Prepared Remarks by David H. Stevens Assistant Secretary for Housing and FHA Commissioner at the Exchequer Club Washington, D.C.
Wednesday, January 20, 2010
Thank you, Ed (Yingling). Good afternoon. Thank you for inviting me to the Exchequer Club. Thank you all for coming.
It has been three years since my predecessor at the Federal Housing Administration (FHA) spoke to you. At that time FHA was marginalized, insuring only two percent of new mortgages. Millions of borrowers took out exotic subprime loans. And, there was a general over-enthusiasm in the housing market, particularly as an investment strategy. As a result, the housing market slowed, and then entered a prolonged period of turbulence.
Today, thankfully, we are on the road to recovery. The slow, steady process of stabilization has begun.
But we still have a lot of work to do. This is a decisive moment in our economic history. We need vision and wisdom….the kind that created FHA in 1934. At that time, responding to the housing crisis that was a result of the depression, President Roosevelt worked with Congress to pass legislation which established the Federal Housing Administration and other entities.
One historian described the rapid improvement in the housing market. He said the Federal response, in his words, “arranged an institutional landscape in which unprecedented amounts of private capital could flow into the home construction industry…. and revolutionized the way Americans lived.”
Another historian was more blunt: the creation of FHA and other actions saved the American Dream.
FHA AND MARKET SHARE
We see this happening again. Over the last three years, FHA has shown, once more, that it is a necessary countercyclical force in the housing market. It reacted to the difficulties in the housing sector by increasing its market share, helping those in need, especially those with low incomes and homeowners from minority communities.
FHA now insures approximately 30 percent of new loans. The resurgence of FHA is one of the most important reasons that the economy is starting to stabilize. And I would hate to think of where the housing market would be without FHA…without the hundreds of thousands of new loans and refinances…without the 400,000 people who still have a home through our loss mitigation efforts….without the liquidity and stimulation provided by our growing presence in the housing market.
We have helped prevent a turbulent market from going into free fall. FHA insured 1.9 million loans in 2009 – up from 1.1 million in 2008. Almost 50 percent of all first-time buyers used FHA. And, in 2009, approximately 835,000 borrowers refinanced into lower interest rate loans, saving them an estimated $1.3 billion.
FHA AND FUND SOLVENCY
But this increase in market share came at a price. FHA was pushed and extended its scope, using every resource to help as many qualified homeowners as possible. The fund is solvent and we are taking steps to manage the risk. I will say more about this in a minute.
As many of you know, an independent review shows the FHA capital reserve ratio has fallen below the congressionally mandated 2 percent threshold to 0.53 percent. But, at the moment, FHA has $31 billion in total reserves in two accounts, representing 4.5 percent of total insurance-in-force. FHA has sufficient cash-on-hand to pay all future losses on current books of business with a $3.6 billion cushion.
And a major drain on our funds has been eliminated. In 2008, Congress ended a practice that greatly contributed to our difficulties: seller-financed down payment assistance.
One way to guarantee fund solvency is for FHA to engage in better risk management. We must put in place mechanisms to guarantee that FHA remains fiscally sound. And we also want FHA to do its job – and do it well.
So, we hired the first permanent Chief Risk Officer in the organization’s history. The Risk Officer will provide the most thorough and comprehensive risk assessment we’ve ever undertaken.
But our efforts must be more sweeping – and involve lenders too. We want to ensure the quality and sustainability of new loans, increase FHA capital, and conduct proper enforcement against fraud.
FHA POLICY CHANGES
So, today, I am officially announcing new policy changes that will strengthen FHA to better serve the American people. They are the most sweeping and significant steps to improve FHA soundness in decades, if not in our entire history. This Administration is determined that FHA will protect both the homeowner and the taxpayer. In fact, this is a new FHA. The changes will insure the long term viability of the program and increase FHA’s capital reserves. They will require more skin in the game from borrowers. There will be greater accountability and transparency from lenders. These changes are consistent with the stronger enforcement actions announced in September. The new policy changes will not disrupt the housing market. In fact, they will contribute to future sustainability in the housing market.
Let me outline these changes:
First, there will be new loan-to-value and credit score requirements. Loans to borrowers with a FICO score of less than 580 will require a minimum 10 percent downpayment. Loans to borrowers with a FICO score of 580 or above will require the traditional minimum down payment of 3.5 percent.
Second, the upfront mortgage insurance premium will increase to 2.25 percent.
We will also pursue legislative authority to increase the statutory cap on the annual Mortgage Insurance Premium. We will ask for conditional authority, triggered either by a decline in the capital ratio below the two percent requirement, or by a certification by the Secretary that the higher cap is necessary to ensure the health of the MMI fund. When we receive legislative approval, the upfront annual premium structure will be adjusted, with some of the upfront premium shifted to the annual premium. This shift will allow for an increase to the capital reserve with a lower up-front cost to the consumer.
Third, we will reduce allowable seller concessions from six percent to three percent to conform to industry standards. This will also reduce potential value inflation.
Fourth, we will increase enforcement efforts to ensure compliance with FHA guidelines and standards. We will use a scorecard system to evaluate and report lender performance. This will compliment the current information available from the Neighborhood Watch data. This change will make the information more user-friendly.
We will also enforce indemnification provisions through section 256 of the National Housing Act.
This is in addition to changes to enhance enforcement announced last month by Secretary Donovan in testimony on Capitol Hill. There he asked for legislative authority to apply section 256 to require indemnification provisions for all Direct Endorsement Lenders. This would require all approved mortgagees to assume liability for all the loans they originate and underwrite.
He also asked for legislative authority permitting our department maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This change would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches.
Today’s changes will be implemented through the regular notice and comment process, or through Mortgagee Letter. We hope for full implementation of all changes by early summer.
These actions are in addition to new requirements to better manage brokers, such as new requirements for audited financial statements and adequate capitalization.
Added together, these changes significantly, vastly strengthen FHA, allowing it to better fulfill its mission.
REVIEW OF POORLY PERFORMING LENDERS
And these changes are part of an on-going set of improvements over the last year. For example, since taking office in July, I have increased HUD’s Mortgagee Review Board’s efforts to review and take action against lenders who violate FHA requirements. We have withdrawn FHA approval for some lenders. We have also suspended some lenders. FHA will not tolerate fraudulent or predatory lending practices. If we determine that our partners are not playing by the rules, we will take action immediately – it’s that simple.
OTHER ADMINISTRATION INITIATIVES
This Administration has worked to tackle the housing crisis on every front – and make every effort to help American families keep their homes. The approach is a comprehensive effort. A year ago our financial sector was on the brink of collapse and house prices were falling rapidly. Many were predicting a second Great Depression. A year later, with home prices up for two quarters in a row, interest rates near five percent and home sales rebounding, the nation’s housing market is returning to stability.
Why? Well, the coordinated efforts of the Treasury and the Federal Reserve have combined to maintain mortgage interest rates near record lows for nine months. This monetary policy is helping first-time homebuyers enter the market, has assisted over 3.8 million homeowners refinance, and is pumping $13 billion into our local economies and businesses every year – generating additional revenues for our nation’s cities.
At the same time, at a moment when the “credit crunch” has challenged so many sectors of our economy—the FHA, Ginnie Mae and the GSE’s have ensured essential liquidity and credit availability in our housing market.
But many American families continue to face the threat of foreclosure. That’s why we launched the Administration’s unprecedented and multifaceted modification program to keep families in their homes whenever possible. We have extended offers for trial modifications to more than 1 million American homeowners – and over 900,000 have entered the trial modification period. We know there is more work to be done to help all those eligible for the program to qualify and to ensure that trial modifications become permanent. That’s why we’ve implemented a temporary review period to ensure that all borrowers are being fairly evaluated for the program.
But, we must have a balanced housing policy. It is vital that we maintain and enlarge opportunities for affordable rental housing. Not everyone should buy a home – not everyone wants to. Affordable housing helps provide housing for those who make our cities work: firefighters, teachers, nurses, and so many others. Under this administration we are putting the Federal government back in the business of building and preserving affordable housing. That is why we are providing full 12 month funding for Section 8 contracts. We have also asked Congress for increased funding for the Housing Choice Voucher Program, the National Housing Trust Fund, and other efforts. We have also introduced initiatives to more closely link housing to the transformation of local communities.
I believe that we are establishing a carefully calibrated housing policy for both the single-family home owner and for those who need housing in multi-family housing. The Administration is supporting our housing recovery through tax policy as well. By extending the first-time homebuyer credit, we have made home purchases possible in the most difficult of markets.
Another important tool we are deploying to confront the housing crisis is the Neighborhood Stabilization Program (NSP). Through NSP, communities across the country have been using $4 billion in HUD-administered funds to reclaim foreclosed homes and place them back into productive use, stabilizing neighborhoods and property values alike.
And recently HUD awarded an additional $2 billion in competitive neighborhood stabilization funds provided through the Recovery Act, rewarding the best ideas for tackling the foreclosure crisis while building on the first round of NSP grants that have flowed to communities across the country.
RESPA reform is also a key component. RESPA reform will also make mortgages more transparent and understandable. New rules came into effect on January 1st. Every borrower needs all the necessary information. Now there will be a clear Good Faith Estimate – a straightforward comparison with estimate v. actual agreement. This will save consumers hundreds of dollars. It also provides needed accountability and transparency.
Also, consumers will be better protected through the Safe Mortgage Licensing Act (SAFE). This law requires states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators. It will also set up a nation-wide mortgage licensing system and registry. This will help increase the integrity of the mortgage process and prevent fraud. In combination with RESPA reform, consumers will have greater protection and much higher likelihood of finding an affordable home.
As well, there are numerous private-sector efforts, such as NeighborWorks and HOPE NOW. I know many of the mortgage lenders and bankers represented here today are part of HOPE NOW and other private-sector initiatives. I thank you for your assistance. There is a growing spirit of cooperation between lenders and borrowers that I believe is healthy for our housing market and our economy. These valuable efforts fit well into the overall structure of our comprehensive approach to recovery.
All of these actions, and others, are helping to rebuild the housing finance sector. And because housing is the cornerstone of our economy, as the housing market improves, that improvement will ripple through every financial sector. As I said earlier, we still have much work to do. But the new financial landscape …and there is a new financial landscape…will help us create the stabilization necessary for recovery. It will also set in place a firmer foundation for the growth of the housing market in the future.
FHA will always have a role to play in this stabilization; its countercyclical presence will increase or diminish with future housing cycles.
I began today by looking back at our nation’s history. Today, history offers guidance and hope. The legislative actions of this Administration, and our efforts at FHA, have put in place better safeguards. We will see more certainty and transparency. There is more responsibility and accountability. Confidence is replacing fear. Despair is giving way to optimism.
The recovery is still in a fragile state. But it becomes stronger and more resilient with each day, bolstered by the changes put in place. We can now see the way ahead. If we can continue our progress, then we will emerge into an era of renewed prosperity and sustainable growth. It has been done before, and FHA was part of that story.
Through our announced actions today, FHA will help make history again.
Thank you. I would be delighted to take your questions.