Thank you, Brian [Stoffers, Chairman], for those kind words. On behalf of HUD, it’s a pleasure to be here in Austin to talk about the extremely positive changes happening in housing finance. Long-awaited reforms, some a decade in the making, are finally coming to the industry that puts Americans into the place they call “home.”
At HUD, our mission is to make sure all Americans have access to quality, affordable housing options. For many people, when they hear the word “HUD,” the first thing that comes to mind is public housing, where we provide assistance to help those who are not yet in a position where they can fully help themselves.
But my goal at HUD is not to see how many people we can get into public housing; it’s how many people we can get out of public housing – so they can come to private sector lenders like you, secure a responsible mortgage, and begin to build their wealth.
As Secretary, I spend a lot of time listening to the first-hand stories and struggles of everyday families trying to buy a home for the first time. For many, it’s an uphill climb. But in my work, I have found there is nothing more rewarding than watching hard-working families successfully make the transition from public or HUD-assisted housing to private home ownership. It’s not only a journey of financial self-sufficiency, but one of deep and enduring pride.
And that’s where HUD’s FHA loan program comes in. FHA mortgage insurance allows millions of lower- and middle-income families and young professionals with limited credit history to access affordable mortgage credit that would otherwise be unavailable to them. Historically, this has been FHA’s most important contribution to the American housing market: facilitating earlier entry points into homeownership for creditworthy low- and middle-income families, especially first-time homebuyers, than would be possible with only conventional mortgage loans.
In March of this year, the White House issued a Presidential Memorandum that directed HUD to pursue reforms that would refocus FHA to better fulfill this core mission. In response, HUD recently released our formal plan to implement the Administration’s vision. That plan sets out our “four pillars” of housing finance reform.
One of our key strategic goals – and the very first pillar of HUD’s plan – is to restore FHA’s focus on getting responsible but traditionally underserved borrowers into homes they can own. To meet that goal, HUD is working to bring a broad, diversified base of lenders back into the FHA loan program. To put it simply: The more people like you who are on our team, the more people will have access to the American Dream.
Depository institutions, which represented nearly half of FHA’s lender base in 2010, represent just 15 percent today. That isn’t to imply we don’t value the many independent and non-depository FHA lenders. You have helped countless families across America realize the American Dream and we want you to continue as a welcomed FHA partner. But we know that at least part of the reason for the decade-long decline in depository participation is because of uncertainty about how federal agencies apply the False Claim Act.
False Claims Act
That’s why I’m proud to announce today that HUD and the Department of Justice have signed a Memorandum of Understanding between our two agencies concerning claims made under the False Claims Act. This MOU provides a framework to apply remedies for FHA lender violations in a consistent, uniform and appropriate way, while establishing clear guidance on the scope of its use.
This agreement is intended to address concerns of uncertain and unanticipated False Claims Act liability for regulatory defects which has led many well-capitalized lenders to largely withdraw from FHA lending. This includes many banks who are statutorily required to help meet the credit needs of the communities where they do business.
Having been a brain surgeon for many years, I’ve seen a similar phenomenon in the doctor’s office. Sometimes a patient’s agonizing uncertainty over what he or she might be diagnosed with is more stressful than actually receiving a difficult, but clear and unambiguous, diagnosis.
Or, to put it in financial terms, “The market hates uncertainty.”
That’s why this MOU is part of a comprehensive plan to bring greater clarity to regulatory expectations within the FHA program. In addition to the MOU, we took two further significant actions this week to improve certainty about False Claims Act compliance and increase the durability of our reforms.
First, on Friday, we posted the revised annual lender certification and loan-level certification that simplify the scope of compliance for FHA lenders.
The annual lender certification form was cut down to just about half a page, and limits the list of certifying officers and employees to just those that FHA lenders are required to identify. At one point, this annual certification required lenders to certify the actions of loan processors, loan officers and officers of the company. For some of the banks in this room, that would be literally thousands of people.
The loan-level certification addresses important materiality and culpability considerations. In particular, we now define the certification of compliance with FHA underwriting requirements in the context of what would make a loan eligible for FHA insurance. We state that the certification is subject to a materiality standard, and we tie it directly to how we define the severity of violations under our defect taxonomy.
Both certifications are now open to the public for a 30 and 60-day comment period, respectively, and as we did with the previous draft proposals, we strongly welcome your feedback.
Second, on Thursday, we posted an updated defect taxonomy, which better assesses the appropriate remedies for identified loan underwriting defects. The final taxonomy is now available on FHA’s website.
Together, these new and revised elements should make affordable FHA-insured mortgages more accessible to qualified borrowers, reduce risks within the FHA program, and preserve appropriately tailored remedies.
Two years ago, I spoke to you at this very conference in Denver, and told you that it was a priority at HUD to fix FHA enforcement – which we are doing with this week’s package of initiatives. Hopefully, you see these measures as we do: a fulfillment of promises. I’d also like to the thank our incredible leadership at FHA and our Office of General Counsel for spearheading the important work with the Justice Department to get our MOU done.
In taking these steps, our intention is to make it crystal clear to all responsible lenders that this is a program you should be participating in – and if you are already, thank you! At the same time, HUD will never tolerate “bad actors” who defraud borrowers and taxpayers, and will continue to enforce all violations under the newly revised guidance.
Further FHA Reform; Pillar I
HUD’s housing finance reform plan also calls for many additional improvements to FHA’s operations. These improvements are needed because we don’t just want to help borrowers buy their first home; we also want to help them stay in that home.
For example, a key part of FHA’s modernization effort is to significantly improve FHA’s outdated servicing policies, processes, and technology. While servicing costs have increased across the mortgage finance market since the financial crisis, independent estimates indicate that the FHA’s servicing costs for non-performing loans are now multiples above the costs of servicing conventional mortgage loans. The increase in the cost to service loans within FHA’s mortgage insurance programs has likely translated into a higher cost of borrowing.
In the coming year, we’ll prioritize these fixes by enhancing our ability to better manage borrower defaults, clarifying rules around conveyance, and enhancing consistency on what is considered “conveyance condition.” We will also work to incentivize timely conveyance of properties and streamline our default milestone timeline, which currently adds to management costs. This will provide greater flexibility to servicers and more appropriately incentivize them to work towards more efficient resolutions with consideration for market conditions.
To better protect the health of FHA’s mortgage pool, we also propose that FHA and FHFA coordinate to ensure that the GSEs have well-defined boundaries in the housing market and avoid overlapping roles.
Pillar II: Protecting Taxpayers
Our plan’s second pillar is to protect taxpayers by strengthening FHA’s risk management systems and improving the financial viability of the Home Equity Conversion Mortgage – or “HECM” program.
FHA currently insures more than $1.4 trillion dollars of mortgage debt. Ginnie Mae guarantees more than $2 trillion dollars in mortgage-backed securities. With volumes this large, FHA and Ginnie Mae must always operate in a manner that best safeguards the public trust and public funds.
For example, HUD’s plan strengthens FHA governance and builds its capital ratio well above the statutory two percent minimum that buffers the agency against periods of market distress.
The HECM program, which has supported millions of American seniors who choose to “age in place,” has suffered significant financial distress in recent years. At the end of fiscal year 2018, FHA’s HECM portfolio had an economic net worth of roughly negative $14 billion dollars and a standalone capital ratio of nearly negative 19 percent. We are actively working to improve this, and early indications are the improvements put into place in the HECM program over the last two years, putting the program on a better trajectory.
To continue shoring up the program’s health, HUD’s housing finance reform plan proposes several key initiatives:
- First, we recommend Congress reform HECM’s loan limit structure to reflect variation in local housing markets and regional economies across the country;
- Second, HUD asked Congress to establish a separate HECM capital reserve ratio and remove HECMs as obligations to the Mutual Mortgage Insurance Fund, which would provide a more transparent accounting of program costs; and
- Third, HUD proposes FHA eliminate HECM-to-HECM refinances, as these loan transactions result in greater appraisal inflation, increasing program costs and causing quick “churn” in pool participations.
Pillar III: Provide FHA and Ginnie Mae Better Risk-Management Tools
The third pillar calls for better risk-management tools at FHA and Ginnie Mae that can only be achieved by granting FHA some independence from broader HUD protocols that govern staffing, procurement, and information technology. Therefore, our plan has called on Congress to enact legislation that would restructure FHA as an autonomous government-owned corporation within HUD.
At the same time, FHA will also pursue a major IT-modernization effort. The agency already created a detailed technology roadmap to develop a new single-platform structure that would allow FHA to better adapt to changing industry, regulatory, and statutory requirements. These modernized systems will be data-driven, and ultimately empower FHA to fully digitize the mortgage process – opening doors to significantly more refined risk analysis and management.
On a personal level, my decades in medicine made me a firm believer in the power of being data-driven and letting the evidence, rather than ideology or speculation, guide your service to people who depend on you. In the medical field, human life expectancy in the developed world in the mid-19th century was roughly 40 years old. Today, it is nearly 80. And the most important driver of better health outcomes was an industry-wide switch from using mere intuition to using hard, quantifiable evidence. We are similarly optimistic that FHA’s IT-modernization initiative will enable it to harness insights from data at a much deeper level.
Pillar IV: Provide Liquidity to the Housing Finance System
The fourth and final pillar is to provide liquidity to the housing finance system.
Following the 2008 financial crisis, Ginnie Mae’s outstanding mortgage-backed security guaranty portfolio swelled nearly fourfold to over $2 trillion dollars. Then, as now, Ginnie Mae has been able to fulfill its mission because of the full faith and credit guaranty of the Federal Government.
Ginnie Mae could – if authorized by Congress – extend its explicit guaranty to mortgage-backed securities backed by conventional single family and multifamily mortgages, as the agency already has the experience of administering and managing the growth of its own mortgage-backed security portfolio.
In addition to this potential future role for Ginnie Mae in the nation’s housing finance system, HUD has recommended Congress pass legislation granting the agency authority to administratively adjust its guaranty fee within a narrow, permissible range. This authority would allow Ginnie Mae to ensure these amounts are high enough to meet its statutory obligations, under even the most extreme circumstances.
While this Administration’s far-sighted policies have helped usher in an era of historic economic highs and strong market stability, we must always plan for periods of correction and volatility. Given the volume of public capital at stake in our housing finance system, any failure to prepare for such a period would be preparing to fail. Now is the best time to protect our country’s bright future, with reforms that prevent the mistakes of the past.
Thank you again for inviting me to be with here today, and for your valuable feedback as a partner to HUD. I look forward to continuing to work alongside you to create a brighter future together, on behalf of all who call this great nation home.