As prepared for delivery
WASHINGTON - Thanks very much. It’s great to be here today. I believe that I was a charter member of AREUEA. I have given many presentations at this very spring conference in past years and some of my early research was published in the AREUEA journal. So it is good to be back in another capacity.
Some of you know, I am no stranger to housing and to the many challenges facing housing finance today. But what is unusual, and for me pretty special, is to find myself, not back at HUD for a third tour of duty, but at the U.S. Treasury Department, which is playing a leading role in helping repair the market and in the broader financial reform effort.
Treasury’s role reflects the depth and seriousness of the financial crisis and its impact on families, the economy, and the financial markets both domestic and abroad. It also reflects the Obama Administration’s determination to use all of the resources at its disposal to aid distressed borrowers and communities, and work to build a stronger, safer, fairer -- and ultimately more sustainable -- housing finance system.
Our work at Treasury focuses on three primary areas: near-term efforts to assist financially challenged homeowners; medium-term efforts to bring more private capital back into the housing finance market; and longer-term reform to create a more sustainable housing finance system. I would like to spend a few minutes discussing each of these issues, highlight a few areas where new data and research could be fruitful, and leave you with a few questions that we are currently working very hard at Treasury and across the Administration to address.
As you know, Treasury has been committed to finding ways to provide meaningful assistance to borrowers who were hit hardest by the financial crisis. Our mortgage modification program – or HAMP – has helped one million borrowers stay in their homes. Additionally, the program has provided a template for private lenders to help another three million borrowers receive mortgage modifications. Perhaps even more significantly, HAMP data could be used for a variety of relevant and timely questions being asked by policymakers, industry, and academics. For example, HAMP data could help identify the determinants of successful modifications for different types of borrowers. It could help answer whether rate or principal modifications are more appropriate and the role of moral hazard. These are issues we are grappling with now and can inform decisions about the structure of the future housing finance system, as well.
Treasury has also been actively promoting refinancing because interest rates remain at historic lows. Helping families refinance puts more money in their pockets and can make it easier for them to make their monthly payment. Since April 2009, more than 14 million homeowners have refinanced their mortgages – putting nearly $27 billion a year in real savings into the hands of American families and into our economy. Most recently, we worked closely with the Federal Housing Finance Agency to further streamline the process for those whose loans are guaranteed by the Government Sponsored Enterprises (GSEs) to enable more underwater borrowers to refinance into significantly lower-interest-rate loans.
While we have made substantial progress and the Administration has taken executive action to help millions of Americans take advantage of today’s historically low interest rates, more needs to be done. But these additional steps require Congress to take action. That is why the President is calling on Congress to expand opportunities for refinancing to responsible non-FHA and non-GSE borrowers who are current on their payments through a new program operated by the FHA.
Treasury also continues to push for harmonized short sale standards across the mortgage industry. Compared to a foreclosure, short sales can help stabilize house prices and minimize the damaging impacts of foreclosed properties where conventional loan modifications do not work. But too many short sales still fail or take too long because of conflicts with the second lien holder, or existing mortgage insurance. We have incorporated consumer protections and worked to reduce these impediments through Treasury’s foreclosure alternatives program. An alignment of short sale standards throughout the industry could greatly streamline and improve the process for all parties involved in short sales. Additional research on the effects of short sales – where they are working and the effects of avoiding foreclosures in those areas – is also an area that can help inform appropriate policy decisions.
In addition to our near-term housing efforts, the Administration is working hard to implement important reforms to the housing finance market so that we address many of the mistakes made during the lead up to the crisis. We’re also looking at ways to help shrink the government’s footprint in housing finance at a responsible pace and bring private capital back to the market. While many people are rightly focused on the long-term reform options, which I will discuss later, some of our medium-term efforts, are often overlooked. Putting these reforms in place involves a great deal of work and attention from a very talented Treasury staff that I have the pleasure of working with. Let me mention a few of these efforts that are currently underway.
For example, as part of its strategic plan, FHFA committed in February to gradually shift a portion of the mortgage credit exposure that the GSEs hold to private investors. Treasury is actively engaged in helping to make this initiative work. These arrangements could be structured as securities that would allow private investors to bear some of the credit risk that the GSEs normally hold. We believe that this initiative could help support our broader efforts to restart the private mortgage market, shrink the government’s footprint in housing finance, and protect the long-term interests of taxpayers. It can also help determine how the market values a credit guarantee on conforming mortgages, which is a question that many stakeholders and policymakers have been closely analyzing.
But this initiative also raises important challenges and questions which Treasury is helping FHFA and the GSEs to think through. For example,
How should such securities be structured in order to preserve the structure of the To-Be-Announced (or “TBA”) market?
What are the necessary tax and legal treatments of these securities?
And finally, how should the securities be structured so that they both reduce the risk profiles of the GSEs and taxpayer exposure, while maintaining their appeal to a wide investor base to yield competitive pricing?
Treasury and FHFA are also working together on the REO-to-rental initiative. This is an important effort to effectively transition properties to support increased rental demand in areas that have been particularly hard hit by the housing crisis. A pertinent question to study will be the effect of transitioning more properties to rental and its effect on both stabilizing home prices by reducing the number of homes that reach REO, as well as the effect on area rents.
Additionally, Treasury’s Office of Financial Research (OFR) is working with FHFA and others to collect, integrate, aggregate, and standardize mortgage data. This includes data generated by Fannie Mae and Freddie Mac for FHFA’s Uniform Mortgage Data Program as well as the Consumer Finance Protection Bureau’s Home Mortgage Disclosure Act data collection. OFR is a new office created by the Dodd-Frank Act to standardize and thus improve the quality of financial data available to policymakers and academics to help assess threats to financial stability.
In the lead-up to the crisis, investors and securitizers often lacked sufficiently detailed and accurate loan-level data to identify all the risks that they held. In the aftermath, transfer of titles and the lack of sufficient and standardized data, such as property identifiers have made appropriate modifications and workouts even more challenging.
Data transparency has also influenced representation and warranty liability – an issue that continues to have serious implications for credit availability. We expect that this initiative will eventually help improve many of these areas where data and information transfer plays a critical role in making the housing finance market more transparent, stable, and sustainable.
We also hope to make the resulting improved data more available and more accessible to the academic and policy communities, while protecting individuals’ privacy. This will help to study risks by lowering the barriers to obtaining and working with such mortgage data.
As I mentioned at the outset, Treasury is also focused on longer-term reform efforts needed to strengthen our nation’s housing finance system. Indeed, this was one of the crucial areas that I’ve been charged with working on in my position as Counselor to the Secretary. With all of the responsibilities we have for housing finance, we are keenly focused on encouraging more responsible underwriting and market practices, preserving a liquid secondary mortgage market, and better serving families.
We believe Americans should have a range of housing choices that make sense for them and their families. We believe that the 100 million Americans who rent should have a range of affordable options, and that we must ensure there is capacity for those with the credit history, financial ability, and desire to own a home to take that step. And we believe that lower-income Americans, who are burdened by the strain of high housing costs, should receive a helping hand.
As you no doubt recall, Treasury and HUD released a White Paper last year on housing finance reform that put forward three possible courses for long-term reform.
- Option 1 -- where the majority of the housing finance market is supported by private capital and the only government involvement would be limited to FHA and other programs narrowly targeted to creditworthy lower- and moderate- income borrowers.
- Option 2 – which builds on Option 1, with a guarantee mechanism to scale up during times of crisis as a backstop to ensure continuing access to credit during periods of market stress; this countercyclical guarantee would be in addition to FHA’s role and other targeted programs available at all times for lower- and moderate-income households.
- And Option 3 – where catastrophic Federal Government insurance would stand behind significant private capital for a targeted set of mortgages; this federal role would also be in addition to FHA’s role and targeted programs for lower- and moderate-income households.
All three of these options share at least four common goals. First, government support should be transparent, explicit, and limited. Second, private capital should be the primary source of mortgage funding and bear the burden for credit losses.
Third, FHA programs and other targeted assistance that help low- and moderate-income families and other underserved groups should continue.
Fourth, we must have strong and consistent standards across the mortgage market for capital and oversight. These changes will help build a more level and competitive playing field for all housing market participants, which, in turn, will be better for both borrowers and the taxpayer.
Since releasing our white paper last year, a wide variety of stakeholders proposed plans under these three options. These proposals have received plenty of scrutiny within Treasury. But no matter how thoughtful any plan, the deeper you dig beneath its top-line description, try to understand all its inter-related parts and ask second- and third-level questions, one quickly realizes the challenges and complexities of the reform process, and sees a dulling of the bright lines among options.
To give you a sense of why I think this way, let me spend the remainder of my time discussing some of the critical questions we have been seeking answers to about various plans put forth.
Some of these questions are common to a wide variety of long-term housing finance proposals:
- First, underwriting standards. In a Qualified Mortgage (QM) world, where lenders must verify ability to repay, what underwriting standards should be required for single family mortgage loans to be eligible for government liquidity and funding support?
- Second, what would FHA’s probable footprint and taxpayer exposure look like in such a world? For example, are there risks that the government in fact takes on more risk through this channel if support through FHA is not appropriately targeted?
- Third, how would multifamily rental be supported so ownership is not disproportionately favored over rental?
- And finally, concentration risk. How should we prevent the concentration of too much mortgage-related risk among various market participants, including lenders, servicers, and investors to help encourage a safer and more sustainable market?
Other questions are specific to a given housing finance proposal.
For an Option 1-type model:
- Can broad availability of the 30-year fixed-rate, pre-payable mortgage be preserved?
- If so, how tight would the credit box and required spread have to be to give investors comfort in carrying the duration and credit risk for such loans without a federal backstop?
- In such a model, would taxpayer exposure to the mortgage market – rather than being reduced – simply shift to federally insured depository institutions and the FHA;
- What are the consequences if private mortgage lending freezes during periods of economic stress?
For an Option 2-type model:
- How would a springing guarantee be effectively structured?
- How would we handle a dormant government role in most times so the skills and systems needed for the springing government guarantee during stressful times are available and reliable?
And for an Option-3 type model:
- What are the appropriate governance structures, capital standards, and risk management requirements for privately capitalized entities that would assume the first loss ahead of any catastrophic government reinsurance?
- How would we design this type of system to support a competitive playing field for many sources of mortgage finance? Are there specific capital standards or other limitations that can prevent consistent preferential pricing for one channel over another? And,
- How should such a system be regulated, and how much should the private sector be charged for the government reinsurance premium.
I want to close by making three points: First, if not properly constructed, any option for reform can create potential taxpayer exposure to the mortgage market. Therefore, thoughtful and effective design under any option is critical to helping ensure that we protect taxpayers and minimize that exposure – both direct and indirect – while still meeting our objectives.
Second, while broad consensus is hard, bipartisan support and compromise is imperative if we are to achieve durable and lasting reform.
Third, rigorous empirical and scholarly research will be essential to informing decisions throughout the comprehensive reform process in order to establish a more stable, fairer, and lasting system of housing finance.