Press Center

 Remarks by Counselor Antonio Weiss at The Consumer Federation of America's Annual Financial Services Conference


12/4/2015
WASHINGTON - Thank you, Barry, for that kind introduction. You and your organization perform such important work, across every major issue that touches the lives of consumers – including banking and financial products, energy efficiency, and food and product safety, to name just a few.
 
We are here today to discuss housing, and I am going to describe Treasury’s priorities and policies in the sector.  I will start by providing an overview of broader housing trends. I will then talk about our housing programs, before assessing the broader policy issues facing the housing finance system as a whole.
 
State of the Housing Market
 
You are all painfully aware that the financial crisis led to the most severe economic downturn since the Depression. Millions of Americans lost their jobs.  Many more struggled to stay in their homes and faced the threat of foreclosure. As you know, moderate and lower income families were among the hardest hit.
 
On day one, the Obama Administration took action, implementing bold policies and ushering in needed reforms. These efforts laid the groundwork for a subsequent rebound in job growth, and a slow, but steady, housing recovery. 
 
What does the evidence tell us?
 
Household formation has picked up notably over the past year, bolstering housing demand. Housing starts have surpassed a pace of 1 million units per year, continuing an upward trajectory since the crisis. And an increase in home prices has boosted home equity and strengthened household balance sheets. Although the share of underwater borrowers today is less than half of what it was in 2010 and 2011, it remains far too high at over four million households, with heavy concentrations in certain cities, such as Las Vegas, Chicago, and Atlanta.
 
Some believe that the crisis forever altered our view of homeownership. But mounting evidence suggests this concern is not well-founded. According to a recent Federal Reserve Board survey, 87 percent of young adult renters would prefer to own their homes rather than rent, if they could afford it. A second survey by the Demand Institute indicates that around 75 percent of millennials believe home ownership is an excellent investment and an important long-term goal. Yes, young people, like their parents, continue to dream of buying a home.
 
In fact, recent Census data indicates that more young Americans are realizing their aspirations. The share of newly-originated mortgages going to first-time buyers, many of whom are under the age of 35, was 52.4 percent in October, up by more than two percentage points from a year earlier.   
 
And 2014 HMDA data shows that African-American and Hispanic households are finally beginning to receive a greater share of home loans, after several years of decline. But there is clearly more work to be done, as mortgage origination rates for these communities are at just two-thirds of pre-crisis levels.
 
Later today, you will hear detailed statistics about the state of the rental market. One Urban Institute study found that we will see five new renters for every three new homeowners over the next 15 years. To the Administration, this confirms our view that the supply of affordable housing is still severely constrained.
 
Treasury Programs
 
Against this backdrop, the Administration has been using all available tools to improve access to credit and housing outcomes. 
 
Treasury directly touches the lives of struggling homeowners through the Making Home Affordable (MHA) program. As of the third quarter of this year, MHA has committed billions of dollars to help homeowners in need, and has provided nearly $18 billion in principal reduction. During this time, the Home Affordable Modification Program (HAMP) has helped more than 1.5 million families permanently modify their mortgages.
 
Perhaps just as importantly, HAMP set new market standards for how modifications and loss mitigation are done across the industry.
 
Recently, Treasury held several conversations with stakeholders to find common ground to continue the standardization and transparency that HAMP has brought to mortgage servicing. Chief among these reforms are loss mitigation solutions that are designed to make monthly payments manageable. By cementing these changes in the servicing industry, HAMP’s legacy promises to help ease the lives of future troubled borrowers for years to come.
 
In addition, the Hardest Hit Fund (HHF) is helping to prevent foreclosures and stabilize housing markets in those regions that experienced the steepest home price declines. It has provided $7.6 billion to state housing finance agencies in 18 states and the District of Columbia.
 
The Fund combines federal assistance with local expertise from states, which have an on-the-ground view of the problems affecting homeowners and communities. Since 2013, Treasury has increasingly reallocated a portion of funds toward blight elimination efforts in seven states –Michigan, Ohio, Illinois, South Carolina, Indiana, Tennessee and Alabama.
 
Starting in Michigan, Treasury worked closely with the state to allocate more than $200 million towards blight elimination efforts in 16 cities, including Detroit. Mayor Duggan recently announced that these funds have allowed for the demolition of more than 6,700 vacant and abandoned homes.
 
We have seen first-hand that blight removal does more than provide communities with a facelift. It generates real economic value. A recent study tracking Detroit’s blight efforts shows that the value of occupied properties within 500 feet of a demolition increased by more than a thousand dollars on average. 
 
Florida is another example. Treasury worked closely with the state to provide assistance to first-time homebuyers in hard hit communities that continue to demonstrate high levels of distress and foreclosures. This program launched in July.  Four other states have followed suit.
 
Treasury is also addressing affordable rental supply through an innovative partnership with HUD.  Last year, Secretary Lew announced that the two agencies would embark on an initiative to provide capital for FHA-insured multifamily loans through Treasury’s Federal Financing Bank. The HUD-FFB Risk Sharing Initiative has invested more than $100 million to finance the preservation of nearly 1,700 units of affordable rental housing. And the program is rapidly expanding. To date, six states have signed on. We expect another seven to join over the coming months. We are also aggressively pursuing how to offer new construction financing through the program. At the same time, we intend to open up the program to CDFIs and other mission-driven lenders.
 
In addition, Treasury was pleased to see FHFA Director Watt instruct Fannie Mae and Freddie Mac to allocate money to the Housing Trust Fund at HUD and the Capital Magnet Fund at Treasury. Over the next five years, we expect these programs to generate more than $1.2 billion for community development and low income households, including homeless families.
 
As you can tell, we are proud of our housing programs. We will continue to use all of our energy and creativity to ensure we reach as many underserved American homeowners and renters as possible.
 
Comprehensive Housing Finance Reform
 
Administration Core Principles
 
Shifting from programs to policy, I want to talk about the housing finance system.  Seven years after the crisis, this remains the great unfinished business of financial reform.
 
As I’ve said before, the Administration stands behind a set of core principles for housing finance reform that include:
 
  • Providing broad access to long-term, fixed rate lending in all communities through all economic cycles.
  • Limiting taxpayer exposure to an explicit, appropriately-priced guarantee to ensure against catastrophic risk.
  • Maintaining a level playing field for community banks and credit unions, which know how best to serve their customers.
 
We believe strongly that any successful reform effort must be built on these core principles.
 
Legislative Efforts
 
The Senate Banking Committee’s hard work, led by Senators Johnson and Crapo, in 2014 remains the most significant bipartisan effort at comprehensive housing finance reform. Their legislation embodied several of the Administration’s core principles, including ensuring the availability of the 30-year fixed-rate mortgage by way of instituting an explicitly priced and limited federal guarantee.
 
However, many raised legitimate concerns about particular components of the bill. Chief among them was a concern that it would not do enough to meet the needs of traditionally underserved markets. While the GSEs’ business model is flawed, much of what they do to promote access and affordability is effective. FHFA has reflected a commitment to these important priorities, including their promulgation of duty-to-serve requirements, an essential catalyst to do more to address borrowers with low to moderate income. We believe a new system should build upon the existing policies that are already working.
 
Others believe the bill should have done more to ensure that smaller firms can compete on a level playing field with larger ones. When talking about a new system, it is all too easy to focus on how lenders and insurers with outsized market influence would participate. But we must learn from the crisis, and work to build a future housing finance system that is not dominated by a handful of our nation’s largest financial institutions.
 
Expanding a future housing finance system to include smaller institutions has benefits beyond safeguarding the economy. Community banks, credit unions, and local lenders are closer to many borrowers outside the purview of the largest lenders. They are in a unique position to assess and address the credit needs of their customer base.  This can lead to more effective risk assessment, and better outcomes for borrowers and investors.  We need to ensure that a future housing system preserves this vital line of credit for traditionally underserved markets, particularly in inner cities and rural communities. All Americans are better served by a more competitive marketplace in which a diverse range of participants are vying for their business.
 
Recap and Release
 
Of course, while Johnson-Crapo was passed out of the Senate Banking Committee, it never received a full floor vote. And, as time passes, some who view comprehensive housing finance reform as simply too difficult have begun calling for a return to the past.  They are asking FHFA and Treasury to allow for the recapitalization and release of Fannie and Freddie from conservatorship. This approach is simply a bad deal for taxpayers and homeowners alike.
 
First, as Barry recently pointed out, recap and release would do nothing to increase access for creditworthy borrowers who remain shut out of the market or renters who are struggling to find affordable homes. 
 
Second, some have suggested the federal government could stop supporting Fannie and Freddie in the near term by allowing the companies to retain their earnings. A recent analysis from Moody’s and the Urban Institute made clear that it could take decades for Fannie and Freddie to build safe and sound levels of capital and that recap and release would ultimately drive up the cost of mortgages.
 
Third, contrary to the claims of some private investors, taxpayers have not been fully “repaid” for the extraordinary risk they took in the crisis.  This “repayment” argument conveniently ignores the ongoing support that underpins Fannie and Freddie’s operations.
 
The bottom line is that we must take on the challenge of much more fundamental reform, and not settle for the misguided call to return to a deeply flawed system.
 
Administrative Actions
 
We remain committed to working with Congress on housing reform that meets our core principles. We recognize that prospects for achieving a bipartisan path forward in the near-term are dim. But we still must lay the groundwork for a future system.
 
Under conservatorship, the Administration and FHFA have executed a series of administrative actions that aim to reduce risk for taxpayers, and secure a vibrant housing market. Chief among these is the wind down of Fannie and Freddie’s legacy investment portfolio. In the lead-up to the crisis, Fannie and Freddie essentially operated as taxpayer-backed hedge funds. The Administration is determined to see these risky portfolios shrink over time, while preserving support for the mortgage guarantee business. We are pleased that both Fannie and Freddie are on pace to meet the $250 billion retained portfolio cap by December 2018, as required by their agreements with Treasury.
 
FHFA and the GSEs have also made steady progress in implementing risk-sharing transactions. These deals aim to reduce taxpayer risk and revive the role of private capital in the housing market.
 
More than 150 investors have participated in GSE risk-sharing deals, and Fannie and Freddie are working to broaden the investor base. One of the best ways to expand the pool of investors is to increase transparency around each transaction’s terms and pricing. Greater transparency will also allow policymakers to ensure that the GSEs are sharing risk in a way that protects the interests of taxpayers and borrowers. And, we continue to evaluate how credit risk transfer affects access to credit and mortgage affordability.
 
Finally, FHFA is working with the GSEs to build the Common Securitization Platform (CSP), which will allow both GSEs to issue a standardized mortgage-backed security. The creation of a fungible security between Fannie and Freddie will strengthen their infrastructure and improve overall market functioning. 
 
But we can help lay the groundwork for reform by going even further and having the common platform serve other participants in a future system – not just Fannie and Freddie.
 
Looking Ahead
 
To conclude, in the year ahead, we will continue to pursue an agenda that broadens access and affordability. We are committed to prudently expanding our Risk Sharing Initiative. We will work with states to efficiently allocate and spend remaining housing program dollars. And we will make sure that HAMP’s servicing practices live on as a lasting legacy after the program expires.  
 
At the same time, we continue to work through complex policy questions about how best to shape the contours of a future housing finance system.
 
These are important questions to consider:
  • Are there alternative structures that can limit risk to taxpayers while ensuring broad access to credit?
  • For example, could a mutual or cooperative approach play a role in a future system?
  • And, how best can we utilize the GSEs’ existing infrastructure and systems? 
 
In the months ahead, Treasury will elicit the thoughts and insights of many of you gathered here today as we refine our thinking.
 
Consumer advocates need to play a key role in shaping efforts around reform.
 
We look forward to working with you to develop programs and policies that harness the energy and efficiency of the marketplace for the benefit of all consumers.
 
Thank you.
 
 
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