Detroit Economic Club

JULY 9, 2008

Thank you, Tom (Dekar). And thank you, Steve Grigorian, for presiding. I also want to thank Beth Chappell for inviting me.

Ladies and gentlemen, thank you for making me feel so welcome. I feel right at home, having grown up in the Midwest. I spent my youth in Wisconsin and most of my family is still there. I have lived most of my adult life in Illinois. Michigan is where my kids have gone to camp for years and where we have spent many wonderful vacations. In fact, my wife and I spent a few days north of Port Huron last summer. This is the part of the country I call "home."

It is not only a pleasure to be here with you today, but it is an honor to be called to serve the American people as their Housing secretary during this difficult and challenging time.

It s true, I have only been on the job for a month, and we have only six months to go. But that doesn t mean we can t get a great deal accomplished in that time. These next 200 days will be among the busiest I have ever had, and I intend to make them the most productive.

This is my first major address as HUD secretary, and I needed to come to the epicenter of the foreclosure crises to discuss our direction.

And I am pleased this discussion takes place at such a venerable and historic forum. Housing needs have been a part of your own history. In 1934, Allen Crow founded the Economic Club of Detroit (your old name) in the midst of a prolonged housing crisis. One purpose of this forum was to discuss the ways that Detroit could utilize the thinking of its business and community leaders to address housing needs.

Our housing market faces tremendous challenges:

  • Experts estimate as many as 2.5 million filings for foreclosures this year, on top of 1.5 million in 2007. That compares with about 650,000 filings in a typical year.

  • Depending on the source, average nationwide housing prices are down between 4 and 17 percent from their peak.

  • And lenders have pulled back markedly from originating new loans. The Mortgage Bankers Association estimates show mortgage originations at their lowest levels since 2000-2001.

You know what it is like here. Michigan has been among the states hardest hit, Detroit especially. In 2007, the Detroit metropolitan area had the highest foreclosure rate of any city in the nation.

At this moment there are over 40,000 homes on the market in Wayne, Oakland, Macombe, Livingston, and Washtenaw counties. That is over a 17 month supply at current rates, well above the (nearly 9.6 months) national average. A six month supply is considered normal.

This morning, I drove around the west side of Detroit. I wanted to see some of the neighborhoods and suburbs for myself.

This morning, I also met with housing counselors and homeowners. I heard their stories, heard about the difficulties they face, and their search for solutions. The loss of a home is devastating for families and for their friends and neighbors.

Honestly, many of the stories I have heard remind me of a difficult period my parents went through in the early 1980s. In our case, it was related to a significant downturn in the economy.

I grew up in Janesville, Wisconsin. It was a General Motors (GM) town. Janesville depended on GM and its suppliers for its jobs and its economy. In the early 1980 s, Janesville's unemployment approached 20 percent and after nearly a year without a job, my father relocated to the other end of the state to find work. There was almost another year when the family was split as my mother stayed at her job in Janesville and tried to sell the house in a very tough economy. I remember the anxiety, the heartache, and the sense of loss.

And now, Janesville may be looking at its toughest patch ahead, since GM announced recently that it was closing the plant altogether.

This is tough on families. Very tough.

In parts of the country, the problems were driven by a housing bubble. But here we know we are dealing with more fundamental economic challenges. Irrespective of the root causes, today I would like to focus on the issue that is causing much of the immediate distress-the fallout from subprime lending.

Subprime lending is not in and of itself a bad thing. It has been a path to homeownership for very responsible people. But irresponsible behavior led to a dangerous proliferation in the market. From 2000-2006, subprime lending went from 2.5 percent of the mortgage market to approximately 20 percent. This occurred during a time when housing prices more than doubled in our largest markets and sales were increasing.

There are approximately $1.3 trillion in subprime loans outstanding. They represent 12 percent of the outstanding loans, but over half (53.3 percent) of the foreclosures. Subprime ARMs are the biggest culprit representing just 6 percent of outstanding loans but over 40 percent of all foreclosures. More than one in four of these mortgages currently are more than 90 days past due or in foreclosure.

Another problem is we have another $150 billion in subprime ARMs resetting in the next 18 months. We have to understand that we will continue to be flooded with a need to work out these loans, and unless we are prepared to deal with that, we will miss the chance to stave off future losses.

Many of us believe that our primary focus as government leaders should be to help people stay in their homes if they are committed to making mortgage payments, and can afford to if they have the right mortgage. Aside from the obvious benefit to the homeowner, it will also reduce additional supply in the market and financial losses for investors. The key is getting them in the right mortgage.

We also need to ensure that there is liquidity to support new home buyers who we need to come into this market. Today, government supported lending is essentially the only source for non-jumbo loans. That is, loans supported by the Federal Housing Administration (FHA), Fannie Mae, Freddie Mac, and the Federal Home Loan Bank have absorbed the retreat of the private sector.

Finally, we need to ensure that these institutions that support our mortgage markets are set up to provide confidence, stability, and clarity to the marketplace for the long-term.

At HUD, we have taken some specific actions on our own to address this crisis. And we have taken these actions without waiting for Congress.

First, we have expanded the Federal Housing Administration (FHA) to help more families, while avoiding new costs to taxpayers. The FHA s mission is to provide stability in the housing market and to provide low-and-middle-income Americans with an opportunity to gain an affordable mortgage backed by the full faith and credit of the United States government. We insure private loans-generally 30-year fixed rate. The first payment is the same as the last payment.

In late August 2007, President Bush introduced FHASecure, an expansion of FHA s mandate to help Americans who were unable to make payments because of a reset refinance into a safer, more secure FHA loan. That was an important step forward. Since then, more than 265,000 families have refinanced with FHA. We have seen a five-fold increase in the number of refinancings from conventional loans to FHA, compared with two years ago. And we know many of these people are refinancing subprime mortgages.

In addition to helping struggling homeowners, the program has added much-needed liquidity to the mortgage market for new loans. Since September 2007 to June 2008, FHA has guaranteed more than $93 billion of mortgage capital. Overall, FHA has gone from 2 percent of the mortgage market in 2005 to in excess of 10 percent today. In Michigan, FHA applications increased 180 percent in the first quarter of this calendar year, compared to the same time last year.

I should add that FHA works extensively with its borrowers who go delinquent to put them on a corrective action plan. Over the last three years, FHA has kept about 300,000 of its borrowers out of foreclosure through loss mitigation actions.

I am pleased to announce that, in a few days, on July 14th, FHASecure will further expand its efforts to refinance homeowners who are having difficulty paying their mortgages. It will open its program to families who have missed up to three monthly mortgage payments over the 12 months or experienced a temporary economic hardship, such as loss of overtime or medical needs as well as those who were affected by payment shock. We estimate that by the end of the year, a total of 500,000 families will have refinanced through FHA since the launch of FHASecure.

As part of this expansion, we are instituting a fairer, more flexible premium pricing structure at FHA. Like any other insurance company, FHA will price the insurance premiums for these borrowers according to their credit risk. This change is essential for FHA to be able to handle the growing risk in its programs and protect the American taxpayer.

Some people have argued that risk-based pricing will harm lower income borrowers. The facts show quite the opposite. Risked-based premium pricing will actually benefit lower-income American families. Contrary to conventional wisdom, FHA families with lower incomes actually have higher FICO scores. These are hard-working American families who live within their means and pay their bills on time.

There are a couple of other measures we have taken to expand FHA s scope:

  • Previously we required people to hold properties at least 90 days before we would finance them to avoid speculative flipping. We are temporarily eliminating that policy so that lenders can sell foreclosed properties more quickly.

  • In addition, the President s Economic Stimulus Package temporarily increased FHA s loan limits, allowing FHA to expand its assistance on mortgages up to $729,000.

Beyond FHA expansion, there has been other important work to help borrowers in need.

Thanks to the leadership of Treasury Secretary (Henry) Paulson, the mortgage servicing industry has formed the "HOPE NOW Alliance" to get agreement throughout the industry on how to work with borrowers in need in an efficient and responsive manner. HOPE NOW includes 27 mortgage lenders, who handle 90 percent of the subprime market and a majority of all loans. By reworking mortgages with homeowners facing foreclosure, the industry has reached 1.7 million homeowners in trouble. That gets right to the problem and doesn t cost the taxpayers anything.

And the Administration has made a substantial effort to increase housing counseling. I know there are some who discount counseling. But, again, the data tells us it is effective. We have learned that 97 percent of those in default who completed housing counseling program with a HUD-approved housing counselor in 2007 avoided foreclosure in 2007. There is powerful evidence about the difference that housing counseling can make. And that is why the President has requested $65 million in his new budget for housing counseling. That is an increase of more than 150 percent since he assumed office.

Housing counselors help people get the right mortgage in the first place. I am thankful for the many housing counselors, programs like "Green Path," which gets referrals from the HOPE NOW hotline and others here in Michigan who help people find the right mortgage or refinance an existing mortgage.

We have also encouraged local businesses to get involved, and many have stepped forward. Here in Detroit some key businesses have shown remarkable leadership. I want to thank partnerships like the Detroit Economic Growth Corporation for all they do to stop foreclosures. I applaud their donation of $1.15 million to help fund the Detroit Office of Foreclosure Prevention and Response. Specifically, I want to thank the Kresge Foundation, the Skillman Foundation, the Hudson-Webber Foundation, the McGregor Fund, and the Community Foundation for Southeast Michigan. I also applaud the Soul Foundation, Saturn Corporation, and Habitat for Humanity for their work to rebuild properties on Detroit s East Side. This is welcome community leadership.

All of this is happening today. Hundreds of thousands of people are being helped. Many of these efforts have been going on for some time. In addition, with growing awareness of them and with growing experience in dealing with the issues, more people are coming to get help, and the help they are getting is more effective. As we all read about the housing bills under consideration in Congress, the Administration has not been marking time: it has been pro-active, out front.

Many of you have read about legislation working its way through Congress. There are some very important provisions in the proposed legislation. For example, both the Senate and the House propose more effective oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Most everyone thinks it is critical for these institutions to have sound, effective oversight. This is also very important to the Administration. They support 80-90 percent of mortgages in our country and have $6 trillion in securities trading in our capital markets.

But many aspects of proposed legislation are not helpful.

Despite the critical need for FHA to expand its support for homeowners in distress, the Senate bill would impose a moratorium on FHA s risk-based pricing structure. At the very time that FHA is an island of hope for hundreds of thousands of homeowners in distress and an important source of financing for new home buyers, Congress would tie our hands and severely limit our reach to struggling homeowners who now might lose their homes to foreclosure.

If Congress imposes a moratorium on FHA s risk-based premium structure, FHA would either have to close its doors or seek some combination of:

  • restricting access to its services,
  • increasing pricing on all borrowers, and
  • seeking an appropriation from Congress.

I am hopeful that reason will prevail and Congress will do the right thing for struggling homeowners and American taxpayers.

FHA needs to be on solid footing and it needs the flexibility to serve the needs of Americans in a troubled marketplace today and into the future.

Lastly, let me just mention that we are working to make the mortgage process more understandable and more uniform for the consumer. People need to be able to read and understand their loans. The unnecessary complexity of mortgages has contributed to our housing crisis. And we must make mortgages more understandable and the process more transparent. HUD is working 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.

I am pleased to announce today that we are reinstituting a pilot program here in Detroit to provide new, more aggressive foreclosure prevention assistance to homeowners. Traditionally, when all FHA loss mitigation measures have been exhausted, lenders foreclose and then submit a claim to FHA. Under this program, we will create a means for lenders and investors to sell their non-performing mortgages before foreclosure to HUD and a joint venture partner that specializes in foreclosure prevention. HUD will transfer the assigned mortgage loans to a joint venture partner who will be responsible for servicing the loan and helping families stay in their homes. The loan will be sold at a significant discount, enabling the joint venture to modify the loan to make it more affordable.

I hope that gives you a good idea of the things HUD and its partners are doing to address the foreclosure crisis. We certainly face rough waters ahead. But as policymakers, we have to choose our actions carefully. There will be political pressure to do something - anything - to convince people that we care about them. A common result of this kind of situation is that we let our good intentions outstrip our ability to analyze the real causes of a problem or to craft clear-eyed solutions.

That s why our action in response to this crisis should be guided by three strategies:

  1. We need to help families who could afford to stay in their homes if they had the right mortgage. We are expanding FHA to do that, and the industry is collaborating through the HOPE NOW Alliance;

  2. We need to take steps to ensure that there is sufficient liquidity flowing into the mortgage markets so new home buyers who can afford a mortgage will be able to buy down the unsold inventory of homes; and

  3. We need to make sure that the institutions that support American home buyers are both financially sound and effective at providing good products for consumers.

These strategies are based on principles fundamental to a healthy mortgage market. That s why I am convinced that they are the ones we should focus on.

There will be more foreclosures to come, as we work through this challenging time. We are going to have to work in partnership at all levels of government and unite the private and not-for-profit sectors to be most effective. But I, for one, pledge to do everything we can to lessen the burden of this crisis on our fellow citizens, and lay a lasting foundation our future.

Thank you.


HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development, and enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at and For more information about FHA products, please visit

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