Remarks by Under Secretary Jeffrey A. Goldstein before the National Housing Conference’s Policy Summit on Mortgage Finance Reform


WASHINGTON, D.C. – June 24, 2011 – (RealEstateRama) — Good morning.  Thank you, Maureen, for that kind introduction, and thanks to the National Housing Conference for inviting me here this morning.  I’m glad to have the opportunity to talk about the future of housing finance, and also to hear your thoughts on how we can best move forward.

I want to first congratulate NHC on its 80th anniversary.  That is a remarkable achievement.  I appreciate and value the vital role NHC continues to play today in many of the nation’s most important and forward-looking housing policy issues.  NHC has earned its respected position as the “united voice for housing.”  I recognize that it’s not easy to find – or create – common ground among diverse interests; it requires not just breadth, but also depth, and patience, and persistence.  It is vital work and it makes our jobs as policymakers more achievable.

And to get the job done on housing finance reform, we are committed to working with Congress.  We want to get this done right and on a reasonable time frame, and with input and energy from groups like yours, I believe it is possible to do that.

Before I talk about housing finance in more detail, I want to say a few words on Treasury’s efforts to help support recovery in the housing market overall.

The Administration has implemented a range of programs to help homeowners avoid foreclosure.  Since taking office in January 2009, we have worked with Congress to implement tax credits for first time homebuyers, support state and local housing agencies, and bolster neighborhood stabilization and community development programs.  We have also implemented mortgage modification and refinancing initiatives, in addition to providing continued financial support for Fannie Mae and Freddie Mac to ensure broad credit availability.

These policies were instrumental in averting a more severe crisis.  But the housing market is still recovering from an enormous trauma that has left millions of families struggling to keep their homes.  Although there are some positive signs – new delinquencies, for one, have been on the decline – it will take some time before the aftereffects of the housing bubble are fully behind us.

It is also important to acknowledge that the housing crisis has changed over time.  Initially, it was predominantly characterized by a collapse in subprime lending.  But as the recession deepened, unemployment rose and house prices declined dramatically – and today many borrowers are un- or under-employed, and many are severely underwater.

We are continuing to improve our efforts to strengthen housing programs in light of these evolving challenges.  In May, Treasury issued a directive for the largest mortgage servicers participating in the Making Home Affordable Program that requires them to assign homeowners applying for assistance a single point of contact.  Earlier this month, we released the first of on-going, detailed servicer assessment reports for the ten largest participants.  We are also implementing new programs to help homeowners struggling with unemployment or who are underwater on their mortgages, as well as helping homeowners transition to more affordable housing through short sales and deeds-in-lieu of foreclosure

At the same time, we are also looking to the future of housing.  Today, the Administration is focused on laying the groundwork for a stronger, safer, and fairer housing finance market – one in which all participants – borrowers, lenders, and investors – can have confidence.  A robust and confident market, properly regulated, will provide great benefits to American families as they decide whether and where to buy or rent a home.

Creating that confidence requires reforms that provide a better set of rules for all the players in the housing finance chain.  It also requires a responsible transition that does not impair the current market’s recovery, and allows times for families, the real estate industry, and financial firms to adapt.  Let me briefly mention a few of our top priorities.

First, risk retention.  Fundamental flaws in the securitization market and the originate-to-distribute model were a key contributor to the housing bubble that helped precipitate the worst recession since the Great Depression.  Treasury is currently coordinating an interagency effort to address one of the major problems we saw in the financial crisis – the lack of alignment of interests between originators and securitizers relative to investors.

One way to improve the alignment of interests is risk retention.  We are committed to implementing risk retention reforms in a thoughtful manner that ensures continued access to sustainable mortgage credit for low- and moderate-income borrowers and protects the health of the still-fragile housing market.  Better underwriting practices for mortgages are good for consumers, good for the financial industry, and good for the economy.  They make future housing crises less likely and less damaging.

Moving forward, our goal is to strike a balance that preserves access to affordable mortgage credit in all communities for creditworthy borrowers across incomes, while strengthening the long-term health of the housing market and our economy.  We believe that risk retention, as part of comprehensive housing finance reform, is an important part of that effort.

The period for public comment on the proposed rule has been extended until August 1, and we encourage NHC and all stakeholders to participate.  We are seriously considering feedback and are committed to getting this rule right, so that we can ensure securitization is a stable and reliable source of credit for consumers, businesses, and homeowners.

We have also made our support for national servicing standards clear.  The servicing industry was unprepared and poorly structured to address the higher levels of default and foreclosure that occurred after the housing bubble burst.  National standards would align incentives and provide clarity and consistency to borrowers and investors, especially in the case of delinquency.  We are continuing to work with the financial regulators to advance that objective.

Treasury is also supportive of the Federal Housing Finance Agency and Ginnie Mae’s review of servicing compensation structures and consideration of new alternatives.  Currently, servicers collect a flat fee that does not adjust to reflect the amount of servicing required, resulting in overpayment for current loans and underpayment for delinquent loans.  A compensation structure that corrects for this shortcoming could help ensure servicers are incentivized to invest the time and effort to work with borrowers to avoid default or foreclosure.

I should also note that the Consumer Financial Protection Bureau will open its doors next month to help ensure consumers have the information they need to make choices that are best for them when buying a home or using other financial services.

These are a few of our continued efforts that will have a positive impact on the housing finance market.  Guiding these and future decisions is our overarching view that the government’s role in the housing market should be comprised of three core responsibilities:  consumer protection and robust supervision; targeted assistance for low- and moderate-income homeowners and renters; and maintaining the ability to provide for market stability and crisis response.

A large part of the solution is enabling responsible private channels to enter the market so Fannie Mae and Freddie Mac can diminish their current role while preserving access to sound mortgages for all credit-worthy American families and communities.  FHFA and the Federal Housing Administration have established a working group to consider changes to pricing and other standards at Fannie Mae, Freddie Mac, and FHA.

Part of a successful transition strategy is also ensuring that the operations, systems, and enormous human capital that resides in Fannie Mae and Freddie Mac can be effectively utilized in a future system.  We recognize that there is great value in the multifamily finance functions of the GSEs that we need to find a way to utilize.

The strength of the market for mortgages guaranteed by the GSEs is a sharp contrast to the private label securities market, which has only seen two new issue deals of around $500 million since 2008.  But it is encouraging that investor demand far exceeded the size of the deals.  High levels of transparency and accountability gave investors confidence, and they were willing to put money to work.

The success of these deals indicates that once uncertainty is reduced and protections for investors and consumers are in place, the private label securitization market can once again be an important source of credit for the housing market.  The future PLS market will be more stable and sustainable than the previous system, which will ultimately be for the benefit of every actor in the system and for the overall economy.

Another significant challenge is the current imbalance between homeowners and renters.  The government has a responsibility to help ensure all Americans have access to quality housing they can afford.  But that doesn’t mean our goal should be for all Americans to be homeowners.

Instead, our approach should provide support to credit-worthy but underserved families who want to own their own home, as well as affordable rental options, that provide access to quality jobs and quality schools, for the one-third of Americans who rent.

The Administration stands strongly behind our obligation to help ensure all communities and families – including those in rural and economically-distressed areas, and those with low- or moderate-incomes – have access to an adequate range of affordable housing options and basic financial services, including sustainable mortgage credit.

These underserved markets account for a majority of all U.S. home purchases, with low- and moderate-income families and communities representing over 40 percent of all home purchases.  We will consider measures to make sure that secondary market participants are providing capital to all communities in ways that reflect activity in primary markets, consistent with their obligations of safety and soundness.


As we move forward to address the challenges of affordability and access, we must address how those issues impact renters.  Today, half of all renters spend more than a third of their income on housing, and a quarter spend more than half.  And for low-income renters, adequate and affordable homes are increasingly scarce; only 32 out of every 100 extremely low-income American families have access to affordable rental homes.

We support a housing finance market that provides liquidity and capital to support affordable rental options and help alleviate the burdens that many low-income households face.  Rental options for low-income households in urban, suburban, and rural communities should be expanded to provide families with more and better opportunities, especially good jobs and quality schools.

But private credit markets have generally underserved multifamily rental properties that offer affordable rents, preferring to invest in high-end developments instead.  Fannie Mae and Freddie Mac, in contrast, developed expertise in profitably providing financing to the middle of the rental market, where housing is generally affordable to moderate-income families.  As we wind down the GSEs, maintaining funding to this segment of the market, including through private channels, is critical.

The Administration is exploring different ways to provide greater support for rental housing.  One approach – but not the only approach – is to expand FHA’s capacity to support lending to the multifamily market.  We will consider a range of reforms, such as risk-sharing with private lenders, to reduce the risk to FHA and the taxpayer, and new programs dedicated to hard-to-reach property segments, including the smaller properties that contain one-third of all rental apartments.

But improvements to FHA are not the only option.  We are also exploring how private channels can finance affordable multifamily housing, perhaps with limited, targeted governmental support.

Maintaining attention on specialized avenues for multifamily rental housing and affordable homeownership is also a priority.  As we reform the housing finance system, we should look for opportunities to explore a range of options:  support smaller multifamily mortgages;

support mortgages to produce and preserve low-rent housing that benefits from federal rental assistance, tax credits, and tax-exempt bonds;  and obtain revenue-neutral, dedicated funding that is transparent and targeted to clearly defined objectives and programs, in order to support housing for the lowest-income families, scale-up effective activities of CDFIs and nonprofit developers, and help overcome obstacles to secondary market acceptance of targeted mortgage products.
Finally, as you all know, our report laid out three potential ways to structure government support in a housing finance market more broadly.  We encourage you to continue to voice your views on the advantages and drawbacks of the options we presented.

What they all have in common is that government support would be transparent, explicit, and limited.  Each would make private markets the primary source of mortgage credit and the primary bearer of mortgage losses.  Each would maintain FHA assistance and similar government initiatives that help low- and moderate-income families and other targeted groups.

The first option would limit the government’s role almost exclusively to these assistance initiatives.  The overwhelming majority of mortgages would be financed by lenders and investors in the private market and would not benefit from any government guarantee.

In the second option, targeted assistance would be complemented by a government backstop designed only to promote stability and access to mortgage credit in times of market stress.  This backstop would have a minimal presence in the market under normal economic conditions, but could scale up to help fund mortgages if private capital became unavailable.

The third option broadens access for creditworthy Americans and helps ensure stability in times of market stress.  Alongside the FHA and targeted assistance initiatives, the government would provide catastrophic reinsurance for certain securities that would be backed by high-quality mortgages.  These securities would be guaranteed by closely regulated private companies under stringent capital standards and strict oversight, and reinsured by the government.  The government would charge a premium to cover future claims and would not pay claims unless private guarantors failed.

It’s important to consider the trade-offs between several key priorities.  We identify those trade-offs as access to mortgages, including the future role of the 30-year fixed rate mortgage, limiting risk to taxpayers, and maintaining a stable mortgage market.  These trade-offs have real ramifications for Americans both as consumers in terms of what kind of housing they can afford and what neighborhoods they can live in as well as taxpayers in terms of the government’s potential exposure to losses.

To some, the main appeal of the first option is that it would minimize distortions in capital allocation across sectors, potentially reduce moral hazard in mortgage lending, and drastically reduce direct taxpayer exposure to private lenders’ losses.  Risk throughout the system may also be reduced, since private actors may be less inclined to take on excessive risk without the assurance of a government guarantee behind them.

But key concerns with this option include its potential impact on access to credit for many Americans.  While FHA would continue to provide access to mortgage credit for low- and moderate-income Americans, the cost of credit for the majority who do not qualify would likely increase.  While mortgage rates are likely to rise somewhat from their historically low levels today under any responsible reform proposal, the effect could be larger under this option, and it may be especially difficult for many Americans to afford the traditional, pre-payable, 30?year fixed-rate mortgage.

Another concern is the ability of the government to ensure access to capital during a crisis.  Congress, FHA, the Federal Reserve, and other regulators could play the countercyclical role that they played in the recent downturn, but it’s unlikely they could provide the full degree of support necessary during a crisis.

The strength of the second option – a government backstop that could scale up in times of market stress – is that it could potentially address the inability of the government to soften a contraction of credit during a crisis, without necessarily taking on all the costs associated with a broad government guarantee during normal times.

However, there remains some uncertainty around how to best design such a mechanism and how effectively it could scale up in times of crisis.  Like with the first option, access to credit, particularly to pre-payable, 30-year fixed-rate mortgages, would likely be more expensive and difficult for many Americans to afford.

The third option would likely provide the lowest-cost access to mortgage credit of the three.  Although premium costs and the first-loss position of private capital would increase rates, reinsurance will likely attract a larger pool of investors and thus increase liquidity.  This could help lower prices and pricing volatility for mortgages and increase the availability of the 30-year fixed.  The government reinsurer’s presence in the market could also facilitate effective scale up to provide credit during market stress.

But this option also comes with costs.  Increased flow of capital into the mortgage market could draw it away from more productive sectors of the economy or artificially inflate the value of housing assets.  While the capital requirements, oversight of the private guarantors, and premiums will help reduce taxpayer risk, the reinsurance of private lending activity exposes the government to a degree of risk and moral hazard.

We have a big decision ahead of us in determining the right balance of these priorities.  The question is:  how do we balance the benefits we are seeking – and the costs we want to avoid — from government involvement in the mortgage market?  These present us with some difficult choices.

Before closing, I want to make two important points very clear.  First – we believe housing is central to the economy.  It is because of this belief that we are taking steps to put it on firmer ground.  The housing sector should be a source of stability and security for American families and the nation’s economy.

Second – we will take the steps I’ve discussed with great care, at a pace commensurate with the economy and the housing market’s recovery.  Our objective is a healthier system of housing finance, and while we believe that these steps will get us to that point, unnecessary haste could prove counterproductive.  We will not take actions which would hurt families, communities, the housing market, or disrupt the economic recovery.

So with that, let me again thank you for your engagement and your contributions on this issue, and thank you for having me here with you today.  I’d be happy to take a few questions now.

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