(Archived Content)
As prepared for remarks
WASHINGTON - It is a pleasure to be with you today. During my fourteen months at the Treasury Department, I have had the privilege of meeting with groups of housing finance agency leaders on four previous occasions to discuss various matters of mutual interest. And I know that we’ll have many more conversations in the future, given the vital role that you play in helping so many of our nation’s families achieve a measure of joy and dignity from the attainment of safe, decent, and affordable housing.
You’ve done this mostly by providing families with access to low-cost mortgage financing to buy their first homes, and allocating tax credits and mortgage financing to developers of affordable rental housing in accordance with state priorities as reflected in your locally developed qualified allocation plans.
Nearly 15 years ago, in a book I wrote on state and local affordable housing policy, I praised the QAP process as an indication of the maturation of HFAs learning how to steer rather than row. What I meant by that was, rather than thinking merely in project terms, HFAs had come to appreciate their power to set priorities and to execute on locally developed, needs-sensitive, affordable housing strategies.
More recently, you have proven your mettle by helping troubled borrowers keep their homes in the aftermath of the worst financial crisis since the Great Depression.
Just as the need to overcome a severe challenge may bring out the best in individuals – testing their tenacity, resourcefulness, and resilience – so too can such circumstances bring out the best in institutions. We have witnessed and learned from your actions up-close and personal in implementing our crisis-driven programs, and we have come away knowing two things for certain:
HFAs are vital elements of our nation’s housing finance and development infrastructure that must be preserved.
And the American people are better off thanks to your work, dedication, and resilience.
HFAs during the Crisis
Many observers have given credit to the Administration and Treasury for taking bold and unprecedented actions to stabilize the housing finance system and stem the dramatic fall in home prices during and after the crisis. Yet, far fewer have recognized the crucial role played by HFAs over the same period in implementing access to affordable housing for tens of thousands of low- and moderate-income American families.
The growing inequity in our society, which should be of concern to all of us, has led to a situation today where 44 percent of our nation’s households have less than $5,800 in liquid assets. These households lack the personal safety net to prepare for emergencies or plan for future needs – such as a child’s college education – let alone have sufficient wealth to make a down payment towards a modest home.
Herein lies where the vast majority of HFAs have played a tremendous role. Over the years, through your issuance of tax-exempt mortgage revenue bonds, you have helped finance the production of more than 2.6 million single-family homes and nearly one million apartments affordable to lower-income families. And every year, your agencies provide about 27,000 borrowers with critical down payment and closing cost assistance towards purchasing their first homes.
And you have done this good work through solid underwriting and outstanding loan management. As noted in a research report from early 2012, since the first quarter of 2009, mortgage delinquency and foreclosure rates for HFA loans have remained less than half that of the average of non-HFA loans made in the same state. This is primarily due to the shunning by most HFAs of subprime lending, and their utilization of fully-amortizing, fully-documented long-term, fixed-rate loans.
Moreover, as noted in a December 2012 Moody’s analysis, despite a rise in delinquencies in recent quarters, the overall financial position of HFAs remains healthy and strong, allowing you to continue working to help troubled borrowers remain in their homes through a variety of assistance plans as their local economies continue to recover. Moody’s went on to state that it does not foresee a slew of downgrades for HFA ratings based on anticipated market conditions.
Treasury and HFAs Working Together
One of the reasons HFAs were able to so effectively fulfill their mandate of promoting affordable homeownership over the last few years was the introduction of the New Issue Bond Program, which the Administration and Treasury launched in October 2009. Some affordable housing industry participants have called the program – and its resounding success – one of Washington’s best kept secrets. Treasury is aware of this, and intends to publish statistics surrounding NIBP on its website.
When the program was introduced, the tax-exempt mortgage revenue bond market was essentially dormant, jeopardizing HFAs’ ability to fund their programs and initiatives. Treasury and the Administration recognized that sustaining the activities of HFAs and maximizing the use of their local market knowledge and expertise was critical to helping low- and moderate-income families sustain access to mortgage credit as credit markets seized up and tax-exempt markets turned upside down.
Thanks to NIBP, the issuance volume of single-family housing bonds in 2010 was 4.5 billion dollars, and in 2011, issuance volume actually increased by 23 percent to 5.6 billion dollars. By the third quarter of 2011, the NIBP had helped finance more than 100,000 single-family homes and more than 24,000 rental homes. Soon thereafter, Treasury extended the program through 2012, and the related Temporary Credit and Liquidity Program through 2015.
Another program that the Administration and Treasury launched in response to the crisis with the assistance of HFAs is the $7.6 billion Hardest Hit Fund, which was aimed at alleviating the pain of those 18 states, alongside the District of Columbia, that were hit particularly hard by the foreclosure and unemployment crises.
While the pace of the program has varied from state to state, we recognize that asking HFAs to move primarily from financiers of affordable homes to experts in foreclosure prevention and loss mitigation was by no means a simple request. In many cases, it required the creation of new programs and infrastructure entirely from scratch, and the procurement of new resources and systems where none had previously existed.
We have been working closely with HFAs to accelerate program activities and implement best practices and lessons learned, and I’m pleased to report that the current pace of Hardest Hit Fund dollars being deployed and the number of homeowners being served is growing exponentially. As of the end of the fourth quarter of 2012, the amount of assistance provided grew nearly 370 percent from the prior year, reaching over $1 billion for the first time, and the number of homeowners assisted increased threefold. At their current pace, HFAs project that a substantial majority of their funds will be committed by 2014 – three years before the program’s official end date.
There is, of course, a pressing need for more affordable rental housing in this country. The growing gap between the national supply and demand of affordable rental housing has led to a shortfall today of more than five million units.
If it were not for the Low-Income Housing Tax Credit, which adds about 100,000 units to the stock of affordable rental housing each year, the situation would be even worse. Your effective stewardship and provision of these critical resources remains one of our most capable tools for combatting our nation’s dearth of quality, low-cost rental housing.
One of the most significant measures we can take to bolster the impact of LIHTC is to secure permanent funding for the National Housing Trust Fund, which the President has asked Congress to do in each of his last two budgets. Once capitalized, it would provide resources to build, preserve, and rehabilitate affordable rental homes. Perhaps most importantly, extremely low-income families stand to gain enormously because at least 75 percent of the funds devoted to rental housing must inure to their benefit. The Fund would assist HFAs and other developers of affordable rental housing as a much-needed source of gap financing for low-income housing and other types of developments.
Comprehensive Tax Reform
Let me turn now to the issue of tax reform.
As you know, the President and members of both parties in Congress have expressed support for comprehensive tax reform. As we seek a bipartisan consensus on this pressing issue, we should not lose sight of LIHTC’s continued use as an efficient and effective means of increasing the supply of affordable housing within the context of our existing tax code.
Indeed, most housing policy observers will agree that LIHTC has become an indispensable production resource. And, as an indication of the Administration’s support, the President’s last two budgets sought several modifications that would make the program even more effective, including measures to promote mixed-income developments.
Today, as we consider a new round of tax reform, LIHTC’s impressive record should stand it in good stead.
Let me turn now to the fate of the mortgage and municipal bond interest deductions. I know some of you have expressed concern with the President’s recent proposal to cap the income tax exclusion on a host of deductions, including mortgage and municipal bond interest, at 28 percent. This was proposed in 2011, and again in last year’s budget. Even though this limitation was not imposed in the recent legislation that postponed the fiscal cliff, a cap on income tax exclusion will likely be part of any discussion of broader tax reforms.
As the Administration continues to evaluate the best course of action on fiscal reform, we remain committed to communicating with market participants and stakeholders as we pursue a balanced approach that considers all alternatives.
Thinking beyond tax reform, we know that there are innovative strategies that may be employed through HFAs to more effectively and efficiently serve the needs of low- and moderate-income families.
One of the more promising ideas contained in the Administration’s FY 2013 budget was to allow Ginnie Mae to securitize multifamily loans originated under the FHA-HFA Risk-Sharing Program. This holds the promise of reducing HFA funding costs, creating additional capacity for FHA multifamily lending at no direct cost and with minimal risk to taxpayers, while utilizing proven and established HFA delivery systems.
Long-Term Housing Finance Reform
Looking ahead to the future, I’d like to spend some time discussing our ideas behind long-term housing finance reform.
Today, nearly nine out of ten mortgages are supported in some form by the American taxpayer, a situation that is both undesirable and unsustainable. The real challenge, however, is effectively revamping the system without severely disrupting the mortgage market and the ability of American families to access credit – a task made all the more complicated in the midst of a recovering housing market.
While we are still exploring which path will lead us towards the safest, most vibrant system of housing finance, we have a set of core principles that will guide us along the way.
We support a system in which private capital is the primary source of mortgage credit and bears the primary burden for credit losses – and one that will provide strong protections for the American taxpayer.
We also seek a system which provides American families access to sustainable mortgage credit, which must include long-term, fixed-rate mortgages; and which provides for credit availability under all conditions, even during times of severe market stress.
Any plan for housing finance reform must also meet the needs of our nation’s growing population of renters, promote the availability of sustainable mortgage credit in all communities, and 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.
Given these core principles, it’s clear that no matter what course we take, HFAs should have a paramount role to play. You’ve proven yourselves to be too strong, too important, and too resilient not to be counted upon as a strong partner in the future of our housing finance system, especially with respect to helping address the nation’s affordable housing needs.
However, just as we have more work to do on housing finance reform, so too do HFAs. Facing the end of NIPB and the reality that your old business model of relying virtually exclusively on tax-exempt executions may be obsolete, I am encouraged to see that many of you have begun to think about transformational issues that are essential to your continued progress, and ultimately to your role in the future housing finance system.
Four necessary, big-picture issues that many of you have begun to grapple with include:
One, reassessing your mission and financial strength:
- Will you expand beyond affordable lending given the lack of statutory targeting requirements with MBS executions?
- Will you begin to include refinancing as one of your products?
- Can you support new risk sharing models to lower your costs with counterparties such as the GSEs?
- Should you invest in additional infrastructure, such as becoming a seller servicer for GNMA, Fannie Mae or Freddie Mac to gain more control over your economics?
Two, reassessing HFAs’ value proposition without the ability to offer a lower interest rate:
- Do down payment assistance and borrower counseling still create a viable product in the marketplace?
Three, assessing your capacity to undertake new executions and meet both the requirements of the MBS programs and the disclosure demands of the MBS investors.
- Can you build the necessary infrastructure to become an approved seller-servicer, or would you have to outsource?
Lastly, understanding how these changes might affect your role and relationships within your own states’ public and political milieu.
What gives me confidence in your transformational capacities is the difference between HFA executions in 2011 and your own estimates of activity in 2012. Important transitional activities are already underway in a significant number of agencies.
Comparing 2011 executions with 2012 estimates, here’s what we know:
Execution through the GNMA TBA Market more than doubled over the past year:
2011: $800 million, by nine HFAs
2012: $2 billion by 19 HFAs
Execution through Fannie Mae more than tripled:
2011: $500 million, by five HFAs
Five HFAs participated in the HFA Preferred program
Zero HFAs participated in the HFA Preferred Risk-Sharing program
2012: $1.6 billion, by 27 HFAs
Seventeen HFAs estimated they would participate in the HFA Preferred program
Ten HFAs estimated that they would participate in the HFA Preferred Risk-Sharing program
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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, we know that important work remains.
Together, we can make progress on the pressing need to expand the availability of affordable housing in this country, and move forward with restructuring and rebuilding a viable, sustainable housing finance system.
Thank you.
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