Prepared Remarks of Secretary Shaun Donovan at the National Association of Realtors Policy and Advocacy Conference
Washington, DC Thursday, January 31, 2013
Good morning. Thank you, Gary. It’s always a pleasure to speak to the National Association of Realtors.
The work you do in our communities and your support for our programs is critical to advancing the goal of responsible home ownership across the nation.
I want to thank you for all of your help advocating for refinancing legislation as well as your work on the FHA reform bill.
NAR members participated in dozens of refinancing roundtable discussions across the country and engaged your Attorneys General on Servicing Settlement issues.
On this and many other issues the Realtors have been a strong partner to HUD, and particularly to FHA.
I know we’re all looking forward to working with our newly confirmed Commissioner, Carol Galante, on many important issues: things like FHA reform, QRM and promoting a vibrant housing market.
So today, I’d like to talk about a few important decisions we’re making -- from how we protect the FHA and ensure its continued ability to provide a pathway to homeownership and the middle class for generations to come, to ways we help homebuyers by reducing risk throughout the housing market.
Housing Market Recovery
Most importantly despite a decline in home sales in December, there are many encouraging signs in the market -- housing construction is growing faster than at any time since 2008, we’ve had the strongest year of home sales since the economic crisis began, and rising home values lifting 1.4 million families above water.
Our most recent Housing Scorecard shows that mortgage rates remain at historic lows and homes remain affordable.
Foreclosure starts are down, shadow inventory continues to shrink, and around the country unemployment continues to fall, putting families and communities on the road to recovery, in part, because of this administration’s policies and all of your work.
But let me be clear, while there is cause for optimism, I am mindful that the recovery remains fragile, and that rash actions could limit the progress we are now seeing.
Our priority is to restore our housing markets, help families get back on their feet, and enter into a new era of housing finance in this country as quickly as possible -- doing so through a balanced approach that doesn’t threaten our progress.
As realtors, you know firsthand that FHA’s programs have been a critical component of this economic recovery.
With a mission of providing access to homeownership for underserved, low-wealth populations, and critical financing for multifamily developments, nursing homes, assisted living properties and hospitals, the FHA is designed to fill gaps in the market, meet important community needs and act as a stabilizing force during economic distress.
And it’s clear that FHA has done just that. By ensuring much needed liquidity in the nation’s mortgage finance markets, FHA was a vital stabilizing force as we experienced the worst economic decline since the Great Depression.
In the last four years the FHA has made homeownership possible for over 3.5 million families, including 2.8 million first time buyers, and for 50 percent of all African-American and Latino homebuyers in 2011.
But while FHA has acted as a critical support, it was not immune to the stresses of falling home values and rising unemployment of the recession.
According to the independent actuary’s annual report on the MMI fund, this fiscal year FHA’s estimated capital reserve ratio fell below zero -- to negative 1.44 percent -- representing a value of negative $16.3 billion.
We take these findings extremely seriously. As stewards of taxpayer dollars, we have, since the start of this Administration, made it a priority to strengthen the fund.
And while the possibility exists that FHA may need to draw on assistance from the Treasury to cover any projected shortfall in its ability to cover the next 30 years of expected claims, we are doing everything in our power to make this unnecessary.
Indeed, we have already taken significant actions to protect and strengthen the Fund. And we are seeing results.
Increasing premiums and changing credit policy -- such as increasing down payments for lower credit score borrowers and ending seller financed down payment assistance -- are not decisions that Commissioner Galante and I take lightly.
They are part of a calculated approach, not to restrict access to credit, but to restore the housing market to full health and protect the FHA fund.
With the help of Congress, our efforts have added well over $32 billion to the Fund to date.
Unfortunately, these actions alone are not enough.
That’s why this week we are announcing several more changes that balance our need to reduce the role of the FHA in the market in the short term, while protecting its viability for generations to come.
First, we will increase the mortgage insurance premiums charged for FHA-insured loans. In addition, we’ve revised our Premium Cancellation Policy to better protect the Mutual Mortgage Insurance Fund. Since 2001, FHA has been cancelling required mortgage insurance premiums on loans when the outstanding principal falls below 78% of the original loan balance.
As a result, we estimate that the MMI Fund has foregone billions in revenue on mortgages endorsed from 2001 through 2012, while FHA has remained responsible for insuring 100% of the unpaid principal balance on them.
FHA will once again collect premiums based upon the unpaid principal balance for the entire period for which FHA is entitled, permitting FHA to retain significant revenue that is currently being forfeited prematurely.
Second, FHA is consolidating its Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) and Saver Fixed-Rate HECM payment options.
While it represents a majority of the loans insured through our HECM program the Standard Fixed-Rate option presents significantly more risk to the Fund.
Going forward, the HECM Saver will be the only initial MIP option available to borrowers seeking a fixed rate mortgage.
Using the HECM Fixed Rate Saver will significantly lower the borrower’s upfront closing costs while permitting a smaller pay out than the HECM Fixed Rate Standard product, thereby reducing risks to the MMI Fund and the borrower.
And third, FHA is finalizing a policy that will require loans to borrowers with credit scores below 620 and a total debt-to-income ratio greater than 43 percent to be manually underwritten.
Lenders will be required to document compensating factors that qualify the borrower for FHA-insured financing, such as a larger down payment or a higher level of reserves.
This protects both the MMI fund and borrowers -- ensuring that even as FHA provides that crucial access to mortgage credit for borrowers with a lower credit score, they are obtaining a carefully underwritten loan that they can afford.
And as you are aware, FHA is also proposing to increase the down payment requirement for mortgages with original principal balances above $625,500 from 3.5 percent to 5 percent.
I can certainly appreciate some of you may be concerned about this change and the impact it may have on your business, but Commissioner Galante and I believe it strikes an important balance, preserving a low-down payment option for borrowers while reducing risk to the Fund.
This change, coupled with the statutory maximum premiums charged for these loans, will help protect FHA and further our efforts to shift these borrowers back to the private market.
Because we all can agree that when the United States government, through the GSEs, FHA, VA and USDA, is still supporting over 80 percent of the nation’s newly originated mortgages, the our involvement in the housing market is far from sustainable or healthy.
This Administration is committed to bringing private capital back to the mortgage market and shrinking the government’s footprint there -- and we’re doing just that.
Recovery: Credit, Regulation, and Stability
Of course, we also recognize that a continuing impediment to expanding credit availability is investor uncertainty, and any efforts to push private capital back into the market will be unsuccessful without efforts to address it.
And we realize that it is our responsibility--to the extent we are able--to provide the certainty and clarity the market is looking for by establishing a clear and fair regulatory environment.
The steps we take to provide stability will facilitate greater liquidity in the housing markets and help to assure investors in this changing landscape.
That’s what it’s going to take to get banks back to lending and people buying homes.
Ensuring this stability has been a driving force behind the Mortgage Servicing Settlement as well as a number of other regulatory actions.
Between March and September almost 310,000 homeowners received over $26 billion in overall consumer relief, with homeowners receiving more than $84,000 in benefits on average.
In addition, participating banks have done over 113,000 principal write-downs to facilitate short sales allowing families who had been unable to get out from under hundreds of thousands of dollars of mortgage debt to move to a new job or start anew while avoiding foreclosure.
And since October, the five largest banks, representing 60% of the market, have been required to comply with new, tougher servicing standards.
As momentum in our housing market grows, the settlement is providing a number of critical tools to continue that progress. With servicers on track to provide almost all of the obligated relief by the end of the first quarter in 2013, homeowners are finally getting the help they deserve.
In addition to enforcement actions like settlements, the government can also provide stability through appropriate regulations.
Recently, the Consumer Financial Protection Board announced new mortgage servicing rules that will help all borrowers, especially those facing potential foreclosure. These rules will provide a more fair and effective process for troubled borrowers who face the potential loss of their homes.
From the outset of the financial crisis, servicers were unprepared to deal with the staggering amount of borrower delinquencies.
Families did not get the help or support they needed that would have allowed them to save their homes. Servicers failed to answer phone calls, routinely lost paperwork, and mishandled accounts. Communication and coordination were poor, leading many to think they were on their way to a solution, only to find that their homes had been foreclosed on and sold.
While the Servicing Settlement creates servicing standards for the five largest banks, we also needed industry-wide standards.
The new mortgage servicing rules accomplish this in two ways:
First, by requiring improved, plain-language communication, they will prevent borrowers from being caught off guard or getting the runaround from their servicers.
Second, they create added protections for borrowers who are having trouble making their mortgage payments.
New protections for non-performing loans ensure that mortgage servicers are giving borrowers information about their available options -- avoiding unnecessary foreclosures -- which is in the best interest of the borrower, the lender, and indeed our entire economy.
Servicing standards, while important and effective, must be supported by consistent, industry-wide guidelines governing the origination of mortgage loans.
That’s why CFPB has taken another important step by publishing a Qualified Mortgage rule.
By establishing minimum standards for what qualifies as a consumer’s ability to repay a mortgage, the CFPB is taking a major step in ensuring that we end reckless lending practices like inappropriately using low- or no-documentation loans and placing consumers in loans they cannot afford.
These standards will protect taxpayers by ensuring that homeowners are given sustainable mortgages, with straightforward terms and obligations that that they can meet -- something we all strive for.
Indeed, the rule recognizes the need to ensure that responsible, affordable mortgage credit remains available to consumers who are able to pay back their loan.
The CFPB has done a commendable job of coordinating with all relevant federal agencies affected by this rule. Going forward, it will be important for the Bureau to closely monitor the implementation of the QM rule and strike the right balance between consumer protection and credit availability.
It is also critical that we properly coordinate QRM with QM.
Going forward, we should be looking for best practice, industry-wide standards that support our broad range of goals.
We’re taking the same approach to GSE reform -- rather than focusing exclusively on bringing back private capital or protecting taxpayers, the Administration is pursuing additional goals such as preserving the 30-year mortgage, maintaining access to credit for all households, and keeping the market stable.
Taking this broad, long-term view can make consensus more challenging, but I believe it’s worth the extra effort.
Despite the fact that the GSEs are now earning profits and paying back Treasury, GSE reform remains and important issue that we look forward to engaging on with the NAR.
These standards and reforms will help homeowners obtain mortgages with straightforward terms and obligations that both lenders and borrowers can clearly identify, providing for a more sustainable, stable mortgage market going forward.
And that’s something we can all get behind.
Recovery: Moving Forward
Finally, I’d like to focus on another critical element for ensuring a stable housing market -- access to information to help consumers make informed decisions.
Since President Obama took office, HUD-approved housing counselors have assisted more than 8.5 million families.
Whether it’s the decision to buy or rent, improving financial literacy, protecting families’ rights against discrimination, or even preventing homelessness, housing counselors play a critical role in helping families make smart, informed choices.
I know all of you understand just how that role is, be that’s what you do every day.
And with a recent HUD study showing that 7-in-10 at-risk homeowners who worked with a housing counselor got the help they needed to keep their home, it’s clear that housing counseling works.
That’s one reason we urged states to use the payments they received from servicers as part of the National Mortgage Servicing Settlement to fund housing counseling efforts. And as of now, states have committed nearly a quarter of a billion dollars to housing counseling, making it one of the single largest counseling investments in history.
At HUD, we’ve launched a new Office of Housing Counseling -- elevating its visibility and importance and working to integrate housing counseling across HUD’s various programs.
And we’ve just announced nearly $20 million in Comprehensive Housing Counseling Grants to fund housing counseling across the country -- providing expert, unbiased guidance and information to help families and individuals meet their housing needs and improve their financial situations.
Recovery: Working Together
There is no single innovation, program, or regulation that will restore the housing market or our economy over night. But our goal is to find the right combination that will yield a robust and responsible system of housing finance for this country.
Supporting proven programs like housing counseling, coupled with better regulation, sufficient enforcement capabilities, and appropriate FHA policies will ensure that not only does this economic and housing market recovery continue, but that it extends to all communities.
In order to make that happen we are going to need your help in the coming months as we make the case for necessary funding and avoiding extreme measures that might slow our fragile recovery.
While we may have some differences on specific initiatives, I know that we want the same things:
Informed borrowers who are ready to make a smart investment when they purchase a home.
Regulations that protect taxpayers, borrowers, and lenders alike, and reduce risks across the board.
And a strong, stable housing market, with access to credit for all eligible borrowers.
As Realtors, we count on you to help people find their piece of the American Dream--their pathway to the middle class.
And I hope we can count on you to help us keep that dream alive.