WORD ON THE STREET: Bringing private capital back into the housing finance system does not mean eliminating all government involvement in housing finance. We believe that a government role, targeted correctly, and with the right protections for taxpayers, should remain an important component of any future system. That is why all three of the reform options we lay out in the Obama administration's white paper include a strong, resilient Federal Housing Administration (FHA) and solid consumer and investor protections.
To that end, reforming and strengthening the FHA is the first of four primary areas of reform to achieve broader mortgage access and housing affordability. The other crucial components of reform are a commitment to affordable rental housing, a flexible and transparent funding source for access and affordability initiatives, and strong measures to ensure that capital is available to creditworthy borrowers in all communities, including rural areas, economically distressed regions and low-income communities.
Within the existing authorities granted to us by Congress, we have already begun the necessary process of making changes to the FHA to ensure that it will be able continue its mission. The FHA has already made the most sweeping combination of reforms to credit policy, risk management, lender enforcement and consumer protection in its history. These reforms have strengthened our financial condition and minimized risk to taxpayers, while allowing us to continue fulfilling our mission of providing responsible access to homeownership for first-time home buyers and in underserved markets.
In the near term, we look to Congress to pass FHA reform legislation that enhances the FHA's lender enforcement capabilities and risk management efforts that are critical to our ability to monitor lender performance and ensure compliance, among other things. Indeed, last year, the House of Representatives passed an FHA reform bill, H.R.5072, which contains an array of changes along these lines, and, while similar legislation was introduced in the Senate, action on the bill was not completed. We look forward to working with both chambers of Congress to enact these proposals into law.
Longer term, we also hope to work with Congress to give the FHA additional flexibility to respond to stress in the housing market and to manage its risk more effectively. This will mean giving the FHA flexibility to adjust fees and programmatic parameters more nimbly than it can today. The FHA should also have the technology and talent needed to run a world-class financial institution.
Strengthening and reforming the FHA in a way that is healthy for its long-term finances and that ensures the FHA is able to continue its mission of providing access to mortgages for low- and moderate-income families is a central component of broader systemic reforms. While the FHA has already changed policy to require that borrowers with lower FICO scores make larger down payments, the FHA will consider other options, such as lowering the maximum loan-to-value (LTV) ratio for qualifying mortgages more broadly. In considering how to apply such options, the FHA will continue to balance the need to manage prudently the risk to the FHA and the borrower with its efforts to ensure access to affordable loans for lower- and middle income Americans, including providing access to homeownership for first-time home buyers and underserved markets.
And similar to the administration's broader reform of the U.S. housing finance system, the FHA will take any steps for reform carefully to ensure that they do not undermine the broader recovery of the housing market. Similarly, as we consider changes in such areas as down payments and LTV ratios, we will make sure to retain the flexibility to respond to changing market conditions so that we are able to manage risk, and maintain access, as effectively as possible.
Some have expressed concerns that the increases to the monthly premium set to go into effect next month – on the order of $30 per month for the average borrower – and any increase in down-payment requirements have the potential to excessively restrict access to credit or perpetuate a dual credit market. We believe that the benefit to the financial health of the FHA of the relatively modest premium increase is appropriately balanced with the need to maintain access, as the change remains affordable for almost all home buyers who would qualify for a new loan. Similarly, we will only pursue increases in down payment where the impact on access is not prohibitive.
Affordable rental housing
With half of all renters spending more than a third of their income on housing – and a quarter spending more than half their income -Â this administration believes that as part of a balanced housing policy, there should be a range of affordable options for the millions of Americans who rent. Reducing the government's role in the single-family market makes this commitment even more critical.
Private credit markets have generally underserved multifamily rental properties that offer affordable rents, preferring to invest in high-end developments. By contrast, Fannie Mae and Freddie Mac 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 Fannie Mae and Freddie Mac, it will be critical to find ways to maintain funding to this segment of the market.
One option would be to expand the FHA's capacity to support lending to the multifamily market. Utilizing existing multifamily expertise so that the FHA and other entities continue the industry's current best practices and retain valuable human capital would help achieve this objective.
We will also consider a range of reforms, such as risk-sharing with private lenders to reduce the risk to the FHA and the taxpayer, and developing programs dedicated to hard-to-reach property segments, including the smaller properties that contain one-third of all rental apartments.
Support for affordable-housing requires consistent, flexible and transparent funding. Although the FHA and other federal affordable-housing policies do a great deal to provide access and affordability, we recognize that a more balanced system will require additional resources to address clear gaps. That was the goal of the National Housing Trust Fund, which was authorized by Congress in 2008, but has yet to receive funding. And with the largest increase in worst-case housing needs in the quarter-century history of the survey, the necessity for strong support of affordable housing has never been more clear.
That is why the administration will work with Congress to develop a new dedicated financing mechanism to support affordable homeownership and rental housing that current policies cannot adequately address. This funding stream would support the development and preservation of more affordable rental housing for the lowest-income families to address serious supply shortages. On the ownership side, it would support down-payment assistance, counseling, or other mechanisms to help qualified low- and moderate-income home buyers, in a form that does not expose them or financial institutions to excessive risk or cost.
The funds could be used to scale up support for proven nonprofit partnerships for affordable-housing production and preservation that can attract much larger amounts of private capital. This is the purpose of the Capital Magnet Fund, also enacted in 2008 and funded in fiscal year 2010 as a pilot demonstration administered by the Treasury Department's Community Development Financial Institutions Fund. Funding would help to overcome market failures that make it hard to develop a secondary market for targeted affordable-housing mortgages, such as mortgages for small rental properties.
These components target specific needs in flexible ways that can engage a range of partners and respond to local priorities and opportunities. We will work with Congress to ensure that funding will be transparent and targeted to clearly defined objectives and programs.
Ensuring capital availability
Last, housing finance reform must include measures to ensure that capital is available to creditworthy borrowers in all communities, including rural areas, economically distressed regions and low-income communities. Our plan calls for greater transparency that requires secondary-market actors to disclose information on the credit, geographic, and demographic characteristics of the loans they package into securities. In addition to benefits for investors, greater transparency allows us know who is abiding by fair-lending and equal-credit obligations – and who's not.
A key lesson from this crisis is that decisions made in the secondary market very clearly drive lending practices in the primary market – and the potential for disparate impact in the availability and quality of mortgages in underserved communities is very real.
To that end, the administration is fully committed to exploring other measures to make sure that secondary-market participants are providing capital to all communities in ways that reflect activity in the private market and that are consistent with their obligations of safety and soundness.
Shaun Donovan is secretary of the U.S. Department of Housing and Urban Development. This article was adapted from testimony that Donovan delivered before the Senate Banking Committee. His complete testimony can be found here.
