As prepared for delivery
WASHINGTON, D.C. – March 3, 2015 – (RealEstateRama) — I last joined you nearly 2 years ago to this day, and it is great to be back at the NCSHA’s winter legislative conference to update you on a few issues that we both care about deeply. While I have worked with housing finance agencies (HFAs) on a wide range of affordable housing issues over several decades in good times and bad, Treasury’s intensive, hands-on experience with HFAs was forged after the financial crisis.
As I said in 2013, “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 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.” And that’s why we will continue to count you among our most valued partners and seek opportunities where we can to work together to achieve mutual goals.
In the few minutes I will be with you this afternoon, I would like to bring you up to date on issues that are critical to your mission including helping distressed borrowers and communities, financing affordable rental housing, driving capital to underserved markets and communities, and expanding access to sustainable homeownership for low-and moderate-income, first-time homebuyers.
Housing Finance Reform
But first, I know that many of you want to know where we are on housing finance reform. On this subject, let me be clear: the Administration stands by our belief that the only way to responsibly end the conservatorship of Fannie Mae and Freddie Mac is through legislation that puts in place a sustainable housing finance system that has private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns.
The Administration remains ready, willing, and able to work in good faith with members of both parties to complete this important but unfinished piece of financial reform. As memories of the financial crisis fade, we cannot become complacent. The best time to act is when the housing market is well along the path to recovery and credit markets are normalizing, not on the precipice of a new economic shock when there is little time to be thoughtful.
Hardest Hit Fund
It is surprising how quickly memories fade, but no one knows how dire the situation was better than you. At the height of the financial crisis, when the Administration was working hard to address the enormous housing crisis facing American families, we turned to you – the experts in what was going on in your states – and created a program that allowed you to tailor your own innovative approaches to prevent foreclosures and stabilize your communities. To date, the Hardest Hit Fund has provided more than $3.8 billion for 70 individual programs, which have helped 227,000 homeowners in some of our nation’s hardest hit communities begin to recover from a brutal recession.
Four and a half years into the program, we are still witnessing innovation, as HFAs adjust their local efforts to respond to the changing housing landscape and needs. For example, fourteen HFAs offer programs that help homeowners achieve long-term sustainability and/or reduce negative equity by providing principal reduction assistance in conjunction with a loan modification, re-amortization, or refinance.
Six HFAs have allocated $372 million to approved blight elimination programs that will help stabilize neighborhoods and prevent avoidable foreclosures. Five years ago, we probably would not have thought about blight elimination when looking for ways to prevent avoidable foreclosures, but for certain communities, that is exactly the type of program needed to help bring back a neighborhood that has been abandoned by many homeowners leaving their neighbors at risk.
It is this kind of flexibility to implement and adapt programs in response to changing economic and housing market conditions and homeowner needs that sets the Hardest Hit Fund apart. But for all the help the program has provided to communities and individual homeowners, I don’t think the Hardest Hit Fund and the HFAs get the credit they deserve.
Treasury is proud of this program, and we know that we need to continue to work with our partners to help you get as much value from the program as possible. We value our partnership with HFAs and look forward to continuing to work together to help our communities become stronger, safer, and more stable.
FFB-FHA Risk Sharing Partnership
I would like to now turn my attention to a recent example how Treasury and the Administration continue to search for creative ways to support the mission of housing finance agencies.
As you know, since 1992, the FHA Risk Sharing program has insured approximately $6 billion of mortgages while maintaining a negative credit subsidy and a lower loss rate than other FHA multifamily insurance programs. The program works by allowing FHA to delegate mortgage underwriting and processing to lenders that take 10-50 percent of the credit loss risk. Lenders that take a 50 percent risk share may use their own underwriting standards rather than FHA’s. To date, state and local HFAs have been the primary lenders, but FHA has authority to partner with other lenders as well.
HFAs have traditionally used Risk Sharing in conjunction with tax-exempt bond financing. Since the financial crisis, however, rates on tax-exempt multifamily bonds have exceeded taxable bond rates. In addition, by statute, Ginnie Mae may not securitize Risk Sharing mortgages as it does other FHA-insured multifamily mortgages. The Administration has continued to propose removing this restriction, but Congress has not acted.
In the absence of congressional action, Secretary Lew announced a brand new partnership with HUD and FHA last June to support the construction and preservation of affordable multifamily rental housing. Under the new partnership, the Federal Financing Bank is providing 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.
A pilot transaction under this program in Far Rockaway, Queens, sponsored by the New York City Housing Development Corporation closed last October, providing permanent take-out financing for a 1,100-unit apartment complex at an interest rate 87 basis points lower than the rate on a comparable transaction completed the prior month. Based upon the success of the initial pilot, the program is being made available to other approved FHA risk-sharing partners. I am proud to report that we already have a pipeline of acquisition deals in excess of $1.5 billion for fiscal year 2015 from 10 housing finance agencies to finance over 150 projects.
And we are focused on refining the program structure to accommodate demand and improve our ability to serve your needs. We understand that lenders and borrowers need greater certainty around borrowing rates. That is why we are working to provide for a 60-day forward rate lock in order to be more consistent with Ginnie Mae executions. We intend to roll out the next generation of documents to all of the HFAs in the pipeline who have deals that can close in the near future.
Low Income Housing Tax Credits (LIHTC)
Like so many other affordable rental production and preservation programs, this Treasury-HUD financing partnership is built on the strong foundation of Treasury’s Low Income Housing Tax Credit (LIHTC). As you know, I have affirmed the Obama Administration’s strong support for the Low Income Housing Tax Credit every time I meet with affordable housing advocates and the HFA community. We know and appreciate that LIHTC is the very foundation of the affordable rental housing delivery system in this country, and that it has helped produce and preserve nearly 2.5 million affordable rental units in the US since its inception.
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, and we look to the Congress once again this year to do the right thing and approve the proposed refinements in LIHTC that would improve its effectiveness.
These refinements include giving states the flexibility to expand their LIHTC volume by nearly 50 percent by converting a portion of their tax-exempt Private Activity Bond authority into additional allocable tax credit authority.
The President’s FY 2016 Budget proposals would also allow larger credits to generate more investment by adjusting the formula for calculating the credits, 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, and allow HUD to designate more Qualified Census Tracts that will earn an additional 30 percent LIHTC allocation. The LIHTC is the most efficient tool available to HFAs to provide affordable rental housing to low- and moderate-income families. We believe that the FY 2016 Budget proposals will greatly enhance its effectiveness.
Because the Low Income Housing Tax Credit has important social benefits, the LIHTC proposals are contained in the Administration’s Reserve for Revenue-Neutral Business Tax Reform, indicating our belief that this critical tax credit should be recognized for the important role that it plays in attacking the chronic shortage of affordable rental housing.
New Markets Tax Credits and the Capital Magnet Fund
While LIHTC remains the foundation of the affordable housing delivery system, Treasury also supports the production and preservation of affordable rental housing through the New Markets Tax Credit, which the President’s budget would make permanent beginning in FY 2016, and through a lesser-known program called the Capital Magnet Fund.
Authorized by Congress in 2008 in the Housing and Economic Recovery Act, the Capital Magnet Fund was created to be another source of funding for Treasury’s Community Development Financial Institutions Fund to finance affordable housing and related economic development activities and community service facilities. It would do so through competitive grants to CDFIs and qualified nonprofit housing organizations. When its funding through an assessment on new GSE business was not forthcoming, in FY 2010 Congress funded the Capital Magnet Fund with a one-time $80 million appropriation.
This inaugural round of funding resulted in awards to 23 organizations in 34 states, the District of Columbia and Puerto Rico, resulting in, among other development activities, the creation of more than 8,000 affordable rental units and more than 900 owner-occupied homes and related economic development.
While the Capital Magnet Fund’s lone appropriation is now exhausted and few state and local housing finance agencies were involved in these initial awards, the reason I bring this to your attention is that in December 2014, the Federal Housing Finance Agency directed Fannie Mae and Freddie Mac to begin setting aside and allocating funds to HUD’s Housing Trust Fund and Treasury’s Capital Magnet beginning January 2015. Resumption of funding is budgeted to generate more than $1.2 billion in additional affordable housing and community development resources over the next five years beginning in 2016, including more than $400 million for the Capital Magnet Fund.
Now I would like to mention an area where housing finance agencies have been ahead of the pack and where we hope to see them continue to be leaders in the future.
The financial crisis revealed fundamental deficiencies in the way mortgages were serviced. The mortgage servicing industry was ill-equipped to help the number of homeowners in need of assistance and in many instances, slow to evolve their practices. As a result, families, communities, investors, and ultimately taxpayers paid the price in the form of unnecessary delays and too many foreclosures relative to other loss mitigation activities that would have produced better outcomes.
My own affordable homeownership research at the University of North Carolina prior to joining Treasury documented the importance of servicing to borrower outcomes. In one published study, my colleagues and I found that after controlling for loan and borrower characteristics and regional economic conditions, the odds that a late-paying borrower would manage to catch up on payments instead of sinking further into serious delinquency and foreclosure can vary as much as 60 percent between servicers. This suggests that servicing strategies do matter.
Nobody knows this better than you do. Since the financial crisis, HFAs have been taking an increasingly proactive role in servicing their loan portfolios, and we believe that HFAs can play a more substantial role in both servicing and lending going forward. HFAs are in a prime position to serve creditworthy borrowers currently shut out the market in part by lender overlays due to concerns around repurchase risk and default servicing. This is precisely because HFAs have developed the capabilities to manage the risks associated with difficult-to-serve borrowers. The HFA business model has been tried and tested, which is why they are a key part of mortgage lending.
It has been shown that HFAs achieve superior outcomes from both a loan performance and loss mitigation standpoint. Many HFAs require borrower counseling for first-time homebuyers and borrowers with FICO scores below a certain level, preparing higher risk borrowers for the financial challenge of homeownership. Studies conducted by the credit rating agencies and the manufactured housing industry have found that HFAs who service their own single-family loan portfolios provide better service and experience superior performance relative to third-party servicers.
Servicing their own loans has allowed HFAs to establish relationships with borrowers, communicate with troubled borrowers earlier in the process, and exercise every available loss mitigation option to keep families in their homes before resorting to foreclosure, leading to better outcomes. Private lenders may not pay enough individualized attention to nonperforming loans to resolve them quickly and are also not set up to utilize both federal and state programs that offer homeowner assistance.
While the start-up costs associated with self-servicing are high, we believe the benefits to both HFAs and borrowers – both existing and potential – can be substantial. Servicing can generate a substantial stream of revenue, permit more flexibility in loan underwriting, and result in better portfolio performance, potentially outweighing the additional cost. And by developing superior abilities to manage the risks associated with difficult-to-serve borrowers, HFAs will be valued partners in the Administration’s effort to ensure broad access to credit for all qualified borrowers.
We are counting on all of you to be strong partners as we work to make the housing finance system fairer and more sustainable, and I look forward to engaging with you in the future.