As prepared for delivery
LAS VEGAS, NEVADA - Today, as we look around and take stock of a number of
encouraging developments in the nation’s housing market, it’s easy to forget
where we were only a few short years ago.
Treasury and the Administration
had to take bold and unprecedented actions to stabilize the housing finance
system and stem the dramatic fall in home prices in the midst of the worst
financial crisis since the Great Depression.
Indeed, the situation necessitated
an around-the-clock, all-hands-on-deck effort, which often required making
tough decisions that weren’t politically popular. But these actions were
nonetheless essential in preventing even deeper damage to the housing market –
along with the investments of countless investors and the savings of millions
of American families.
We worked with Congress to
implement tax credits for first-time homebuyers. We bolstered state and local
housing agencies with borrowing assistance so they could continue to lend. We
supported neighborhood stabilization, community development and housing
We introduced mortgage
modification and refinancing initiatives that not only helped families stay in
their homes, but also helped transform a mortgage servicing industry that was
woefully unprepared for a crisis of this scale.
Treasury and the Federal Reserve
committed substantial financial support to help keep mortgage markets liquid by
purchasing agency mortgage-backed securities.
Given the scale of the damage, we
knew there was no easy fix. At the time, many questioned whether federal
intervention could be successful, or was even necessary. But it has now become
clear that our actions helped prevent a further free-fall in home prices and
were critical in averting an even more severe, protracted housing crisis.
We know that many of these actions
were not popular. But overall, our actions gave markets the confidence they
needed to continue providing mortgage funding through the depths of the crisis,
which helped stabilize financial markets, improve the risk profiles of many
legacy mortgage portfolios, and support homeowners across the country.
Since the darkest days of the
crisis, we’ve made tremendous progress. Fewer borrowers are falling behind on
their mortgage payments or entering foreclosure. Distressed properties and
shadow inventories are also declining.
A majority of housing market
indicators have reversed their declines. Housing starts and home prices
continue to recover. Just this morning, the newly released S&P/Case-Shiller
home price index for the 20 largest cities shows that home prices in November
increased 5.5 percent compared with a year ago – the largest year-over-year
increase in more than six years and the sixth straight month of year-over-year
Housing has contributed positively
to GDP growth in each of the last six quarters, and forecasters expect that it
will continue to be a positive force in growth, as new residential construction
continues to pick up.
Yet, despite this encouraging
news, Treasury and the Administration have not lost sight of the fact that
major challenges remain. Although we’ve achieved significant progress, many
homeowners continue to struggle – particularly in some of the hardest-hit
communities and regions.
We have three key items on our
agenda that aim to alleviate the pain of these hardest-hit communities and
First, we must continue helping as
many responsible borrowers as possible refinance into affordable mortgages by
taking advantage of today’s historically low interest rates.
So far, more than 15 million
borrowers have refinanced, and since its introduction, HARP has helped more
than 1.8 million underwater homeowners secure a lower-cost mortgage – putting
more than $27 billion a year in real savings into the hands of American
families and into our economy.
However, as you know, HARP is
limited only to GSE loans, and with interest rates at their lowest levels in 50
years, we can do more.
That is why the President put
forth a plan to open up refinancing to millions of families, helping
responsible homeowners seeking relief from high monthly payments save thousands
of dollars a year on their mortgages and those struggling under the weight of
We must expand streamline
refinancing to families whose loans are not guaranteed by the government.
Many of these loans are held in
non-agency trusts, so legislation that gives these high-interest borrowers in
PLS trusts the ability to refinance into lower-cost loans could be especially
A substantial portion of these
loans – approximately 30 percent – are higher-risk, interest-only or balloon
loans that could pose a greater risk of default.
However, we will also consider
non-legislative means at our disposal to help responsible non-GSE homeowners
access these low rates. To be the most effective, as well as address investor concerns, the legislative
route would be preferable to using existing Making Home Affordable program
Legislation would facilitate a
refinance, whereas under our existing authority, Treasury could only modify the
most deeply underwater loans and pay investors for some amount of forgone
Second, we continue to take action
on several items that address the plight of communities that are still
suffering from the aftermath of the housing crisis.
Our Hardest Hit Funds program,
which provides financial support to the 18 hardest hit states and the District
of Columbia to develop locally tailored programs to assist struggling homeowners, is
gaining traction, and we will continue working with states to ensure that their
programs reach those in the greatest need.
Additionally, we will look for
ways to help consumers repair their credit and regain their footing in the
housing market and support neighborhood stabilization.
Third, and perhaps most
importantly for the long-term future of the housing finance market, we seek to
enhance the conditions for private capital to serve a greater role in taking on
mortgage credit risk.
We believe a housing finance
system that facilitates a paramount role for private capital – subject to
strong standards for oversight and consumer protection – is one that will best
serve the needs of homeowners and taxpayers alike.
As many of you know, the United
States government, through the GSEs, FHA, VA and USDA, still supports over 80
percent of the nation’s newly originated mortgages, a state of affairs that is
simply unsustainable and undesirable over the long-term.
Responsibly shrinking the
government’s footprint in housing finance over time is important to protecting
taxpayer interests. However, we must balance our policy goal of reducing the
government’s footprint against the need to preserve access to mortgage credit
for creditworthy borrowers.
While lending was too fast and too
loose in the run-up to the financial crisis, we’re now in a situation where
many families that can effectively take on monthly mortgage obligations are
being denied access to credit.
In this regard, the Federal
Reserve has a similar outlook. Chairman Bernanke noted that tighter lending
standards are probably preventing creditworthy borrowers from buying homes, and
this could be slowing the revival in housing and slowing the economic recovery.
While no single metric can
pinpoint how far the pendulum has swung the other way, I simply note that the
average credit score of the post-2008 books of business for Fannie Mae and
Freddie Mac range between 750 and 760, about 40 points higher than it was
before the crisis. Similarly, FHA’s average credit score for 2012 borrowers is
around 700, about 70 points higher than it was before the crisis.
Moreover, many creditworthy
borrowers who are being denied mortgages today had their credit scores damaged
because a job loss or reduced wages from the financial crisis caused them to
miss an auto or credit card payment.
These potential borrowers still
meet GSE and FHA underwriting requirements, but are being underserved by many
lenders. Barring families who suffered from economic events beyond their
control the ability to obtain a mortgage, even after their lives and
livelihoods have substantially recovered neither serves their interests, or
your interests as investors. It also does nothing to promote economic growth or
Of course, we also recognize that
a continuing impediment to expanding credit availability is lingering investor
uncertainty, and working to address that issue continues to be an important
part of our agenda.
As you know, the Consumer
Financial Protection Bureau, along with other regulators, have released a
collection of mortgage-related rules in the past several weeks that covers
different parts of the mortgage origination chain.
These include requiring lenders to
verify a borrower’s ability to repay, setting best practice servicing
standards, increasing transparency for appraisals, setting standards around
originator compensation practices, establishing escrow requirements, and
mandating the provision of disclosures, such as those relating to counseling,
to high-cost loan borrowers.
These standards will help
homeowners obtain mortgages, with straightforward terms and obligations that
both lenders and borrowers can clearly identify, providing for a more
sustainable mortgage market going forward.
While investors, securitizers,
originators, and servicers may not agree with every aspect of each of these new
rules, their release helps provide clarity to market participants who may have
been waiting for greater certainty before putting their capital back to work.
With the release of these final
regulations, the rules of the road going forward are beginning to take shape.
Market participants can once again go about the business of taking on mortgage
credit risk and serving a much broader swath of the market than has been the
case since the onset of the financial crisis.
Looking at a pending rule,
Treasury has been hard at work coordinating the asset-backed securitization
risk retention rule-writing process, with a keen focus on the qualified
residential mortgage. The overarching goal of risk retention is to align all of
the disparate interests along the chain of securitization, so that securitizers
and originators have ‘skin in the game’ and are better encouraged to diligence
the underlying assets.
While Treasury is the coordinator
for this effort, not a rule-writer, we understand the importance of defining
QRM so as not to unnecessarily increase the cost or decrease the availability
of mortgage credit.
By providing greater clarity for
mortgage participants, more credit can be made accessible to American families,
and the government’s footprint in the housing finance market can begin to
recede. But we understand that these measures alone will not suffice.
So, in thinking about how to
broaden the role of private capital going forward, what else needs to be done?
First, we must make more progress
on representation and warranty reform. We know that rep and warrant risk is
leaving lenders in a position where they fear having a bad loan put back to
them if there exists an underwriting flaw or error, no matter how trivial or
immaterial. Thus, lenders are only extending mortgages to the most pristine,
minimal-risk borrowers, leaving other creditworthy borrowers without sufficient
levels of credit.
Significantly, in this regard, on
January 1st of this year, FHFA put in place a new rep and warrant framework for
the GSEs, with further guidance to come.
But rep and warranty reform should
also extend to the non-GSE sector, which will require the non-agency investor
and securitizer community coming together with a clear voice and taking
decisive actions to clarify rep and warranty procedures and responsibilities
within the private label securities sector.
Ultimately, we should be looking
for best practice, industry-wide standards here so that differential buy-back
risks across channels do not distort the pricing and flow of mortgage credit.
Even those who question the wisdom
of an industry-wide standard should agree that a uniform definition of
materiality, third party arbitration, an agreed upon number of continuous
payments to provide lender relief, and uniform timelines for review and claims
resolution would provide more clarity, consistency and certainty to market
Second, we need more certainty
around first lien priority so that first lien investors are better protected,
and the modification process is fair and transparent. We support instituting
contracts and enforcement mechanisms that protect first lien priority and fully
writing-down second liens prior to a first-lien modification. However, this is
an area that may require working with banking regulators to achieve our desired
Third, we need to improve the
quality of and access to mortgage data. Empowering investors with data so that
they can gain a more complete understanding of mortgage risk reduces
uncertainty as investment choices are made.
The solution may include the
development of a national mortgage registry that would cover the roughly 48
million first-lien and 13 million second-lien mortgages in the country, which
would help address issues relating to data accuracy, lien matching, recordation,
assignments, documentation, and title transfers that arose in the run-up to the
Of course, any such registry would
need to protect borrowers’ privacy while still allowing stakeholders the
opportunity to gain a more complete picture of the nation’s mortgage finance
Finally, let me turn to the topic
of long-term housing finance reform, an issue of interest to all of us in this
room and beyond.
No matter what path we take to
reform, Treasury and the Administration have core, fundamental, requirements
that must be met. We intend not only to ensure that private capital be the
primary source of mortgage credit and bear the primary burden for credit losses
– which it must; and that taxpayers are strongly protected – which they will
We also seek a system which
provides American families access to sustainable mortgage credit, which must
include long-term fixed rate mortgages; and which would ensure that credit
remains available under all conditions, even during times of severe market
Any plan for housing finance
reform must also meet the needs of our nation’s growing rental population, and
must ensure sustainable mortgage credit be available in all communities, and
must serve borrowers across the income spectrum.
Comprehensive housing finance
reform is not just about achieving any one of these priorities – it is about
developing a system that achieves all of these priorities.
In the course of the past year, I
have had countless meetings with virtually every interest represented in the
housing finance reform debate, including many of you in this room. And I
have been on the receiving end of some pretty harsh commentary on both the
substance and pace of our housing activities.
Of the many organizations with whom
I have met or whose housing finance reform proposals I have pored over, few
address all of the above priorities, and most have a narrower scope.
I mention this not to be critical,
but to emphasize that the real challenge of housing finance reform is creating
a system that achieves all of our aims, and not just some of them.
In the course of many of these
meetings, Treasury is often implored to make particular decisions on certain
issues; we are urged to make the kinds of hard choices that those doing the
urging won’t make themselves.
And when I ask those sitting
across the table why they haven’t taken a position on an issue of great
interest to us, more often than not the response is that while they acknowledge
its importance, it is not an issue in which their organization is invested;
Or that their organizations
represent a mix of players in the mortgage chain and so they are unable to
develop a consensus position.
I have two responses: first,
welcome to the club: balancing interests while achieving broad interconnected
purposes is very hard work. And second, we need your help and leadership if we
are to make progress on reform, including a responsible and stable transition
A more unified voice within the
investor and securitization community could help accelerate our collective pace
down the path of comprehensive housing finance reform.
In closing, let me once again
return to my key theme of encouraging private capital to take on more mortgage
We understand the necessity of
reducing the government role in the mortgage market responsibly over time as a
necessary condition for crowding in more private capital to take mortgage
credit risk. But we don’t think that it is sufficient to achieve our mutual
In my view, without addressing the
reasons why the non-agency market remains largely moribund, shrinking the
government’s footprint could raise housing finance costs and further restrict
the flow of mortgage credit to creditworthy borrowers.
On many of these issues, such as
reforming rep and warranty frameworks and clarifying terms and responsibilities
in pooling and servicing agreements and other contracts, you – private market
participants – are in a strong position to suggest approaches to resolve them,
as you see on a day-to-day basis how these parts of the securitization chain
And, so as we emerge from one of
the greatest financial crises in our nation’s history, and reflect on the last
four years with an eye towards the future, one thing we know for certain is
that we’re all in this together.
We need your engagement and
participation, and all the thoughts and ideas that may spring forth, to help us
restructure and rebuild a viable, sustainable housing finance system.
We know that no one alone has all
the answers, and we owe it to the American people to keep our doors open to
your advice and feedback. Treasury and the Administration are eager for your