​Remarks as Prepared for Delivery

Melvin L. Watt, Director

Federal Housing Finance Agency

2014 National Association of Realtors Conference & Expo

New Orleans, LA

November 7, 2014

Thank you for inviting me to speak to you this morning.  As realtors, you are working on the ground every day to help individuals and families who want to achieve the goal of homeownership.  While we know that homeownership is not a good option for everyone, we also know that it is one of the primary ways that many Americans have accumulated and grown personal wealth.  Homeownership is also a means for many families to gain stability and invest in their communities. 

The last several years have been difficult ones for the housing market, especially when it comes to homeownership.  In the aftermath of the financial crisis, the market was hit hard with record defaults, loss of home value and equity, and foreclosures.  This market turmoil has affected your communities and your work as realtors.  But, things have started to improve.

At this time when the housing market is recovering but not yet fully recovered, there has been much needed conversation about homeownership, both about access to homeownership and about demand for homeownership. 

On the access to homeownership side, the conversations always start with the availability of and access to credit.  There is widespread concern that today’s credit market has swung from the reckless lending of the past to an opposite extreme in which only borrowers who have the most pristine credit can get a mortgage.  Compared to the pre-crisis period in the early 2000s, the overall volume for purchase mortgage lending has significantly declined.  In addition, credit scores required by lenders have, on average, risen considerably both across the entire market and within Fannie Mae and Freddie Mac’s guarantee business.  

FHFA, both as regulator of the Federal Home Loan Banks and as regulator and conservator of Fannie Mae and Freddie Mac, is at the heart of this conversation.  No one wants to return to the excesses and abuses of the past and FHFA is taking steps to ensure that this does not occur.  But the message we have tried to send is that we need to find a way back to responsible lending to creditworthy borrowers across all market segments.      

As part of FHFA’s statutory obligations (1) to ensure safety and soundness of our regulated entities and (2) to ensure liquidity in the housing finance market, the question of how to achieve responsible access to credit is of critical importance.  In putting the access to credit conversation in context, we should start with the mortgage lending reforms that have been adopted since the housing crisis began. 

We now have in place a robust set of mortgage lending protections that could well have prevented the abusive lending boom we experienced.  With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, borrowers now have meaningful protections against the kind of mortgages with risky features that resulted in high default rates and helped fuel the crisis. 

With these reforms, before a mortgage loan can be made, lenders are now required to assess whether a borrower has the ability to repay a mortgage.  This requirement provides a critical protection for borrowers, contributes to the stability of the housing market, and is fundamental to safe and sound lending.  Assessing a borrower’s ability to repay prevents the no-doc lending that was pervasive during the boom and led to widespread losses. 

Reforms that have been adopted also restrict other mortgage products, such as subprime teaser adjustable rate mortgages that led to unaffordable payments when interest rates increased a few years into the loan.  Other reforms restrict the prepayment penalties that stripped away home equity when borrowers tried to exit unaffordable loan products.  And, mortgage originators can no longer be paid more for putting borrowers who qualify for better loan alternatives into more expensive loans.

The Dodd-Frank Act also created the Qualified Mortgage standard.  This standard requires loans to be fully amortizing, meaning no interest only or negatively amortizing loans.  To be a Qualified Mortgage, points and fees cannot exceed the specified thresholds and loan terms also cannot exceed 30 years.  And FHFA has directed the Enterprises to limit their mortgage purchases to loans that meet these Qualified Mortgage product feature requirements. 

These reforms establish a solid new foundation for the housing market to responsibly provide access to credit for creditworthy borrowers. 

However, today’s constrained credit environment has resulted in relatively few borrowers buying houses and benefitting from these protections and improvements.  The recent lender practice of setting higher minimum credit score standards than required by the Enterprises has locked many creditworthy borrowers out of today’s market.  This practice has been driven both by an overall cautious approach to the post-financial crisis housing market and by uncertainty about Fannie Mae and Freddie Mac’s repurchase requirements.  As a result of these and other factors, mortgage originators have focused on refinancing and lending to borrowers with higher credit scores in recent years. 

But there are also a number of troubling headwinds limiting demand for homeownership.  These demand factors are keeping some individuals and families on the sidelines of the market instead of looking to buy a home.  So, factors driving down demand must be an important part of the conversation also.  What are some of these factors?

Increasingly, millennials – which include young people between 25 and 34 years of age – are choosing to remain renters.  Signs suggest that many millennials want to own a home in the future, but are holding off on purchasing for a number of reasons.  Many are getting married and having children later in life than their parents did, which often delays a decision to become a first-time homebuyer.  Additionally, many of them continue to face economic hardships from having entered the job market during the Great Recession.  The number of adult children living with their parents has also risen dramatically. 

Student loan debt is also having a financial impact on some millennials, and there are many nuances to this issue.  On the one hand, higher education may lead to increased future income for many in this group and, therefore, ultimately increase their ability to become successful homeowners.  However, many individuals with student loans are struggling with high debt levels and impaired ability to save for a down payment – both of which make it more difficult to qualify for a mortgage.        

On the demand side also, prospective borrowers other than young people and millennials are also facing challenges in accumulating enough money to make a large down payment and cover closing costs.  This is a problem of particular importance to communities of color, which generally have significantly lower average household wealth and experienced record loss of wealth during the financial crisis as a result of abusive mortgage products, the economic downturn and other factors.  And the impact of this wealth disparity is likely to have a growing impact on the future housing market since people of color are projected to account for approximately 70 percent of the increase in number of households over the next decade. 

Demand in today’s market is also limited by former homeowners who found themselves unable to keep up with their mortgage payments during the financial crisis, including many who lost their jobs during the recession or faced reductions in their income.  Many of these individuals not only lost their homes, but also seriously damaged their credit.  Many filed for bankruptcy.  Although some of them may be back on their feet in terms of income, their impaired credit records constrain their ability to return to homeownership.  

A less quantifiable factor on demand is the psychological impact of the housing crisis across the country.  Many people watched their friends or loved ones lose their homes or suffer financial hardship in the housing crisis, and this has deterred them from entering the homeownership market.  

Bottom line, there is no lack of rational explanations for why demand for homeownership is down, and these explanations will continue to change and evolve in the months and years ahead.  While things will not change overnight, it is my hope that many creditworthy individuals and families who are currently renters – but have the ability to pay a mortgage and become homeowners – will have the opportunity to pursue homeownership and will decide to do so.

A shift in this direction will not only be beneficial for our economy and overall housing market, but homeownership and paying down a mortgage remains a way that many individuals and families can save and build and retain wealth over time.¹   The reforms I’ve already discussed will restrict the kind of wealth-stripping and abusive lending practices that characterized the subprime boom.  And, the foundation of these reforms and responsible lending practices will provide predictable mortgages that borrowers can afford and have the ability to repay.  Because of these factors, the fact that home prices are still low in many locations, and the fact that interest rates are low, now is a great time for realtors to be actively encouraging their customers who can afford it to become homeowners.

While FHFA can’t respond to every factor that is restricting demand for homeownership, we do have a number of efforts underway to encourage responsible lending and access to credit for those who want to become homeowners.  All of these efforts are consistent with our mandate to ensure the safety and soundness of our regulated entities and to ensure liquidity in the national housing finance market.  These efforts are also consistent with the actions we are continuing to take to strengthen the financial position of Fannie Mae and Freddie Mac while they are in conservatorship, such as addressing guarantee fees, requiring the Enterprises to transfer significant credit risk to the private market, reducing their portfolio investments, and improving their servicing standards and loss mitigation options.      

As I discussed two weeks ago when I spoke to the Mortgage Bankers, FHFA is continuing the process of updating and clarifying the Representation and Warranty Framework (Framework) for the Enterprises.  While I won’t take the time today to repeat the details of this Framework, I do want to emphasize that FHFA is working to have the Enterprises place increased attention and resources on conducting quality control reviews and providing lenders access to automated appraisal tools to detect problems with mortgage purchases early on, even before the loan is purchased.  In addition, we believe that these revisions and clarifications to the Framework will reduce lender uncertainty about when the Enterprises will require repurchase of a loan and, as a result, will pave the way for lenders to lift some of their current credit overlays and reduce the cost of credit to borrowers without compromising the safety and soundness of the Enterprises.  

I also announced recently that the Enterprises are working to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent.  As I said earlier, there are creditworthy borrowers in today’s market who have the income to afford monthly mortgage payments but do not have the money to make a large down payment and pay closing costs.  Purchase guidelines that allow for 3 percent down payments will provide an opportunity for access to credit for some of these borrowers.  

To appropriately manage the Enterprises’ risk, the guidelines for these loans will be targeted in their scope and will include standards that support safety and soundness.  We know that the size of a down payment – by itself – is not the most reliable indicator of whether a borrower will repay a loan.  As a result, the guidelines will require that borrowers have “compensating factors” and risk mitigants – such as housing counseling, stronger credit histories, or lower debt-to-income ratios – in order to make the mortgage eligible for purchase by Fannie Mae or Freddie Mac.  This approach builds on the Enterprises’ experience using compensating factors and risk mitigants.  It also meets the objective to develop guidelines that look at and assess a borrower’s full financial picture and ability to repay, not just whether they have enough money for a big down payment.  Additionally, like other loans with down payments below 20 percent, these loans will require credit enhancement, such as private mortgage insurance. 

For individuals and families who rent rather than buy, continuing to support affordable rental housing is also an ongoing priority for FHFA and the Enterprises.  Fannie Mae and Freddie Mac have historically played a key role in providing financing to multifamily projects and their multifamily business has demonstrated excellent performance even through the recent financial crisis. 

Under FHFA’s 2014 Conservatorship Strategic Plan, FHFA did not require a reduction in the Enterprises’ multifamily production levels, and we provided additional capacity for the Enterprises to participate in affordable multifamily projects.  Consistent with safety and soundness, FHFA is working with the Enterprises on multifamily initiatives for smaller rental properties and for manufactured housing communities which often are more likely to benefit smaller or more rural communities.  Additionally, the Federal Home Loan Banks continue to support affordable rental housing, including units affordable to very low-income families, through their Affordable Housing Program and other initiatives. 

Thank you again for providing me with the opportunity to be with you today and to speak about our work at FHFA to improve access to mortgage financing in a safe and sound way.  Our efforts at FHFA build upon the foundation of mortgage lending reforms that now provide borrowers with significant protections from the abusive practices that contributed to the financial crisis.  In fact, as the housing market continues to recover, we all have a shared responsibility to ensure that the home purchase process provides borrowers with opportunities for homeownership that are sustainable.

As FHFA continues efforts to move the housing finance market back to a state of normalcy that is built on responsible lending, we look forward to our ongoing engagement with realtors and other stakeholders in this important endeavor.

 ¹ See e.g., Herbert, McCue, and Sanchez-Moyano, "Is Homeownership Still an Effective Means of Building Wealth for Low-income and Minority Households? (Was it Ever?)," Joint Center for Housing Studies, Harvard University, at 48 (September 2013) (available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/hbtl-06.pdf).