ready and open for business.
There is much we can do together. The housing crisis requires our best efforts.
Two months after your founding, in 1932, President Roosevelt explained the need for our mayors and other elected officials to help the country out of its financial difficulties. He asked for economic statesmanship. Speaking at the Commonwealth Club in San Francisco, President Roosevelt said this involves "persuading, leading, sacrificing, teaching always, because the greatest duty of the statesman is to educate." He asked for "faith in America" and "faith in ourselves."
He was right then and would be correct today. We must be economic statesmen, ready to set partisanship aside, giving homeowners the information and opportunities they need.
I know we can do this, by having faith in each other and faith in this country. Thank you.