Remarks as Prepared for Delivery

Melvin L. Watt, Director

Federal Housing Finance Agency

Mortgage Bankers Association Annual Convention and Expo 2016

Boston, MA

October 24, 2016

This is the third consecutive year that I have said "yes" to your invitation to speak to the Mortgage Bankers Association annual convention.  I keep coming back because I consider it an important opportunity to speak to the many leaders of the mortgage-lending community who assemble here and who are so crucial to the effective functioning of our nation's housing and mortgage markets as we try to meet our commitment to ensure that our housing finance system supports the provision of decent and affordable housing.  This year, as in years before, I want to discuss some of the important challenges we face in meeting that commitment.     

Over the almost three years since I became the Director of FHFA, I've spent a lot of time wondering whether we'll ever get to a "new normal" in the housing market and, if so, what the "new normal" will look like going forward.  I don't think anyone would dispute that the financial crisis changed lots of things in the housing market. 

These changes are real, and they have been felt by everyone in the housing sector – realtors, brokers, appraisers, lenders, servicers, insurers, borrowers and renters, and, of course, Fannie Mae and Freddie Mac.  Some of these changes have been obvious, and some have been subtle.  But all of them have culminated in a very different landscape compared to what was "normal" pre-crisis.    

While we seldom welcome change, usually we are powerless to resist it, and we have little choice but to embrace it when it results from crisis.  Sometimes, change can be in the form of improvements, like things we now take for granted such as the ability to repay rule and the qualified mortgage standard.  A crisis can also expose and bring pre-existing problems to the surface that we are forced to acknowledge and confront.  I think of the challenges we face in helping people of color achieve homeownership in a responsible, sustainable, and wealth-building way as an example of this. 

At this point, just beyond the mid-point of my five-year term as Director of FHFA, one thing I have concluded is that change is inevitable and something that will be a constant ingredient in the "new normal."  So one of my objectives today is to challenge all of us to commit to march forward together, embracing change as part of the new status quo and certainly not resisting it just because it may not conform to the way we used to do things. 

Let me reflect just briefly on where we came from, but, then I want to turn my attention quickly to some challenges we face ahead.      

***

As I've already acknowledged, the financial crisis had a devastating impact on the housing market and on people across the country.  During the crisis, the unemployment rate spiked, mortgage defaults skyrocketed, and foreclosures dramatically increased.  At their lowest point, home values had dropped by over 20 percent, putting over 12 million homeowners underwater on their mortgage by the end of 2011.    

Now there's plenty of sentiment that the market has recovered, and for many people that may be right.   Depending on the index you look at, including FHFA's own FHFA House Price Index, average home prices are either close to or actually exceed pre-crisis levels.  Additionally, the number of homeowners with mortgage balances that exceed the value of their property – those we refer to as "underwater homeowners" – continues to go down every month.    

For many people, however, the single-family market is still struggling to regain its footing.  Before the crisis, we had the problem of risky lending running rampant.  While those abuses have largely been addressed through regulatory reforms and business changes throughout the mortgage market, for many people we now find ourselves searching for solutions to quite the opposite problem. 

There's broad concern that the market is not yet supporting access to credit for the full spectrum of creditworthy borrowers, although data reveals increases in purchase originations in recent years and recent HMDA data confirms that purchase volume increased by 13 percent in 2015.  The joint efforts we undertook to revamp the Enterprises' representation and warranty framework (which I discussed at this convention two years ago) have resulted in some loosening of the credit overlays used by lenders and some other initiatives have helped move the needle incrementally also.  But average credit scores for purchase loans at the Enterprises still remain historically high.  During a protracted period of very low interest rates, when it normally would have been reasonable to expect robust lending to borrowers in all parts of the credit spectrum, purchase loans for the Enterprises have been crowded at the top of the credit box.

The recovery has also been disappointingly uneven.  In some areas, economic growth, job gains, and demand are outpacing housing supply, sparking rapidly rising property values and a new wave of conversations about how to increase housing supply and maintain affordability.  These critical, and sometimes difficult, discussions are centering around zoning rules, housing density, and how to balance rising demand without displacing existing low- and moderate-income households.  They also involve new ideas about how to create affordable housing in high opportunity areas. 

Time and the recovery have not, however, lifted all communities.  Some areas of the country have not regained pre-crisis home values – and some are not projected to do so for some time to come.  These areas continue to have a significant number of borrowers who are seriously delinquent on their mortgage or who are current in making their payments but are still underwater.  These problems often exist in urban and low-income neighborhoods that were hardest hit by the crisis and where abandoned and vacant homes adversely impact property values and fuel a continuing cycle of disinvestment.  Often these are neighborhoods where people of color predominate.  Ironically, these hardest hit neighborhoods often stand in close proximity to other, higher-income neighborhoods that are thriving.  And, of course, many rural areas, where manufactured housing continues to be an important source of housing, also continue to face unique and difficult housing challenges.

***

Today's housing market is being reshaped as well by economic factors that have real impacts on individuals and families and pose, perhaps, the most difficult and lasting impediment to credit access.

In the years since the height of the collapse, many households have grappled with the long tail of the crisis.  Workers have faced a protracted economic recovery that has slowly produced more jobs, but little wage growth.  This slow recovery has left many families with limited paychecks and less spending power than before. 

New data suggest that real incomes may finally be showing signs of growth, although real wages still remain below peak levels.  Last month, the Census Bureau released data showing that median wages, adjusted for inflation, grew over 5 percent in 2015.  This growth was shared across demographic groups, with the notable exception that workers living in non-metropolitan areas experienced flat incomes, signaling a challenge for many families living in rural areas. 

It's too soon to reach any conclusions about income trends, but sustained wage growth would obviously help many people regain their footing in the economy and in the housing market. 

In addition to job losses or strained incomes, many people took a big hit on their credit scores during the crisis – either falling behind on credit cards, or becoming delinquent on a mortgage, or even losing a home to foreclosure.  Some borrowers will begin to see these negative events fall off their credit reports in the next several years, and that has the potential to improve their credit scores.  But such improvements will mitigate neither the very real declines in wealth that many have experienced nor the emotional impact of the crisis.  It's reasonable to think that these impacts will leave many people both less able and less willing to take on the risk of homeownership again in the future.

A number of demographic changes are also taking place.  One change that is impacting housing is the age demographic, especially the changing habits of millennials.  During and since the crisis, students and young people have faced the twin challenges of entering a recovering job market and carrying higher levels of student debt.  Many millennials live with roommates and others have chosen to live with their parents, both of which help reduce housing costs but also reduce housing demand.  Additionally, marriage of millennials has lagged that of prior generations, and marriage has long had a strong correlation with homeownership, especially first-time homeownership. 

These trends have translated into lower rates of homeownership among millennials.  But, as this generation ages, we expect that household formation will follow, leading to a significant upturn in new households.  Research indicates that, although they prefer to rent now, many millennials are still interested in becoming homeowners in the future.  However, like other potential borrowers, many millennials will face the challenge of finding affordable homes to buy and, given their student loan and other debt burdens, building enough wealth for a down payment.

Another important demographic change taking place is the growth in minority households.  The Harvard Joint Center on Housing Studies projects that minorities will make up 75 percent of net household growth in the next decade.  While the 2015 HMDA data released last month shows modest gains in the percentage of African American and Hispanic borrowers across the housing market, overall home ownership for these groups remains low.  Purchase loans for African American borrowers increased from 4.9 percent of the market in 2014 to 5.2 percent in 2015.  Similarly, the percentage for Hispanic borrowers increased from 7.5 percent to 7.9 percent.  All of these figures are, of course, well below the percentage of these minority groups in the population, and the disproportionate impact of the crisis for people of color has resulted in even more ground to be made up.

While there are many layers to the challenge of finding a way to address this disproportionality, homeownership has historically been the primary means of acquiring and maintaining wealth in minority communities.[1]  So finding responsible ways to improve access to mortgage credit by minority borrowers would represent an important opportunity both for these borrowers and for other participants in the housing sector. 

Another major change over the last eight years, caused at least in part by the crisis, has been the dramatic increase in the number of people who are renting.  Millions of families lost their homes to foreclosure and, in the process, moved from being homeowners to renters.  Over the last ten years, the number of renters increased by 9 million, and renters now represent 36 percent of all households.

This change has a number of impacts.  Most significantly, skyrocketing demand for rental housing, especially in cities, has fueled substantial rent increases and declining affordability.  By the end of 2015, over 20 million households were paying more than 30 percent of their income toward rent.  Of these, over 10 million paid more than 50 percent of their income on rent.  

High rent payments not only impact the finances of households in the present, but may also limit future housing options by making it harder to save for a down payment.  There are some signs that rent increases may be lessening in certain metropolitan areas, but rental affordability is certain to remain an ongoing challenge for many families.  

***

As we look to define the "new normal" going forward, all the changes I have discussed, as well as others, will have an impact on who becomes the next generation of homeowners and who stays in the rental market longer-term.  Many of these factors fall outside the statutory mandate and control of the Federal Housing Finance Agency and some are outside the ability of any participant in the housing market to control.  But I believe we should all be committed to using our individual and collective efforts, whenever and wherever possible, to create a "new normal" that includes solutions to these intractable challenges.  

So, at FHFA we have been working diligently to make the housing finance market more liquid, efficient, understandable and transparent to try to meet the challenges that we have the authority to impact.  I've already referenced some of the changes and accomplishments these efforts have led to.  And I'm indebted to many of you here today for the assistance and cooperation you provided to help formulate and implement many of the changes.    

I'll take the opportunity to list just a few of these accomplishments and changes and, as I do so, you can reflect on how they are changing the mortgage market:

• Publication of a 2014 Conservatorship Strategic Plan that emphasized managing the Enterprises in the present and reducing risks to taxpayers consistent with our statutory mandates;  
• Implementation of a more systematic and transparent approach to setting Enterprises' guarantee fees;
• Leveling the playing field for lenders of all sizes and expanding the direct access of small lenders to the Enterprises, as well as increasing outreach to rural lenders and state Housing Finance Agencies;
• Continuing robust implementation of loan modification, foreclosure prevention, and HARP programs that have resulted in millions of people being able to remain in their homes and weather the effects of the housing crisis;
• Major modifications to the Enterprises' representations and warranties framework; 
• Clarifying the Enterprises' role in the overall multifamily market and placing greater emphasis on the categories of affordable and underserved rental housing by excluding them from our multifamily scorecard cap;
• Strengthening the Enterprises' counterparty standards through new eligibility requirements for private mortgage insurers and non-bank servicers;
• Greatly expanding and maturing the credit risk transfer market;
• The imminent implementation of Release 1 of the Common Securitization Platform, which will represent the first actual use of the CSP;
• Finalizing the features and disclosures of the Single Security, which will replace the Enterprises' separate securities;
• The Enterprises' release of their 97 percent LTV loan products and enhancements to their affordable lending programs;    
• Developing a post-HARP streamlined refinance program at each Enterprise;
• Making diversity and inclusion a priority throughout all the housing finance activities of the Enterprises and the Federal Home Loan Banks; and
• Releasing a revised uniform residential loan application.    

None of these things has been easy and almost all of them have been characterized by extensive input, consultation, and collaboration, often with many of you present here today. 

While there appears to be substantial consensus that the work we have done has moved the mortgage market in the right direction, there are still plenty of challenges to face and much work to do.  For that reason, we are in the process of refining our objectives and charting a course to make more progress in a number of areas.  

One of our most important projects now in process is developing our 2017 Scorecard for the Enterprises.  While we won't be releasing the Scorecard until the end of the year, I'll give you a little sneak preview.  

An area we'll be asking the Enterprises to focus on next year will be research to enhance our efforts to increase responsible access to credit and affordable housing.  We want the Enterprises to intensify their research and analysis about barriers to access to credit and opportunities that could help overcome those barriers.  Based on the work they have already done and this additional research, we'll be asking them to begin well-researched pilots and initiatives that are calculated to move the access needle safely and soundly, but hopefully also significantly.        

Because we recognize that not everyone is able to be a successful homeowner, access to affordable rental housing will also continue to be a very high priority for us.  Providing access to affordable rental housing has also been a major challenge.  Although the multifamily market has grown by leaps and bounds in recent years, the growth has been concentrated at the top of the market, providing luxury rental units in high-cost cities.  So the Enterprises' research and efforts won't be limited to access to homeownership.  In next year's scorecard, we'll also be asking them to explore other ways to more fully support liquidity in the affordable segment of the multifamily market.         

In addition to these and other scorecard items, we are also well on our way to completing our duty to serve rulemaking, which will implement a provision in the Housing and Economic Recovery Act of 2008 that requires the Enterprises to support three underserved markets:  manufactured housing, affordable housing preservation, and rural housing.  With the focus on these three segments of the market, we believe this rulemaking can have a real impact on access to mortgage credit, as well as affordable rental housing.  We proposed a number of eligible Enterprise activities for each underserved market in our proposed rule, including ways for the Enterprises to support residential economic diversity in these markets.  We are carefully reviewing and considering the many comments that we received from the public, and we are diligently working to publish the final rule by year end, or early next year at the latest.  Our efforts will then turn to fully implementing our process to oversee and evaluate the Enterprises' duty to serve activities.    

We would also like to chart a way forward on language access issues.  Our objective is to work with the Enterprises, the industry, and consumer advocates to look for ways to increase opportunities to lend to borrowers with limited English proficiency, while ensuring that these borrowers are able to understand the terms of the mortgage credit they receive.  We expect to release a request for input on language access issues and, as has become customary, we hope to receive a wide range of responses and input from all parts of the housing and mortgage sector.  Our discussions to date have made it clear that there are many legal and practical concerns to be addressed in this area and that we must, therefore, proceed with caution.  

This is by no means a full list of the work we project for 2017, but I hope it gives you a flavor for some of the things we hope to accomplish.  The lending community has an obvious and important role to play in figuring out how to serve the next generation of homeowners and renters.  Your involvement will have a significant impact on whether the initiatives I have just discussed prove to be successful. 

As FHFA has done in the past, we hope to have a robust dialogue with you and other stakeholders about the Enterprises' work to examine access to credit barriers and to develop solutions to all our challenges that are responsible, but also innovative and effective.  As I stated at the outset, we need to march forward together into this uncertain "new normal," prepared and willing to solve the challenges of the market today and in the future. 

Thank you again for having me here today so we can continue this important dialogue.  I look forward to our ongoing work together. 

[1] Christopher Herbert, Daniel McCue, Rocio Sanchez-Moyano, Update on Homeownership Wealth Trajectories Through the Housing Boom and Bust, Working Paper: Harvard Joint Center on Housing Studies (February 2016) (stating that "[e]ven after the precipitous decline in home prices and the wave of foreclosures that began in 2007, homeownership continues to be associated with significant gains in household wealth at the median for families of all races/ethnicities and income levels.  Households who are able to sustain homeownership over prolonged periods stand to gain much." available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/2013_wealth_update_mccue_02-18-16.pdf.