As prepared for delivery
WASHINGTON - Good afternoon. Thank you, Barbara, for
your introduction and thanks to all of you for inviting me to join you today.
Before I begin, I want to acknowledge the tremendous leadership that NCSHA has
demonstrated over the past few years as we have worked to relieve stress in
housing markets. State housing agencies have been key partners in preserving
access to mortgage credit and helping struggling homeowners in the wake of the
financial crisis.
I see from your agenda that you have a great lineup of
people scheduled to talk with you about the ongoing work in Washington related
to the housing market and to the housing finance system: Secretary Donovan and
members of his team at the Department of Housing and Urban Development; Acting
Director DeMarco from the Federal Housing Finance Agency; and a number of
congressional representatives as well.
Rather than covering some of the same ground that these
speakers are likely to cover, my remarks focus on a couple of the areas where
Treasury has a specific role working with state housing agencies. I would
like to talk in particular about our joint efforts on the New Issue Bond
Program, the Temporary Credit and Liquidity Program, and the Hardest Hit Funds.
But before getting into the details of those programs, I
think it is useful to take a step back and look at the overall state of the
economy and the housing market. As all of you know, housing, jobs, and the
strength of the economy are inextricably linked. We see this at the
national level, and I am sure you see and feel this keenly at the state level
as well, particularly in those states that have been hardest hit by the housing
crisis.
As Barbara noted, I serve at the Treasury as the Under
Secretary for Domestic Finance. While this is a broad role, a key
responsibility is working on housing finance issues. Housing plays such
an important role in our financial system that we cannot fully restore the
strength and stability of our financial system and our economy without
addressing and fixing some of the challenges that the housing market continues
to present.
Many of the problems that we continue to face today in the
housing market are the fallout of the 2008 financial crisis and the excesses
that fueled it. Four years ago a global financial crisis ravaged our
markets and our economy with a force unlike anything we have seen since the
Great Depression. In the United States a number of federal entities - including
the Treasury, Federal Reserve and the Federal Deposit Insurance Corporation –
had to undertake extraordinary measures to stabilize the financial markets and
restart economic growth.
Support for the housing finance system, which was completely
broken and a major contributor to the financial crisis, was a key part of the
financial crisis response. Fannie Mae and Freddie Mac were placed into
conservatorship, Treasury and the Federal Reserve provided essential support to
the hemorrhaging mortgage market by purchasing agency mortgage-backed
securities, and we also provided assistance to state housing agencies through
the Temporary Credit and Liquidity Program and the New Issue Bond Program.
The American Recovery and Reinvestment Act also helped
provide critical support for Low-Income Housing Tax Credits, a key tool for
supporting the construction of affordable rental housing. As investor appetite
for low-income housing tax credits dried up in the midst of the recession and
housing crisis, the Section 1602 program, also known as the “exchange program,”
allowed state housing finance agencies to exchange all or a portion of their
2009 tax credit allocation for cash. With the help of NCSHA, Treasury
worked closely with 55 state housing finance agencies to implement the program.
Treasury awarded nearly $5.7 billion to these state housing
finance agencies to spur the development of affordable housing and create and
retain jobs. Housing finance agencies, in turn, invested the funds with
over 400 developers for constructing or rehabilitating almost 1,500 housing
developments with more than 89,000 rental units. Developers estimated
that more than 116,000 direct jobs – carpenters, plumbers, electricians,
masons, tile workers, landscapers, etc. – were involved in the construction and
rehabilitation of the housing units and common areas.
The 1602 program was a critical stopgap; investors returned
and are once again using low-income housing tax credits.
Treasury recently provided a broader update on the financial
stability programs, including not only the Troubled Asset Relief Program known
as TARP, but also the mortgage backed securities purchase program, support for
Fannie Mae and Freddie Mac, and programs implemented by the Federal Reserve and
FDIC.
At this point we expect these programs to generate an
overall positive return, with some areas generating profits that exceed losses
in other programs. This is an outcome that no one anticipated in the darkest
hours of the financial crisis and represents a very good result for U.S.
taxpayers.
But it is important to remember that much additional work
remains to be done and that the true costs of the financial crisis and
follow-on recession are much larger than the cost of the financial stability
measures. After weathering the deepest recession since the Great Depression we
have still not fully recovered. While Americans have experienced some rebound
in retirement savings, for example, the value of their home equity – a major
component of household wealth – is still less than half the level of its
pre-crisis peak. While growth in the labor market appears to be gathering
momentum, the national unemployment rate at 8.2% is still unacceptably high,
and in some states even higher. Real GDP has only recently returned to its
pre-crisis levels.
The housing market in particular remains weak, although it
has begun to show some signs of stabilization. Housing starts and home sales
have trended higher since last summer but remain near record low levels.
Historically low mortgage rates and the decline in home prices have improved
measures of housing affordability, but demand remains weak. Negative
equity has also prevented many homeowners from being able to take advantage of
these low rates by refinancing, with roughly one in five mortgage holders
underwater on their mortgages. Other negative factors remain as well, including
the large stock of homes in the foreclosure pipeline and the lack of sufficient
private capital in the housing finance system to take the place of the outsized
government role in the wake of the financial crisis.
We have recently been focusing on a number of measures to
address these challenges:
Broadening access to
refinancing for homeowners who are current on their mortgage payments but may
be underwater on their loan. This initiative is known as HARP 2.0 and was
rolled out in December 2011.
Developing a national program
for Fannie and Freddie to dispose of foreclosed properties on their balance
sheets to meet rental demand; and
Continuing to provide and improve upon hardship assistance,
like the Hardest Hit Funds that reach the states that have been most impacted
by the crisis.
We have also asked FHFA to allow the GSEs to participate in
the principal reduction alternative of the Home Affordable Modification Program
known as HAMP. Given the large percentage of outstanding mortgages that are
currently backed by Fannie or Freddie, it is important that the GSEs
participate in this program. As you know based on the programs that you
have implemented in your states, principal reduction can be a useful tool to
provide sustainable modifications for underwater homeowners, reducing the
likelihood that they will lose their homes.
Principal reduction is an important tool to have at our
disposal as we continue to repair the damage caused by the housing crisis. In
some targeted cases, principal reduction makes economic sense for both the
homeowner and the lender – helping reduce investor losses and preventable
foreclosures over the long term. That’s the view of not only the Administration
and others within government, but also many private market participants. The
most recent quarterly survey from the Office of the Comptroller of the Currency
showed that, of those mortgages held by private investors, nearly one in five
that were modified reduced principal. Indeed, in the each of the last six
months, more than 40 percent of non-GSE mortgages modified through HAMP
included principal reduction.
We believe it would be valuable to expand the availability
of this option to additional homeowners, including those with mortgages backed
by Fannie and Freddie. It would not only help stabilize communities, but
also reduce losses to the GSEs and the taxpayer. As Secretary Geithner has
recently said, the number of families who would benefit is not overwhelmingly
large, but is significant and “any time we think there’s a way to help more
people stay in their homes, help facilitate transitions to other forms of
housing, help repair and heal the damage, we’re going to keep doing that.”
Housing Finance Agency Initiative:
Let me now turn to an existing Treasury program that works
towards those goals and that you are all familiar with – the Housing Finance
Agency Initiative and its two components, the New Issue Bond Program – NIPB –
and the Temporary Credit and Liquidity Program – TCLP.
In 2009, State and local HFAs were issuing less than 25% of
their historical average bond sales, with many HFAs forced to shut down lending
entirely. In response to this market disruption, the participants in the
HFA Initiative – Treasury, FHFA, Fannie and Freddie, and the HFAs – worked hard
to align their interests and create a program that has turned out to be a
successful and innovative partnership to help HFAs resume their important role
in affordable housing finance.
As you well know, over the last 2 years HFAs have used NIBP
to support many activities, from buying a first home; preserving affordable
rental housing, purchasing and repairing foreclosed properties; to providing
housing to the elderly, the homeless, and people with special needs. We
believe the funding provided by Treasury, through the GSEs, has had a
significant positive impact.
Overall, 92 State and local HFAs have participated in
NIBP. Of the $15 billion in funding allocated under the program,
approximately 80 percent has been used or is committed to finance new housing
bonds or refund outstanding obligations. HFAs have quietly but
efficiently financed over 100,000 single family units and over 24,000 rental
units through the program. As one former colleague at the Treasury put
it, “the HFA Initiative is the most successful housing program that no one has
ever heard of.”
NIBP was originally intended to be a one-year program, but
it has been extended twice to allow HFAs more time to deploy the funding.
Under the most recent extension, HFAs had until April 2 to notify Treasury
whether they intended to use their remaining funds in 2012 or return the funds
and exit the program. I’m glad to report that only $460 million was
returned by State HFAs, leaving them with $2.4 billion to use. Of the 32
State HFAs with NIBP funds remaining at the end of 2011, 30 have opted to
continue in the program, indicating a confidence they can deploy the remaining
funds.
The Temporary Credit and Liquidity Program originally
provided 12 HFAs with credit and liquidity support for $8.2 billion in Variable
Rate Demand Obligations or VRDOs, stepping in when bank credit facilities dried
up. Currently, seven HFAs remain in the program, and Treasury’s aggregate
exposure is down to about $5.2 billion, as obligations have been paid down or
replacement liquidity providers have been found.
The TCLP facilities are being extended through 2015, and
participating HFAs must develop detailed plans to reduce their exposures in the
interim. The HFAs need to formulate and execute thoughtful but aggressive
exit strategies over the next three years because TCLP cannot be extended
beyond 2015. Both the authority and the appropriation for TCLP, which
were contained in the Housing and Economic Recovery Act of 2008, have now
expired. HFAs remaining in TCLP must use all available tools to pay down
their VRDOs, convert them to obligations that do not require liquidity support,
or find alternative sources of liquidity. We have received preliminary
plans from the seven HFAs remaining in TCLP, and along with the GSEs, have been
in close contact with their CFOs. We expect to reach agreement on final
plans in the coming months and will include elements of the plans in the terms
of the TCLP extension.
While successful, both NIBP and TCLP are temporary programs
designed to address a short-term market failures in the traditional HFA
business model. Almost three years into these programs, however, we face
the question of whether the current outlook for HFAs still represents a
temporary disruption, or a new equilibrium that will require HFAs to change
their business model. We all need to think critically about this subject
and the future of HFAs.
In evaluating the question, Treasury recognizes both the
strengths and the challenges facing HFAs. Among the HFA’s strengths is
unmatched local knowledge necessary to meet the unique needs of specific
communities, a superior track record in minimizing defaults among first-time
home buyers, the ability to combine effective counseling and proactive
servicing with underwriting activities, and strong performance in multi-family
portfolios.
Challenges include the continuing imbalance between
tax-exempt funding rates and market mortgage rates, limited investor base for
mortgage revenue bonds, high liquidity fees for variable rate debt – which
still constitutes one-third to one-half of all borrowing for some HFAs – and
the financial deterioration of traditional HFA counterparties providing
insurance and investment contracts.
In addition to these strengths and challenges, of course,
there is the larger question of how housing finance reform will affect the
affordable housing delivery system in which HFAs operate.
It will take time for the markets and policy makers to work
through these issues. Treasury’s experiences over the last few years with
NIBP and TCLP have led not only to valuable information and perspectives, but
important professional relationships with HFAs and the financial institutions
supporting them. We look forward to working with NCSHA and the HFA community to
discuss options for how HFAs can continue their crucial mission of providing
affordable options for homeowners and renters.
Hardest Hit Fund:
The success of the partnership with your organization and
the HFAs with the programs I’ve just discussed led us to establish the Hardest
Hit Fund (HHF) in 2010. As part of the Administration’s overall strategy for
restoring stability to housing markets, HHF provides funding for state HFAs to
develop locally-tailored foreclosure prevention solutions in areas that have
been hard hit by home price declines and high unemployment. From its initial
announcement, this program evolved considerably from a relatively small, $1.5
billion initiative focused on HFAs in the five states with the steepest home
price declines to a broader-based $7.6 billion initiative encompassing 18 states
and the District of Columbia.
State HFAs have responded by developing a range of programs
tailored to their markets including programs that provide bridge loans to
unemployed homeowners, cure arrearages for homeowners who experienced a prior
hardship, provide principal reduction through a modification or second lien
extinguishment, and assist homeowners looking to transition out of their home
with a short sale or deed-in-lieu of foreclosure. Through March 2012, state
HFAs have reported assisting more than 45,000 homeowners and another 38,000
homeowners are under review for assistance.
But getting to this point was challenging as state HFAs, who
were largely in the business of providing financing, had to retool and develop
systems and infrastructure to reach at-risk homeowners and operate their
programs. For many HFAs, this meant hiring new staff and bringing on key
partners, such as housing counseling organizations, to help them market their
programs and provide intake and eligibility screening services. The pace of
spending on HHF programs has picked up momentum in the first quarter of 2012,
and we look forward to the full deployment of this assistance to homeowners.
And the value of this work – both by HFAs and their partners
– cannot be overstated. HFAs know their local housing markets, and a
particular strength is their responsiveness to the people they are working to
assist, serving as a constant touch point for homeowners and making adjustments
to programs and operations based on lessons learned and addressing the changing
needs of homeowners. Over the course of the program, HFAs have made their
programs more flexible, recognizing the need to encapsulate a wide variety of
homeowner hardships and experiences. We support this approach and have worked
closely with HFAs to adapt their programs quickly and make them as effective as
possible.
Beyond this approach, Treasury also believes that the value
of HHF lies in the states’ investment in infrastructure and longer-term
capacity to provide foreclosure relief. In addition to selecting and training
networks of housing counselors, state HFAs are using these funds to create
homeowner portals to apply for assistance and hire underwriters and other staff
to review and approve applications. As a result of this investment, each state
HFA has developed a deep knowledge base that will extend beyond the life of the
program. Even now, as state attorneys general are weighing how to distribute
funds from the foreclosure settlement, state HFA staff have been key
consultants on how to effectively use those funds. Some state HFAs even report
that foreclosure settlement dollars will leverage the infrastructure of their
HHF programs – utilizing staff, systems, marketing approaches, and partnerships
– to provide foreclosure relief for homeowners who are struggling, but not
eligible for HHF-specific assistance.
This crisis was unprecedented and we knew that the solutions
to relieve stress in the housing markets needed to address the evolving nature
of this crisis as well as modern-day social, political and economic
constraints. As a key collaboration between federal and state authorities, HHF
has led the way in incubating these approaches, and the Treasury team and I
look forward to working with you to identify best practices over the coming
months and years.
*****
I would like to conclude by expressing my support for your
work and the vital role you play in helping homeowners in your states.
Last week, I visited the Nevada Hardest Hit Fund at their offices in Las Vegas
and had the chance to hear about the work they are doing and the challenges
they are facing in one of the states that continues to suffer the most from the
housing crisis. Like all of you, they are working hard to find the most
effective ways to help homeowners in their state make the best of an extremely
difficult situation. While it is certainly important for us to keep
working on developing and implementing the best policies that we can at the
federal level, we are well aware that each of you is fifty times closer to the
circumstances and best positioned to identify and address the needs of the
markets and families you serve on a daily basis.
No single federal or state or private sector program will
provide the solution to all of the challenges we face in restoring the health
of our housing system. But it’s important for all of us to remember that
every time one of your programs provides assistance that helps keep a family in
their home, find affordable rental housing, or buy a new home, it is not only a
small step towards repairing our housing market and rebuilding our economy, it
is more importantly a giant step for that family.
Thank you for the work you do every day and thank you again
for inviting me to join you. I look forward to continuing to work with
you to restore the health of our nation’s housing
system.
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