Remarks of Secretary Shaun Donovan at the National Association of Home Builders’ Board of Directors Meeting.
Thursday, February 6, 2014
As prepared for delivery
Thank you very much, Rick (Judson), for that kind introduction and for your remarkable leadership as Chairman.
I’d also like to recognize your Chairman-Elect, Kevin Kelly. He’s going to do a great job, and I look forward to working with him in this new capacity.
Finally, I want to thank all of you, NAHB’s Board of Directors, for inviting me here today. It’s wonderful to see so many friends and partners at this early hour, an especially remarkable feat after a night in Las Vegas.
And I’m deeply grateful to be with you this morning.
Partners for Progress
As I was preparing my remarks, I thought back to the first time I was with you as HUD Secretary. It was early 2009 and the mood in the room, and in the country, was much different than today.
We were confronting a once-in-a-lifetime crisis that was devastating families in ways we had never seen before. I remember reading a piece about a man named Charlie Ryan from Minnesota who, after 30 years as an electrician, got laid off.
After months of trying to find any job, in any field he could, Charlie said “after a while, you avoid places and people … you go from feeling confident to not being able to run the third shift at the Dairy Queen.”
This was the kind of pain being experienced by construction workers, builders, homeowners and so many more when we met in 2009. This industry had been knocked off its feet, but it didn’t stay down.
It was determined to fight and I remember at our first meeting making a simple declaration: that since housing was at the heart of the collapse – we were going to make sure that it was at the heart of the recovery.
In the years since, all of us in the Administration have been proud to partner with you to do just that. That’s why we’ve helped roughly 8 million responsible families modify their mortgage. That’s why we allocated $7 billion to address foreclosed and abandoned properties in all 50 states through our Neighborhood Stabilization Program.
That’s why, when other financial institutions stopped lending, the Federal Housing Administration stepped up to keep credit flowing. And that’s why we used a variety of tools to save the Low Income Housing Tax Credit market, keeping affordable homes in the pipeline and construction workers on the job.
As a result of these and other efforts, the market is healing. Last year, housing starts were at their highest levels since 2007. Home prices rose 11 percent from the year before, the highest annual increase since 2005.
From the beginning of 2012 to the third quarter of last year, the number of underwater borrowers fell by nearly half, lifting 5.7 million homeowners above water. During that same period, homeowners have seen $3.4 trillion in home equity restored.
Bottom line: progress is occurring across the country. I thank you all for the critical role you’ve played in this comeback. During the tough times, you stood strong. You were resilient. You innovated.
All this work played a big part of the recovery because when you are building: people are working, opportunity is expanding, communities are strengthening and our economy is growing. And today, I want to talk about what the Administration will continue to do to support your work.
Specifically, I want to talk about our efforts to work with the private sector to create jobs so more families can look for that first home; to ensure that these families can access credit when they are ready to buy; to help you meet growing demand by making it easier to do business with HUD; and, lastly, to build a rock-solid housing finance system for the future by getting reform done.
First, I’d like to talk about our work to help families strengthen their financial futures. When President Obama took office, the U.S. economy was losing 800,000 jobs a month and putting people back to work was his top priority.
That's why, in addition to our work to turnaround the housing market, he rescued an auto industry that has come roaring back. He wanted more American businesses to compete in the global economy and now we are exporting more services and goods stamped “Made in America” than ever before.
He’s worked in unprecedented ways to get global businesses to invest in America and create jobs here. And all these efforts have paid off.
Businesses like yours have created 8.2 million new jobs over the past 46 months. And as the President said in his State of the Union address, he is determined to build on this progress by making 2014 a year of action.
Specifically, he has put forth a series of concrete proposals to be taken—both with and without Congress—to strengthen the middle class and expand opportunity for those trying to get there.
That’s why he has raised the minimum wage for Federal Contract Workers, giving more families the chance to save and buy that first home.
He is enhancing training programs to help Americans get the skills they need to work for businesses like yours and build all those cutting-edge products being displayed at this show. He is partnering with CEOs to put the long-term unemployed back to work so that they can afford that rental unit in one of your multifamily constructions.
He is pushing for investment in our infrastructure so that people can get jobs rebuilding roads and upgrading ports, work that can give families the chance to upgrade their living conditions.
He is fighting for immigration reform, which would create a new pool of millions of potential homeowners, and pump hundreds of millions in sales, income and spending into the U.S. housing economy.
In total, he is taking actions that would expand opportunity and make communities stronger. This is good for your industry and for our nation as a whole, so I ask you to support the President’s agenda in this year of action so we can create new jobs for all those ready to work.
But of course, this is just one part of the equation. Even if families bolster their financial situations, they still need to have access to credit if they want to buy a home. As we all know, before the crisis, credit was too easy to get. Now, it’s too hard to obtain for qualified Americans.
According to the Federal Reserve, from 2007 to 2012, mortgage lending to borrowers with credit scores over 780 fell by a third. Loans to those with scores between 620 and 680 fell 90%. Clearly, action was needed, which is why we’ve been working in a variety of ways to get credit to those ready to own. One way is by simplifying the regulatory environment for lenders.
Case in point is the qualified residential mortgage rule. It’s the result of six federal agencies, including HUD, coming together to make QRM equal to QM in order to simplify the mortgage origination process.
This is a direct result of the feedback we’ve received since the first proposal in 2011. Now our rule avoids greater complexity and overly restrictive down payment requirements that could serve only to exclude creditworthy borrowers.
Some of our critics have called this a dilution of our rule. But as you know, the Consumer Financial Protection Bureau’s QM rule itself is a very strong measure. By aligning these rules, we are setting a clear enforcement standard for the market. And we are confident that our actions have found the right balance between responsibility and opportunity moving forward.
Another way we want to ensure credit is available for responsible low- and middle-income families is by strengthening the Federal Housing Administration for the long term. As you know, FHA has historically been a source of hope and opportunity for underserved communities.
And during the housing crisis, it helped keep the dream of homeownership alive for families by providing much needed liquidity to the nation’s mortgage finance markets. We want to make sure that future generations have this same opportunity by ensuring FHA is strong for years to come.
That’s why we have strengthened underwriting standards and our portfolio, resulting in dramatic improvements. FHA’s Mutual Mortgage Insurance has gained $15 billion in value over the last year.
The actuary anticipates that the Fund will return to the required two percent capital reserve ratio in 2015, two years sooner than projected in the 2012 report. We also continue to look for innovative ways to get credit to those ready to buy and ensure these transactions have the best possible chance to succeed.
Through our Homeowners Armed With Knowledge (HAWK) initiative, we are working to embed housing counseling throughout the FHA origination and servicing process. Through updated Manual Underwriting guidance and the Back to Work initiative, we are ensuring lenders look at the whole financial picture when underwriting a loan.
This helps those who may have experienced damaged credit due to the crisis—but are fundamentally creditworthy borrowers—to be considered for a mortgage. In total, FHA continues to fulfill its mission of helping open the doors to homeownership for a wide-variety of qualified buyers.
Our actions are working. For example, it’s been reported that Wells Fargo has dropped their FICO minimum for FHA from 640 to 600.
I strongly urge other lenders to follow suit. It is time to give every responsible family the opportunity to own. Now, as we work towards this goal, I know one area of concern for you is the new loan limits FHA implemented on January 1st.
To be clear: these changes were required by statue under the Housing and Economic Recovery Act of 2008 – and we have a very limited ability to make changes. The good news is that we expect the impact of the new loan limits to be modest, with an average contraction in lending of about two percent of the originations in any given MSA.
In addition, this reduction is aligned with the administration goal of reducing the government’s footprint and encouraging the return of private capital. However, we understand that some communities will be affected more than others, especially in areas where the cost of housing is high.
And I pledge that we will monitor the effect of the new loan limits while paying special attention to any harmful impacts on FHA’s ability to serve its mission.
Making It Easier to Work With HUD
Another critical part of achieving our mission is making it easier for you to do business with HUD. Take our multi-family office, for example.
When we started in 2009, the office was too slow to respond to your needs, which hurt development and jobs on the ground. In addition, our office faced a surge in activity, jumping from $2 billion in originations in 2008 to $18 billion last year.
That's why I've made it a priority to improve processing times and productivity – and our multifamily office has made huge strides across the board. Through our "Breaking Ground - Delivering Results" program, cycle times have decreased 50 percent in two of our most commonly used programs: 223(f) and 223(a)(7) – and our backlog has dropped 70 percent.
Through our Low Income Housing Tax Credit Pilot Program, deals are taking an average of only 86 days from receipt of the complete application to closing. With these faster turnaround times, we have closed on 19 projects since its launch in 2012.
And in the pipeline, we have an additional 86 projects that represent roughly 9100 units. Through the new centralized processing model we launched in July in the Office of Affordable Housing Preservation, transactions that used to take six months are now being done in six weeks for complex deals such as 236 de-couplings.
And to build on this progress, we are going to transform FHA's Multifamily Housing Office. As you know, the old model was just too complex to give you the service you deserve.
For example, when an employee needs approval to waive regulations, they should get that answer right away.
But under current conditions, they can wait weeks for an answer. So we've initiated this transformation simply because we can and must do better. Right now, we have completed the planning process, and expect to launch the transformation in the next few weeks.
Know this: when it's done, you will have a more nimble, efficient and effective office. And we are achieving this progress at all levels in order to support the important work you are doing to fuel the economic recovery.
But I know none of us are content with the gains we’ve made thus far. After all, if the housing market were to collapse again, it would undermine all the progress we’ve made.
That is why we’ve got to ensure that a crisis of the magnitude we just saw never happens again by reforming our housing finance system.
Housing Finance Reform
Naturally, this will require action from Congress. Now, I know what you are all thinking: after all that’s happened in Washington in recent years: what makes Shaun Donovan think that there can be movement in this area?
First of all, we’ve started to see real bipartisan progress with the budget deal and the farm bill. And just yesterday, Senators Johnson and Crapo came out with a joint statement declaring that they are actively working on the strongest bipartisan bill possible.
It’s another reminder that housing, historically, has been an area of common ground. President Truman and Senator Taft worked together on the Housing Act of 1949.
Ed Brooke and Walter Mondale worked together to produce landmark housing legislation decades later. So there is real hope and it is time for all parties to finally make reform a reality.
Last August, the President outlined a series of principles that he believes should be at the core of the housing finance system of the future – three of which I want to highlight today.
The first is that private capital should be at the center of the system. We all know that current conditions—where government guarantees more than 80% of mortgages through Fannie, Freddie and FHA—are unsustainable.
The risks and rewards of mortgage lending have historically been in the hands of the private sector, and should continue to be in the future. So how do we structure reform to attract back private capital?
To start with, reform legislation should put private capital in a first loss position so that we can ensure that taxpayers are never again on the hook for bad loans and bailouts. That means winding down Fannie and Freddie in their current form.
As the President has said, for too long, their model was “heads we win, tails you lose.” We can change this by making a smooth transition of assets—the people and infrastructure—as part of government’s new limited and targeted role. And as we make this transition, we remain firmly focused on doing it in a way that doesn’t disrupt the credit market in the short-term so that our recovery can continue.
Second, the government role should be explicit and defined, as opposed to before when it was implicit. Right now, for example, because Fannie’s guarantee is not explicit – investors require 25 basis points of additional yield compared to Ginnie Mae, which carries an explicit guarantee.
An explicit and defined role would require the new entities to pay for the government insurance similar to banks paying for FDIC deposit insurance.
It also requires an expansion of the housing trust fund and the capital magnet fund so that the new system explicitly supports more affordable housing initiatives. Specifically on this last point, we’ve got to ensure that reform yields a major fund of $5 billion a year for the production of affordable housing, down payment assistance and a range of other goals that expand opportunity at all levels.
An explicit guarantee from the federal government makes possible the third principle of reform outlined by the President which is ensuring access to safe, responsible financing like the 30-year fixed rate mortgage market. As part of this work, we’ve got to shape a competitive marketplace by giving community banks and smaller lenders the same access to the capital markets as the big banks.
Six years after the financial collapse, it is time to get this and other critical aspects of housing finance reform done. The Senate Banking Committee has gone from the information-gathering phase to negotiating the details of reform.
The time to make our voices heard is now so we can spark some urgency. We need to let the Committee, the full Senate and House know that we want bipartisan legislative action early this year.
I look forward to working with you to keep up the pressure to put housing finance reform at the top of the legislative agenda. Businesses and families deserve nothing less.
As I get ready to close and take your questions, I can’t help but think about all that’s happened over the past five years. We have done remarkable work together to address historic challenges.
Again, I thank you, the Home Builders, for the leadership role you’ve played in this great comeback story. But, as we all know, this story is incomplete.
The last chapters have yet to be written. And it’s up to all of us to determine how it ends.
So let’s work together to ensure that these next chapters bring new jobs to Americans – as the President outlined in his State of the Union Address.
Let’s work together to expand access to credit and opportunity for all responsible families. Let’s work together to ensure that HUD, and other government partners, are working at their most effective for you so you can build communities and strengthen our economy.
And let’s work together to reform the housing finance system – once-and-for all. Are these goals ambitious? Yes. But NAHB knows how to build big and achieve great things.
So let’s work in continued partnership to make 2014 an unprecedented year of action.