FDIC's Forum on Mortgage Lending for
Low-and-Moderate-Income Households

TUESDAY, JULY 08, 2008

Thank you, Sandra (Thompson, Director of the Division of Supervision and Consumer Protection, FDIC). Greetings to my fellow panelists.

Good morning, ladies and gentlemen.

It is tough to follow a speech by the Fed Chair. I appreciate his remarks. He made me think of an earlier chair speaking in different circumstances.

History tells us that fifty-five years ago, Fed Chair William Martin spoke to a packed audience at the Detroit Economic Club. His topic was the transition to free markets after the Second World War. He spoke of the demands of the war and the difficulties of transition to a peacetime economy. And one of the more recent changes had been the withdrawal by the Fed of fixed prices in the Government bond market. Chairman Martin argued this was a good thing, because fixed prices ran counter to the strengths of the economy and did not reflect human choices and free markets. He said that the maximum benefit to consumers, the country, and the economy came from allowing costs to reflect realities, to allow the proper function of the "price mechanism."

Now, 55 years later, I can sympathize. Because, for 74 years, the Federal Housing Administration has operated a "one-size-fits-all" pricing mechanism, regardless of the credit history of the borrower. No insurance company would run their operation that way´┐Żand none of them do. As the San Diego Union noted in an editorial two years ago (February 19, 2006), "only one major player in the mortgage market has never shifted to risk-based pricing - FHA..."

Supposedly, our fixed-prices helped consumers. That was the historical argument. And I didn't want to do away with our fixed prices for that reason. But we found that fixed pricing didn't necessarily help, that consumers may be better protected by a competitive FHA that is allowed to do its job, which is to stabilize the economy and to provide low-to-moderate-income Americans with the full faith and credit protection of a government-backed FHA loan.

And risk-based pricing 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 actually have higher FICO scores. These are hard-working American families who live within their means and pay their bills on time. Pricing mechanisms should reflect that fact!

And, the irony of the last few years was that FHA lost business with its fixed rate´┐Żlost that business to subprime lenders who used risk-based pricing. In 2006, our own estimates showed that FHA lost 70 percent of its business from 2003-2006. In the first half of the decade, the housing market was booming here and abroad, and world wide equity in the top 20 countries had increased from $40 trillion to $70 trillion. There had been an $8 trillion increase in the market value of single family homes in the United States alone. And while all this was going on, in 2006 our market share at FHA was under 2 percent. We were marginalized during the boom, unable to compete because of low loan limits and higher downpayment requirements.

Well, we know the outcome, a subprime crisis that has now evolved into a worldwide credit crisis. The turbulence in the housing market was been felt in California, Ohio, Florida, Michigan, New York, Nevada, and even in the financial institutions of London and Madrid, small towns in rural Finland, the streets of Budapest, and the mega-cities of China. Because the world economy is so intertwined, we still must confront the fact that shock in one place or one sector rapidly ripples out to effect economies around the globe.

And addressing this turbulence will not be easy. As both Chairman (Ben) Bernanke and Secretary (Henry) Paulson have said repeatedly, there is no silver bullet answer. But they have also said that FHA is one answer, and they are right! A fully competitive FHA is one way to help people keep their homes, one way to introduce more liquidity into the market, one way to calm the housing market, and one way to ease the fear that undermines consumer and credit confidence.

Frankly, at FHA we saw the problem coming. I take no satisfaction in claiming this foresight; I wished I'd been wrong. But, back then, Fed Chair (Alan) Greenspan and others also warned that booms lead to busts, that there is a housing cycle, and that this boom could not be sustained without structural changes in the housing market and more prudent actions by lenders themselves.

So in 2006 we asked Congress to modernize FHA to make us more competitive and responsive to market conditions. We asked this in 2006, and in 2007, and again in 2008. We are still waiting while people are losing their homes. I feel like a character in Samuel Beckett's "Waiting for Godot": constantly, patiently, persistently waiting. I appreciate the individual Members of Congress who have supported reform and thank them often for that support. They see the urgency. But the institution itself, Congress as a legislative body, has been unable to pass one housing bill that could be sent to the President. And we could have avoided some of this mess, maybe most of it, if Congress had been prompt and responsive.

Frankly, we have been ahead of Congress and did not, could not, wait for them.

In late August 2007, President Bush introduced FHASecure to help Americans facing foreclosure refinance into a safer, more secure FHA loan. That was a sound step forward. Since then, approximately 250,000 families have been able to refinance with FHA. Our projections show that we are on pace to reach a total of 500,000 families by year's end. That means half a million families who did not have to lose their homes and now have a predictable, stable mortgage: first payment the same as the last. They have the right home and the right mortgage.

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 $93 billion of mortgage activity into the housing market; more than $36 billion of that investment came through FHASecure.

And our market share has increased, from under 2 percent in 2006 to about 10 percent at the moment. Some have even predicted a much higher market share by years end. Almost three months ago, in early April, I announced additional assistance to even more at-risk homeowners. That expansion will start on July 14, less than a week from now. While Congress continues to debate and debate, our FHASecure expansion is only six days away. It will assist families in default as a result of temporary economic hardship, as well as those who were affected by payment shock.

Expanding FHASecure offers lenders and borrowers a refinancing alternative that makes voluntary write-downs a viable option. Appropriately reducing the principal amount owed on subprime mortgages helps both troubled borrowers and lenders.

Another helpful action was the passage of the President's Economic Stimulus Package. The stimulus package temporarily increased FHA's loan limits. The new loan limits were announced in March. They range from $271,000 to $729,000. For the rest of the year, we can back more mortgages in high-cost states and help homeowners hold on to their houses. This instantly helped some people.

But these loan limits will expire at the end of the year. So we need to have appropriate and long-term changes to FHA's loan limits through modernization legislation. I don't think the loan limits need to be as high as in the Stimulus Package. But we must have loan limits higher than under current statute. New, sound, appropriate loan limits must be part of any package that comes out of Congress in the next few days.

And that brings me back to risk-based pricing. Any modernization must allow it. As I previously mentioned, we have already published regulations to start risk-based pricing. I want to thank Chairman Bernanke for supporting our position on the Hill.

But some in Congress are trying to block our implementation of risk-based pricing. This blatant, short-sided political ploy will only move FHA closer to insolvency. Unless we are allowed to have risk-based pricing we will need taxpayer funding or eventually have to raise money through a hike in premiums.

FHA's solvency is threatened another way through the practice of seller-funded downpayments. 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 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's pretty unique for a federal program. Now, currently, FHA is solvent. In fact, we have a reserve of about $21 billion. However, as a result of our annual re-estimate, we had to book an additional $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. So, while we remain solvent, no insurance company can sustain that amount of additional costs year after year and still survive.

In early June I announced that FHA is reopening public comment on our proposed rule to eliminate seller-funded downpayments. We are eager to review all comments. But we are counting on Congress to eliminate seller-funded downpayments as part of FHA modernization. And I have repeatedly said in my conversations with the Hill that if they don't do this, FHA may have to come back and ask for additional funding to cover our losses from this practice.

I will be looking for every opportunity to use FHA to help people keep their homes. But we can't turn FHA into something it is not. Some in Congress want to turn it into a mega-mortgage agency, in effect federalizing the mortgage market. Some want to dump bad loans on us. Some want to create new, overly-bureaucratic mechanisms for mortgages. And others want to tie our hands and turn back the clock, restricting FHA's ability to compete at all. At a time when FHA is a bright light in a dismal, dark market, we can't let good intentions turn into disastrous mandates that further mangle the mortgage market.

We have made several constructive steps to help the market and American homeowners. I believe all of this places the housing market on a more stable foundation for the future. I still think about the wise advice offered 55 years ago by Chairman Martin: if we want to protect the people, the nation, and the economy we must turn to our strengths in the economy. I believe we are trying to do that at FHA.

Thank you.


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