Oral Statement by Secretary Alphonso Jackson
September 20, 2007
before the Committee on Financial Services
United States House of Representatives
Chairman Frank, Ranking Member Bachus, distinguished members of the Committee, thank you for inviting me to testify this morning.
I also want to recognize my colleagues Secretary Paulson and Chairman Bernanke for their valuable actions and partnership over the past few months. I am pleased to join them today.
Mr. Chairman, as former Fed Chair Alan Greenspan once said, the subprime market "democratized credit." And this resulted in homeownership for millions of Americans.
Mr. Chairman, some borrowers weren't ready for homeownership. Foreclosures followed for tens of thousands of people. Our ongoing concern is that more Americans may face foreclosure with the new rounds of resets anticipated through 2008. So far I have been speaking about 20 percent of the subprime loans. And not all these loans will result in foreclosure.
It is important that we know this. The "lesson" here is not to throw out subprime loans. Most people with subprime loans will be fine and their homeownership adds wealth to our economy and gives them equity and a financial stake in the community. Our estimate is that 80 percent of the subprime loans made in 2005 and 2006 will not be problematic.
But borrowers need to be as informed as possible, which is one reason why we strongly urge them to use the nation's 2,300 HUD-approved housing counselors. Information leads to wise borrowing, manageable loans, and more economic security.
Mr. Chairman, the powerful riptide of foreclosure on our national economy and on world markets brings us here today. A market correction may escalate into a catastrophe unless we act now.
Already, the Federal Housing Administration (FHA) has stepped forward within the full extent of its legislative and regulatory abilities. By the end of Fiscal Year 2007, we will have helped more than 100,000 borrowers refinance with an FHA loan.
We have worked with other federal and state authorities to prosecute predatory lenders. We will use the full force of the law to end predatory lending practices once and for all.
But in order to assist more Americans, the President has proposed a series of actions. Some of them do not require Congressional action, while others do. Earlier this month, the President announced a new FHA product called "FHASecure."
Under this proposal, borrowers who are otherwise creditworthy, but have recently become delinquent on their mortgages as their teaser rates reset, may now receive FHA help. In the past, FHA did not back borrowers who were delinquent. Eligible homeowners will be required to meet our strict underwriting guidelines and pay the corresponding mortgage insurance premium. This offsets the risk to FHA and costs the taxpayers nothing.
I want to repeat that ... no cost to the taxpayers.
We estimate that with FHASecure we can help an additional 80,000 delinquent, yet otherwise creditworthy, borrowers refinance and save their homes.
This is in addition to the 160,000 non-delinquent borrowers we already expect to help in Fiscal Year 2008.
This will bring the total number of new borrowers assisted through FHA's existing refinance efforts to 240,000 next fiscal year.
I have also directed FHA to prepare a new regulation for risk-based pricing. This makes sense. Safer borrowers should pay less; riskier borrowers should pay a little more. I am hopeful that we will be able to implement this change in January so that we can reach an additional 20,000 borrowers.
So, of the 2 million loans expected to reset by the end of 2008, we estimate about 500,000 will actually foreclose.
Through FHA, we estimate that we can help save about half those homeowners.
This is what may be done through administrative action.
But this country needs FHA Modernization, which the President has asked from the Congress once again this year.
I know you appreciate the sense of urgency.
I was pleased that the bill passed on Tuesday contained some of the President's proposals. We need to raise loan limits so we can help low to moderate income and first-time homebuyers in expensive housing markets. We need to give families more flexibility in down payment options, something we cannot do today.
These legislative changes would help some 200,000 families, if not more, purchase or refinance into safe FHA-insured mortgages. It would allow the FHA to be more responsive to the housing market.
Mr. Chairman, every day places thousands of homeowners at greater and greater risk. Working together, the President and Congress can continue to make changes that will address the subprime crisis. Foreclosure isn't good for anyone: the homeowners, the community, the local tax base, the lender. Today we have the chance to make powerful and positive changes that will reflect statesmanship and good sense.
Again, I thank the Committee for the opportunity to appear today.
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