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WASHINGTON - Given my role at the Department of the Treasury as the housing finance counselor to Secretary Lew, I meet frequently with a wide range of stakeholders from the world of housing, including researchers, market analysts, financial industry experts, investors, advocates, and legislative leaders from both sides of the aisle. Taking the pulse and gaining the insights of all of these groups is an essential part of my job.
But I especially enjoy speaking at important statewide conferences where I get the chance to meet with experts and leaders in the field of affordable housing. Your commitment and passion demonstrate an understanding that expanding affordable housing opportunities is not only about alleviating the financial burdens of our least fortunate citizens – it is also about bringing greater strength and stability to families and communities across the nation.
And it is to the world of affordable housing policy, research, finance and public service that I have dedicated my teaching and professional career.
Today, Treasury is involved in the design and implementation of a host of programs that, taken together, help address critical failures in the housing finance system, and drive capital to underserved markets and communities. These programs expand affordable rental housing, finance critical community facilities like day-care centers and charter schools, and support small business lending and other job creating activities.
They are helping strengthen families and communities across the country, and I would like to spend some time highlighting a few of them here today.
As we take stock of a number of encouraging developments in the nation’s housing market, it is easy to forget where we were a few years ago. Not historically known as a front-line, housing-driven agency, Treasury took bold and unprecedented actions to stabilize the housing finance system and help 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 were not always popular.
But these actions were essential in preventing even deeper damage to the financial markets, as well as the investments and the savings of millions of American families.
We supported neighborhood stabilization, community development and housing counseling programs. We provided state and local housing agencies with borrowing assistance so they could continue to lend.
Three of our emergency programs were targeted to state and local housing finance agencies like the Virginia Housing Development Authority because we recognized that sustaining their activities and maximizing the use of their local market knowledge and expertise was critical to helping low and moderate-income families access mortgage credit as the capital markets seized up and tax-exempt markets turned upside down.
Our $8.2 billion Temporary Credit and Liquidity Program enabled 12 housing finance agencies across the country to preserve the viability of their variable rate demand obligations.
Our $15 billion New Issue Bond Program, launched in October 2009, has helped HFAs maintain access to tax-exempt markets. VHDA was a trailblazer for the NIBP, one of the first HFAs to issue an NIBP bond and the first to draw funds from escrow. VHDA made good use of its single-family allotment, deploying all $483 million that it was allocated.
Thanks to its outstanding execution, the VHDA NIBP bonds, together with its associated market funds, helped finance approximately 5,800 single-family homes.
It is no surprise that the NIBP has been so successful given that the VHDA’s leadership had a key role in its design. Susan Dewey served as president of the National Council of State Housing Agencies when NIBP was designed and rolled out, playing a vital role in forging the partnership between Treasury and the HFAs that made the program possible.
While these programs have been critical to addressing breakdowns in specific financing markets, we continue to depend on the insight of state HFAs to help us tackle the lingering effects of the financial crisis, particularly the lack of affordable rental properties.
That is why in June Secretary Lew announced a brand new partnership with HUD and FHA to support the construction and preservation of affordable multifamily rental housing.
Under the new partnership, the Federal Financing Bank will provide financing for loans insured under FHA’s multifamily risk-sharing program, significantly reducing the interest rate for affordable multifamily apartment buildings compared to the cost of tax-exempt bonds under current market conditions.
The pilot transaction under this program in New York City may close in the coming days, after which the program will soon be made available to other approved risk-sharing partners. And it is my understanding that VHDA has also applied to HUD to be a Risk-Share Program HFA, for which we expect them to be approved in the coming weeks, thus enabling Virginia to participate in this new program.
Like so many other affordable rental production and preservation programs, this new Treasury-HUD financing partnership is built on the strong foundation of Treasury’s Low Income Housing Tax Credit (LIHTC).
As you know, the Obama Administration strongly supports the LIHTC, which has helped produce and preserve more than 91,000 affordable rental homes in Virginia since its inception, including more than 3,000 units in 2012 alone, the last year for which national data are available.
Over the past few years, the Administration has proposed several legislative changes to increase LIHTC's scope and flexibility as part of the budget process.
For example, we have proposed to give states the flexibility to expand their LIHTC volume by nearly one-fourth by converting a portion of their unused tax-exempt bond authority for additional tax credit authority.
We would also allow larger credits to generate more investment by adjusting the formula for calculating the credits. And we would encourage more mixed income housing as long as the average resident income does not exceed 60 percent of the area median and rents are restricted accordingly.
While we have made tremendous progress since the depths of the crisis, we are not out of the woods yet.
Fewer borrowers are falling behind on their mortgage payments or entering foreclosure on an aggregate basis, but that is of little comfort to those families that are experiencing financial hardship.
In response, Treasury has continuously worked to prevent avoidable foreclosures by helping struggling homeowners make their mortgage payments more affordable.
And in the process, we helped transform a mortgage servicing industry that was woefully unprepared for a crisis of this scale.
Notably, Treasury’s Home Affordable Modification Program (HAMP), which to-date has helped more than 1.5 million struggling families permanently modify their loans, is saving these families about $500 every month.
HAMP has helped more than 32,000 Virginia families with permanent, affordable loan modifications, whose median payment reduction of $540 represents a 35 percent saving.
In the process, Treasury set a standard for the mortgage industry on how to restructure loans and help homeowners. In fact, more than 5 million homeowners have been helped by private lenders who in many cases have used a similar loan modification framework to the one created by HAMP. These data points are encouraging, but still, we know that our work is not done.
That is why Secretary Lew announced that the Making Home Affordable suite of programs would be extended for at least another year, through 2016.
Over the past two years, FHFA and FHA have taken meaningful steps to help improve lender confidence in making GSE- and FHA-backed loans and expand access to credit for qualified borrowers.
Just last week, FHFA Director Watt announced a significant milestone in these efforts by providing further details on what underwriting errors can trigger a repurchase request.
At the same time, FHA has been hard at work streamlining its own compliance process and allowing lenders to better manage their risks.
While Treasury is keenly engaged with both FHFA and FHA as they continue to address the factors that have caused lenders to restrict access to credit for qualified borrowers, we have to do more to make sure our markets are effectively serving potential home buyers.
Coming out of the financial crisis, many households need to rebuild their balance sheets and strengthen their credit.
While renting may make financial sense for many Americans over the long-term, many renters still have a desire to be homeowners, and that is why Treasury is exploring a wide range of potential options that can help provide them with a clear path to homeownership.
We are engaging with market participants to evaluate a variety of rent-to-own programs and products that could make economic sense both for households and capital providers.
As we continue to work hard to increase access to credit for all credit-worthy consumers, we are acutely aware that the increasing reliance on automated underwriting systems and the growing ubiquity of credit scores are reshaping the credit landscape for all potential borrowers.
Unscored consumers, those with thin files, and those with damaged credit are increasingly being forced from the marketplace, finding available credit options rarer and more costly than in the past.
As a result, consumers need to better understand how their payment performance affects their credit score, and what they can do improve it. We are also looking into new scoring technologies that more accurately capture a consumer’s ability and willingness to pay in a single metric.
And we are also evaluating non-traditional means of verifying a consumer’s history of servicing their credit obligations, such as reporting positive rent payments to credit bureaus.
The Administration is also working hard to foster the development of a safe and sustainable private market for mortgage lending that can serve alongside government-supported options.
A diverse housing finance system featuring multiple sources of mortgage financing would promote greater competition, market efficiency and consumer choice.
Through our initiative to facilitate the development of a well-functioning, responsible private label mortgage-backed securities market, Treasury is taking a leadership role in trying to attract more private capital to take mortgage credit risk.
Putting private capital at the center of the housing finance system is a core tenet of the President’s vision for housing finance reform. And as you know, Treasury has been focused on working with Congress to enact comprehensive, bipartisan housing finance reform legislation consistent with the President’s principles since the onset of the financial crisis.
September marked the sixth anniversary of Fannie Mae and Freddie Mac entering conservatorship. As I have said before, the status quo is unsustainable, leaving taxpayers at risk and many credit-worthy borrowers underserved.
We owe the American people better. The critical flaws in the legacy system that allowed private shareholders to reap unlimited profits while leaving taxpayers shouldering enormous losses cannot be fixed by a regulator or conservator. They require legislation.
As you may know, this past May marked a significant and encouraging milestone in this regard. The thoughtful bipartisan efforts by Senate Banking Committee Chairman Johnson and Ranking Member Crapo have solidified points of broad agreement on the principles that should underlie the future housing finance system.
Among others, these include:
· Preservation of the 30-year, fixed-rate mortgage;
· The extension of an explicit government guarantee on qualified single family- and multifamily rental mortgage-backed securities;
· The need for a mechanism to ensure broad and affordable access to the system; and
· The establishment of a countercyclical role for government so that mortgage credit continues to flow to qualified borrowers even in times of severe economic stress.
The bipartisan agreement achieved in voting this bill out of Committee represents real progress that we have banked and demonstrates that the Johnson-Crapo majority did not forge its consensus by merely picking off low-hanging fruit.
Resolving many of the issues required principled compromise and the maintenance of good will and open lines of communication among members on both sides of the aisle.
But there is obviously more work to be done to broaden the bipartisan coalition, and that work is ongoing.
Even as the discussion on legislative reform continues, FHFA is making important decisions that are determining not only the near-term priorities of the GSEs and the price of mortgage credit, but FHFA also will help shape the contours of the future housing finance system.
Three such actions include expanded efforts to transfer GSE mortgage credit risk to the private sector through credit risk-sharing transactions; continued progress on the development of the Common Securitization Platform; and, most recently, a decision to transition the Enterprises towards the issuance of a single security.
As these initiatives are implemented through non-legislative means, their positive influence on market practices should facilitate the transition toward achieving lasting legislated housing finance reform.
As importantly, other near-term decisions by FHFA will also help inform future legislative discussions.
These include decisions on how guarantee fees and loan-level price adjustments related to borrower credit quality will be evaluated going forward, and capital standards that FHFA will require of private mortgage insurance companies that do business with Fannie Mae and Freddie Mac.
In setting these policies for the GSEs, FHFA must make the same kinds of tradeoffs between strong risk management and taxpayer protection, and maintaining broad access to credit, as policy makers and legislators must do in setting capital requirements for guarantors in the future housing finance system.
By making their analytics and decision-making processes around these critical issues transparent and public, FHFA’s actions should provide invaluable insights in the continuing discussions around legislative reforms.
These are just some of the innovative steps the Administration is taking to facilitate a vibrant housing market, and Treasury’s leadership role in driving capital to underserved markets will continue.
We count on all of you to be strong partners in the future of our housing finance system, especially with respect to helping address the nation’s affordable housing needs, and I look forward to hearing from you in the days ahead.
Thank You.
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