WASHINGTON, D.C. -- Several federal officials, on the front lines in the battle to restore order, activity and confidence in the nation's housing market, told an audience of real estate journalists on Thursday that curbing foreclosures is key to a housing and economic recovery.
"Our first responsibility is to stem the tide of foreclosures sweeping the country and help people keep their homes," said Housing Secretary Shaun Donovan, who addressed members of the National Association of Real Estate Editors during an annual conference.
"With the housing crisis at the root of the economic crisis, (the U.S. Department of Housing and Urban Development) has been quite literally at the center of the administration's response."
James Lockhart, director of the Federal Housing Finance Agency, which oversees Fannie Mae, Freddie Mac and the federal home loan banks; and John Walsh, chief of staff for the Treasury Department's Comptroller of Currency, which supervises and regulates national banks, also spoke during separate sessions at the conference on Thursday.
In referencing a new regulatory plan introduced this week by the Obama administration (see Inman News story), Donovan said, "The financial crisis revealed devastating inadequacies in consumer protection across a wide range of financial products -- but nowhere was that clearer than mortgages."
The proposed Consumer Financial Protection Agency has a goal of transparency, with consumers receiving "a single, simple, integrated federal mortgage disclosure that is reasonable, clearly written and concise," with companies offering "plain vanilla" mortgage products as a default while other more exotic varieties will carry "stringent protections" -- he said.
"Whether we are regulators or consumers, we can only make informed choices if we have all the information."
In responding to an audience question, he said that while preventing foreclosures is a priority, it obviously is not possible to prevent them all. But, he said, the foreclosure wave was too large to ignore, as foreclosure properties were "driving down neighborhood values substantially."
He added, "Our fundamental analysis was that allowing foreclosures to continue at the scale they were wasn't going to lead to a bottom -- it was going to lead to a much more substantial decline than would have occurred otherwise."
And he said that there are some encouraging signs of increases in sale transactions and even price stabilization in some market areas, though more evidence is needed to call a "bottom" to the market.
Donovan also said that loan modifications are a vital component in preventing foreclosures, and changes to the administration's Making Home Affordable Initiative (see related story) are showing some signs of progress, with 16 servicers -- representing 80 percent of the mortgage-servicing market -- already signing contracts and beginning modifications and refinancing.
"And participating servicers have extended offers on nearly 200,000 trial modifications, including 40,000 last week," he said, though, "the scale that we are at today is not going to get to the scale of the problem. Now is the time for servicers to step up their efforts ... to get to the scale that's really necessary under the plan."
Acknowledging renters' troubles, Donovan said, "We need to have a national housing policy that is not just about homeownership," and noted that renters represent nearly half of all households in foreclosure properties, by some estimates.
Lockhart said that the subprime disaster was obviously underestimated, with those loans that are serious delinquent -- behind in payments for 90 or more days -- rising to record levels.
The Making Home Affordable modification initiative, which provides $75 billion for loan modifications, paired with an expanded and revamped FHA Hope for Homeowners plan, is intended to appeal to more consumers at risk of foreclosure by reducing eligible borrowers' monthly housing expenses to 31 percent of gross income.
Servicers can lower borrowers' interest rates to 2 percent, extend loan maturities to 40 years, or offer principal forgiveness, among the range of available modifications.
"What we don't want is people waiting for the next best program. What we need to do is get people to pay attention to this program," Lockhart said.
"There are a lot of people (in trouble) just not answering their mail, and we need people to say, 'Gosh, a 2 percent interest rate isn't bad. Maybe I do need to get a modification.' "
Lockhart presented statistics showing that 83 percent of loan modifications in first-quarter 2009 for loans held by Fannie Mae and Freddie Mac actually decreased the monthly payment amount, compared with just 16 percent in first-quarter 2008.
Five states -- Arizona, California, Florida, Michigan and Nevada -- were among the hardest hit in the housing crisis, and those states represent two-thirds of Fannie and Freddie's first-quarter 2008 losses.
He also said that the Obama administration is "looking at going significantly higher" than the 105 percent loan-to-value limit currently in place for Making Home Affordable loan refinancings. Only loans owned or guaranteed by Fannie Mae and Freddie Mac are eligible for that program.
Lockhart also ran through the list of possible options under consideration for the future of Fannie Mae and Freddie Mac, which are now under federal conservatorship.
In releasing its proposed overhaul of the financial regulatory system this week, the Obama administration outlined six possible options, ranging from selling off their assets to nationalizing the companies, but said a report analyzing those options won't be completed until next spring (see story).
Lockhart said "mission creep," or an expansion beyond original goals, and "political interference" are issues to consider in the future of Fannie and Freddie, and there would be "significant risk" in nationalizing the entities.
If the federal government does retain some risk in the future of the entitie
s, he said the federal government should be compensated for this. And the entities should be run "based on sound insurance principles," with strong underwriting, a strong capital position, risk-based pricing and the flexibility to respond to market changes
"It's my view that we just have to get this restructuring right. We don't want to go through another event like we've been through this past two years," Lockhart said, acknowledging that it was clearly "folly" to allow the entities to "legally leverage their mortgage credit by well over 100-to-1."
Also, he said, the entities must be structured to be counter-cyclical. "We need to figure out how to dampen some of the boom and bust, and certainly the internal governance has to be fixed.
"The compensation at Fannie and Freddie got out of control, as it did at many other financial institutions. Everybody's compensation was out of line."
Walsh, chief of staff for the Treasury Department's Comptroller of Currency, said that while many federal programs are geared at stopping the spread of foreclosures, "the mortgage data continues to show rising and spreading foreclosures."
Declining home values are a "major concern," he said, "because the further individuals are underwater, the less capacity or incentive they have to swim to the top."
A high unemployment rate has yet to bear out its full impact in the delinquencies statistics, too, he said, and serious delinquencies among prime borrowers rose 44 percent in the OCC's latest report.
An April 2009 report by the OCC found that modifications that reduced borrowers' principal and interest payments tended to have better success, with modifications that reduced payments by more than 10 percent cutting in half the number of serious delinquencies after six months.
But the bulk of modifications (59 percent) covered in that report either did not change the payment structure or increased payments by borrowers.
"Unfortunately, in this highly stressed economic environment, there is no way to eliminate foreclosures," he said, "And the question of how much to change mortgage market rules or how much public money to spend to reduce those impacts is a very active subject of public policy debate."
Steps have been taken though, he said, "to prevent a recurrence of the practices that got us into this mess -- the emergence of complex products and weak underwriting that left too many borrowers with financial obligations they could neither understand nor afford, and created risk beyond lenders' ability to manage."
David Berenbaum, executive vice president for the National Community Reinvestment Coalition, an association of about 600 community-based organizations that promote affordable housing and job development, said outreach is key to educate consumers about available programs and to help them avoid scams.
There are still instances in which "consumers are being misguided into (loan) products and, in fact, they don't understand them," he said.
Ken Wade, CEO for NeighborWorks America, a congressionally chartered organization, agreed with Berenbaum that education and counseling can help prevent consumers from making the wrong choices in securing a mortgage.