Mortgage Banking
October 2008
A brand-new Hud secretary has stepped into the job when much remains to be done to shore up the housing market, implement a massive new housing law and oversee a revived FHA program.
By Robert Stowe England
Steve Preston was sworn in as secretary of the Department of Housing and Urban Development (HUD) on June 5, filling the vacancy left by the resignation of former HUD Secretary Alphonse Jackson last March. Prior to coming to HUD, Preston served as administrator of the Small Business Administration (SBA) from 2006 to June 2008. At SBA he led a reform agenda to improve the agency's ability to respond faster to natural disasters and more efficiently provide services.
Prior to the SBA, Preston had more than two decades of experience in the private sector. From 1997 to 2005, he was chief financial officer, and then executive vice president of strategic services, at The ServiceMaster Company, Downers Grove, Illinois. The company relocated to Memphis, Tennessee, in 2007. From 1993 to 1997, he was senior vice president and treasurer of First Data Corporation, Greenwood Village, Colorado. He previously worked from 1983 to 1995 as an investment banker with Lehman Brothers, New York.
He earned an undergraduate degree in political science from Northwestern University, Chicago, in 1982 and an MBA from the University of Chicago's School of Business in 1985.
Preston assumed the reins at a critical time for HUD, as the nation faced its worst mortgage crisis and housing downturn in modern times. He needed to hit the ground running and use his background in the private and public sectors to help HUD meet its considerable challenges in a timely manner.
Mortgage Banking caught up with the secretary Sept. 3 at HUD headquarters in Washington, D.C., just hours before he left for a tour of Louisiana and other Gulf Coast states hit by Hurricane Gustav. (This interview was conducted before Hurricane Ike ravaged the Texas coast, and before Fannie Mae and Freddie Mac were taken into conservatorship.)
Q: You have been in your job only a few months, and have only four months left to go. You have said you feel you will be able to accomplish something even in this short span of time. So far, have you been able to begin to accomplish some of the things you wanted to?
A: Absolutely. It has been a very, very productive three months. And we've done a number of things. First of all, we've seen a major piece of housing legislation [the Housing and Economic Recovery Act of 2008] passed, and we're well on our way to implementing that. We made a lot of progress on [new rules proposed in March under the Real Estate Settlement Procedures Act (RESPA), including a new rule governing a Good Faith Estimate of settlement costs that contains required disclosures concerning interest rates and monthly payments at the initial and highest adjusted rate], and we've got a number of other major initiatives to improve this agency's ability to provide services to Americans in a responsive way.
In addition, I think what's been important is to see how the leadership of this agency has come together to really focus on the very significant tasks ahead of us. So, I'm very happy with the way that happened. We've got a big job to do, and I think people are rallying very much to do that well.
Q: Could you explain Impact 200, your overall plan to improve the work and management of the department, its goals, what you have achieved so far, and what you hope to achieve before the end of January?
A: It's important to note that HUD's mission in the marketplace today has grown dramatically and it is perhaps more significant than at any time in recent history. It's absolutely imperative that we make every single day count. The reason we launched Impact 200 is to focus exactly on what we are going to get done, how we were going to get it done and the impact it would have for the benefit of Americans in the 200 days following its launch [on July 17]. Impact 200 was really the result of very significant work in reaching out to our employees, reaching out to our leadership, reaching out to our customers, reaching out to our partners in trade associations and on [Capitol] Hill to understand what the needs are and how to get after them most effectively.
Impact 200 is very much focused on what we can do for our customers; how we can enable our employees to provide that service more effectively to customers; and how we can provide better quality, oversight and integrity to the programs we have.
Q: What lessons were learned from Hurricanes Katrina and Rita that have been and are being applied to providing housing assistance to those whose homes have been damaged and those who have been made homeless in Hurricane Gustav and other major natural disasters?
A: Well, I think the agency has made a lot of progress in a number of areas. No. 1, it is making sure that people who are HUD clients get out of affected areas and work closely with [the Federal Emergency Management Agency (FEMA)] to make sure that happens. No. 2, once people come back to a disaster-affected area, we have any number of mechanisms in place to ensure that those people have housing if theirs has been damaged. If [someone is] a HUD client, we specifically find them another facility to live in or [we] provide them with financial support to be able to handle rent in a different place.In addition, we've developed something we call the National Housing Locator, which is a tool that we have to help anybody who's lost a home or an apartment to find a new place to live. We work hand-in-glove with FEMA in disaster-recovery centers now to be able to provide support to people. Part of Impact 200 actually includes an initiative to continue to improve our internal coordination and service levels to people who have suffered from a natural disaster.
Q: How did this work in the floods in the Midwest? People who fled the floods in those states must be back in their homes by now.
A: Well, actually many of them in Iowa are not back in their homes. Iowa continues to have some challenges, but those people would have had the opportunity to use the National Housing Locator to find alternative places to live. Although I have to say, these types of tools are generally more effective in larger urban centers where we have significant housing stock and significant alternatives for people who are displaced from their residence. The challenge in rural areas can be greater because there isn't necessarily pre-existing housing stock.
Q: Does HUD plan to revise its proposed new RESPA rule based on comments from reviewers, and when will the final rule appear? How will it be implemented?
A : We are very carefully reviewing the comments that we received. It's very important for us to achieve a balance between the value that new RESPA rules provide the homebuyer and the potential burden it places on the industry. So, we're working very hard to understand all the factors in that balancing act. So, at this point, it's difficult to gauge when the final rule will appear. But when it does appear, we will address the implementation issues at that time.
Q: Do you think the housing market has hit bottom, and how soon do you expect house prices to start rising again?
A: think the status of the housing market varies by geography. Some markets are actually showing some signs of strength and some rebound. Other markets have continued to have very significant inventories of unsold homes and will continue to see a real rough patch going forward. So, it's difficult to talk about it. .. on a national level. That having been said, I think nationally we have about an ii-month inventory of homes [for sale]. In a typical market you'll see six or seven months. So, we have a way to go before the market gets to a place that is more representative of a balance in supply and demand.
Q: FHA took a front-and-center role with the launch of FHASecure in trying to mitigate the impact of foreclosures in the face of falling home prices and overstretched homebuyers facing interest-rate resets. How successful has the FHASecure program been, and how many homeowners do you expect to help by year's end?
A: As of Aug. 31, in the first year after FHASecure was launched, we refinanced 325,000 homeowners into a safe, secure, 30year FHA-insured [Federal Housing Administration-insured] mortgage. So, we know that there were hundreds of thousands of families that were helped in this very difficult marketplace. Many of them were in subprime mortgages where they were facing a reset. By the end of the [current calendar] year, that number will exceed 500,000. So, our refinancing programs have been extremely successful and really a source of hope for people who didn't think they had alternatives. And so we're thrilled that we've been such a critical part of so many Americans being able to stay in their homes.
Q: I think in the latest report on mortgage originations, FHA had a significant share of the overall market. What are you seeing in terms of market share?
A: Our market share has gone up dramatically in the last year and in the last two years. It wasn't that long ago we were looking at a market share that was in the 2 percent range. And now we think we're about in the mid-teens. Other reports have us even higher.But our importance-not only to refinancing, but our importance to people buying a new home-has dramatically expanded. And in a market where we are seeing both [types of lending activity], dramatically more people have been able to find more affordable, more secure refinancing out of a difficult loan. And in a market where new homebuyers need liquidity to be able to purchase a home, FHA is serving an absolutely essential role at a very critical time.
Q: How important has it been to be able to do risk-based pricing, in terms of meeting the needs of low-income borrowers and in terms of mitigating the foreclosure challenge?
A: Well, we [were not] able to do riskbased pricing for very long. With the congressional moratorium [having begun] Oct. i, we go back pretty much to one-size-fits-all [pricing]. So, that does concern [us]. Now, we have done a dramatically scaled-down version of it going forward, and by that I mean we've introduced product pricing for people who are refinancing, but who have experienced delinquencies. And in those cases, we will be charging somewhat higher fees to cover the higher risk and that will somewhat mitigate the negative impact of the moratorium on risk-based pricing.
However, we are very concerned that without the ability to have risk-based pricing, many Americans who need our product will be paying much higher fees for a new home or to refinance. And any other insurance company in this country has the ability to price its product based on the risks that it takes. And ironically, at a time when it's very difficult in this marketplace, and we are the most important insurer of loans in the marketplace, Congress has restricted our ability to do so.
Q: The Hope for Homeowners program offers FHA insurance for up to $300 billion in mortgages for an estimated 400,000 homeowners where lenders agree to lower the principal to make the loan more affordable. In terms of this new program, do you expect it will be up and running in October, as indicated in the new law? Do you think it will, in fact, be able to help 400,000 homeowners, given that lenders have to agree to mark down the principal?
A: It's very difficult to gauge the number of people the new Hope for Homeowners program will help. We're in conversations with many banks. I think they are evaluating the circumstances under which they will use the program. The 400,000 estimate was from the Congressional Budget Office, and I think everybody understands that estimate is helpful in understanding the potential but not necessarily a reliable gauge of where this will come in. So, I think we're going to have to wait for the program to get launched and to give the banks more time to evaluate it before we can understand the degree to which [banks will be able to help people] take advantage of it.
Q: I would guess that some lenders may be reluctant to participate.
A: think some banks will be reluctant to mark down principal. I think it is going to be important for us to structure the program so [it] doesn't become used as the last resort. And we have to make sure the procedures are relatively straightforward and streamlined for them to be able to use it.
Q : Could you tell me about your pilot program in Detroit to provide more aggressive foreclosure prevention? Has that begun yet? How will it work?
A : It has not begun yet. We're still negotiating with partners right now, and so it's a little bit early to get into detail on that. But we're hopeful it will provide homeowners an opportunity to stay in their homes with a more affordable rate. We're hoping it will be up and running in October. We've got commitment letters that are in the process of being signed with the partners managing the joint venture. We're under way, but we're not ready to launch.
Q: How has FHA's role in the mortgage market changed since the summer of 2007, ana what role do you expect FHA to play in the future?
A: We're in a situation where almost the entire mortgage market has gone to some form of government support. [In July and August we were not] seeing expansion at the GSEs [government-sponsored enterprises]. Between the combination of those factors, FHA has seen its volumes grow more than threefold this summer. It continues to see its growth relative to last year's increase. So, FHA is playing a central role in providing new liquidity and a safer, more affordable alternative to people who are in a loan they can't afford.
Q: The new housing bill has a first-time homebuyer's tax credit of $7,500, which is really a loan that has to be paid back over 15 years. How effective do you expect the tax credit to be?
A: It's difficult to gauge. It's somewhat complicated because it does have to be paid back, but it is interest-free. I think it will be attractive to some first-time homebuyers. But it will be attractive to them in a marketplace where we really need new homebuyers. So, on the margin, I think it may generate some activity-but I don't think most people view this as a significant driver. It's just one more provision that may be helpful on the margin.
Q: The new housing law bans the use of seller-provided down-payment assistance, an important objective sought by the FHA. Does the new law provide what you wanted? How important do you think the FHA's efforts to focus attention on this problem were in getting this provision into the new law? What is the share of FHA-insured mortgages that have down-payment assistance?
A: The new housing law does not ban all down-payment assistance. It specifically bans down-payment assistance that has been provided by the seller of the property. So, those are situations where the seller has an incentive to provide down-payment incentives. I think Congress viewed that as a less-thanarm's-length transaction. FHA made clear to Congress what effect those programs had on the portfolio. The loss rates were dramatically higher than other loans in the portfolio, and it was becoming an increasing percentage of the portfolio. So, unfortunately, the prevalence of seller-funded down-payment-assistance loans has been a significant driver of higher cost in the FHA portfolio. I think for all of those reasons, Congress decided to ban the practice.
Q: What is the percentage of all seller-funded down-payment-assisted loans in the total FHA portfolio?
A: Right now it's approximately 15 percent of our portfolio, but it is running at 35 percent of new loans to purchase a house. That [is slated to end] as of Oct. 1.
Q: Do you think the housing law's new FHA loan limits [from 95 percent to no percent of area median home price, with a cap of 150 percent of the GSE limit-now $625,000] provide the program with the kind of flexibility it needs to meet the needs of borrowers in all markets?
A: It dramatically expands our ability to meet the needs of borrowers. And there are markets that have been higher-cost markets where we have effectively not been a factor because of the loan limits. California is a case in point. In California, the original loan limit was just under $363,000. [In the new housing law, the loan limit] went up 72 percent to $625,000. We're seeing our applications in California surge because of the fact that we now have a product that is available for a much larger percentage of the population than before. I think it's also important to note that many of the markets that are seeing the most difficulty are, in fact, higher-priced markets.
END
Copyright 2008 Mortgage Bankers Association of America. Reprinted With Permission.
