BANK OF AMERICA
December 14, 2012
Thank you, Karen. Karen and her colleague, Ted Gayer, are members of Bank of America’s National Community Advisory Council.
They provide their insight on many of the issues we face, and we appreciate their partnership. I’m grateful to them and to the Brookings team for putting together this important forum.
There’s a saying that “confidence never comes from knowing all the answers but being open to all the questions.” Forums like today are designed to challenge our thinking. To tackle the tough questions.
Questions about the impacts of the recession and population growth on homeownership.
Questions about what lending standards will ensure homeownership is accessible and sustainable.
Questions about what role a strong affordable rental program has in the housing framework.
Questions about the proper role of the government and private sector in the system.
By focusing on these questions we can build confidence in the housing system going forward. We have a distinguished panel to discuss these questions. And, I invite all of you who have been focused on these issues to push the dialogue forward in a new direction.
To make sure we are replicating this conversation over and over again in the coming months to ensure we reach the right outcomes. It’s a dialogue our company is committed to being a part of, and we look forward to having.
To begin this dialogue, I’d like to make a few observations about where we are in the housing recovery. There’s an incredible amount of work that has been done over the past few years to help homeowners in distress.
In the last year, we’ve made progress. We’ve implemented programs from the servicing settlement, seen greater stability in home prices – but there is still work to do.
Observations on the Current State of Housing and Recovery
While there are still areas of the country that are hurting more than others, the housing market is showing signs of real, sustained recovery.
Overall, home prices are up. Housing demand is up which means more construction – a good thing for the overall economic recovery. Delinquencies continue to decline. National servicing standards are in place and alternatives to foreclosure are in full swing.
Our company acquired Countrywide at the height of the housing crisis and inherited a severely distressed portfolio. As a result, we have been front and center in efforts to assist homeowners. We’ve helped nearly 1.5 million people avoid foreclosure through modifications, short sales and other programs.
Our company has more than 50,000 people – out of 270,000 – working on this. 50,000 people working on about 900,000 delinquent loans.
To put that in perspective, nearly 75 percent of the Fortune 500 companies have less than 50,000 employees.
The industry has tremendous resources working to help customers get the right solution. Modification programs that offer payment relief, short sales, relocation assistance up to $30,000. And, we have principal reduction programs that are cutting principal on average about $150,000.
These programs are making a difference for the customers that can be helped.
But, even with a strong arsenal of programs and generous principal forgiveness, re-default rates, while better, are still high.
Why? Because at this point in the cycle it isn’t a lack of programs that is the issue. It’s that many customers remain unemployed, are still feeling the impacts of the recession and lack the cash flow to sustain a payment – even a modified one.
Important to the housing recovery is letting the process continue to move forward. To help customers get to the right solution even if that means transitioning to rental. In more than 40 percent of our foreclosure sales the property is vacant, so we must also become more efficient in how we handle foreclosure inventory.
We’ve worked with Chicago on an initiative to fast track vacant properties through the foreclosure process that we believe can be useful in other cities. Getting vacant properties back on the market as fast as possible makes a big difference to the community and to the neighbors who don’t want to see abandoned homes on their street.
We’ve also partnered with cities like Detroit and others on programs to donate and rehabilitate vacant properties. We just announced this week a partnership with Habitat for Humanity to donate 2,000 vacant properties to provide people in need an affordable home.
We’ve also committed to donating 1,000 properties with a specific focus on our nation’s military. So far this year, we’ve completed about 150 donations to military families.
Families like U.S. Army Specialist Nicholas Salerno, his fiancée and two children who recently received one of our donated homes in Tampa. During a tour in Afghanistan, Salerno suffered a brain injury and partial leg amputation. He and his fiancée credited their new home with providing them the fresh start their family needed.
So, as we think about the future of the housing system, how does everything we have learned during the crisis and recovery apply?
It underscores the need to shape a system that keeps borrowers out of the situation of owning a home and not being able to afford it.
It means shifting the conversation from what percentage of Americans own homes to what is the right solution at the right time for each individual or family.
As the housing market strengthens, now is the time to have this dialogue in earnest so we can reset to a more secure, sustainable system for all the players involved.
What I’d like to do is frame the rest of my remarks around the main players in the system – homeowners and homebuyers, lenders and the government.
Discuss some of the assumptions we need to challenge. And discuss the questions we need to ask in terms of what a reset would like.
For homeowners, what are the resets we have to make about homeownership?
It’s remarkable given everything we’ve been through in the past several years that in survey after survey an overwhelming majority of Americans still aspire to homeownership. And, most Americans still rank homeownership as an important part of the American Dream.
But, if you dig beneath the survey findings, you’ll see that much of the value we place on owning a home is emotional not financial.
Take, for example, the most recent Fannie Mae Housing Survey. The top two reasons for homeownership were to have a good place to raise children and a safe place to live.
As a just, democratic society, we owe all our citizens a safe, good place to live. But, a roof over one’s head doesn’t always have to come with mortgage debt. And in many cases shouldn’t.
Homeownership is valuable. It stabilizes a community and leads to more civic engagement and investment.
For those who purchase a home for a place to live and make long-term payments, a home can also be a vehicle for wealth creation.
It’s important to recognize that much of the value created during the housing bubble was more the result of easy credit and over borrowing than from underlying home value appreciation.
Historically, the long-term average of home appreciation going back to 1975 is 4.6 percent - and that includes the recent bubble and bust years. Since 2001, average appreciation has been 2 percent. Leading up to the crisis, the virtues of homeownership – stability, security, savings – got disconnected from the act of homeownership.
The laudable goals of the ownership society evolved from building long term equity to cashing in on short term equity gains. In practice, it became less about having a safe place to live and more about making a quick profit. Home purchases for investment gains, not for shelter, increased from a historical average of 4 percent to a high of 28 percent in 2006.
Homeowners heavily leveraged in their home became the norm. Home flipping and taking cash out for things other than the home - much of the behavior before the collapse was completely disconnected from the positive aspects of owning a home. According to a Freddie Mac report, for eight consecutive quarters starting in late 2005 cash out refinances exceeded 80 percent of all refinancing.
One question policymakers should consider is that if people are going to take cash out, speculate, or buy up multiple properties to rent, should they be able to do so with mortgage capital – especially mortgage capital guaranteed by the government?
We need to look hard at some of the old assumptions and ask the question, is homeownership the right solution for everyone? Is there value in more flexible housing options?
We have to challenge the assumption of stability vs. mobility.
Workforce mobility is increasingly important to counter potential income shocks, as was the case in this past recession. According to some of Karen’s research, the volatility of household income rose nearly 30 percent in the past four decades.
In addition to these realities, the past five years of high unemployment and underwater home values have taught us that sometimes flexibility is a virtue. And, flexibility is something a mortgage does not provide.
We have to challenge the assumptions about the purchase cycle.
It’s important to understand the purchase cycle has fundamentally changed. It used to be that if you got in trouble, home prices could save you. Macro conditions were working in favor of a robust housing market – the economy was strong, population growth was high, demand was high – but not anymore.
There is now a lower fundamental expectation of economic growth. In 2003, forecasters expected growth of 3.1 percent over the next six years and a long-run average of 3.3 percent. In 2012, forecasters only expect 2.5 percent growth over the next six years and a long-run average of 2.7 percent.
Unemployment is more uncertain and long-term unemployment has risen to record levels. Today, 40 percent of unemployed workers are unemployed for longer than six months – well above the historical average of 13 percent.
U.S. household formation has slowed dramatically. Average annual household growth for the past five years has been about 560,000 – less than half the pace in the first half of the 2000s.
Regionally the demographic issues can be even more dramatic. In a city like Detroit that has lost 25 percent of its population over the past decade – a debate about homeownership is going to be completely different than in cities like Phoenix or Dallas where population growth and housing demand is strong.
All these factors taken together – weaker economic growth, slower household formation, employment uncertainty - will make the purchase cycle slower. And, will make it harder for a borrower to find an escape valve if they take on a mortgage that becomes unaffordable.
We have to challenge the assumptions about risk.
Ultimately, I believe a more sustainable housing model rests on more than just prudent lending standards but also on our ability to educate people about the inherent risks that come with this responsibility.
At Bank of America, we’re focused on homebuyer education and partner with a network of more than 600 nonprofits to provide purchase counseling. Coming out of the crisis, credit repair is a prime focus and we’re working with counselors and educators on steps consumers can take to repair credit and prepare for sustainable homeownership going forward.
So, absolutely homeownership is important. The American Dream is important. But we need to think about do we understand the real attributes of homeownership? Do we understand the risks?
Because even a responsible home buying decision carries risk.
Let me tell you, I get letters every day from customers who are struggling to pay their mortgage. And, if you want to read the letters that tear your heart out. It’s the letters from people who can’t pay for the same reasons they couldn’t pay 20, 30, 40 years ago. They got sick, got divorced, lost their job. And that’s not going to change.
So, these are the questions we need to consider for a homeowner reset.
How do we support the positive aspects of homeownership?
How do we help people make smart financial decisions that are not based on assumptions?
How do we promote the benefits of homeownership while preparing people for the risks and responsibilities that come with it?
Next, what are the resets needed for lenders?
Here, the discussion often becomes solely about the availability of credit. Whether banks as a whole should be lending more.
But, let’s take a step back.
By being overly aggressive the entire housing system caused a great deal of damage to the very people we were trying to help attain homeownership. And that damage was certainly not caused because we weren’t lending enough.
The U.S. mortgage crisis originated with a dramatic expansion of credit. Lenders, prompted by lower interest rates, rapidly rising home prices, and large amounts of foreign investment capital, made credit available to borrowers who previously would not have qualified or at levels that ultimately proved to be unsustainable.
Subprime, little to no down payment, stated income and low doc loans all expanded. At Bank of America, our primary window into the mortgage crisis was through our acquisition of Countrywide. We exited subprime lending in 2001 recognizing many of the inherent risks. In fact, we were criticized by some for not being more active in subprime.
We did so and still met our longstanding commitment to affordable lending for low to moderate income borrowers.
There is no doubt that post-crisis credit is tighter. But there is also no doubt that a fundamental part of a reset for lenders has been reinstituting quality underwriting.
If you think about what our industry has been through. What our country has been through. What our customers have been through. There can be no margin for error. We must make sure the asset is iron clad. That’s not bad, it’s just slow.
And credit is available. We’ve extended more than $53 billion in mortgage lending this year to nearly 215,000 borrowers – 30 percent of these loans have been made to low to moderate income borrowers. The industry as a whole has extended $1.3 trillion.
Access and availability of credit are critical. As lenders have reset along tighter standards, there may be opportunities for flexibility. But, we have to go back to where we started.
Do we believe homeownership is a good to be pursued at all costs? If we don’t believe that than strong underwriting and quality credit standards are our best protections against putting people in homes they can’t afford.
There has been a lot of debate about down payments. When we think about this – a 20 percent down payment is light years from what was going on before. My oldest child is 21, and as he thinks about homeownership – going out to get a job and saving 20,000 or 30,000 whatever it takes – that’s a lot of money.
Personally, I don’t think there is anything magic about a 20 percent down payment – 10 percent seems reasonable but clearly it can’t be zero. The requirement for a down payment at the moment is a policy decision, and probably a good thing.
A down payment incents all the positive traits of ownership – saving, the delayed gratification of having worked hard for something, plus some security that you have some equity in the home if you are hit with an unforeseen event.
There are very real concerns that a too high standard can lock some people out of homeownership – something we don’t want. But, all the right voices are engaged to ensure we land somewhere reasonable that promotes a more sustainable system and protects the homeowner.
So, these are the questions we need to consider for lenders to reset.
How do we make credit available but protect people from taking on too much risk and ending up in a home they can’t afford? And, how do we strike the right balance between prudent underwriting, responsible down payments and access to homeownership?
Finally, what are the resets for the government? In this area, the discussion often becomes dominated by GSE reform and the need to wind down Fannie and Freddie.
But, again let’s take a step back.
Why is government involved in the housing market in the first place? Traditionally for two main reasons – to expand liquidity and to make homeownership accessible to those who might otherwise be unable to attain it.
Currently, the government role looks much different. The government dominates the entire housing finance market by backing about nine in 10 loans.
Take FHA. FHA has been instrumental in sustaining the market the past few years, but they have come a long way from their original mission. FHA’s original focus was to help low to moderate income borrowers in the wake of the Depression, and then to provide assistance to GIs returning from WWII.
FHA now accounts for about 20 percent of the market, provides low down payment lending for loans up to $729,000, and recently concerns have been raised about its financial stability. This is just one example of where a reset is needed.
Fannie and Freddie have helped maintain liquidity in the wake of the housing crisis. But, we need a plan to move from a market dominated by the GSEs and FHA to one that does three things.
First, return FHA to its core mission of providing credit to low to moderate income borrowers.
Two, the GSEs undertake an orderly transition to facilitate the return of private capital. And, that they provide clarity to the market about what credit and servicing risk they are willing to take. Three, private capital is incented to return to the market by removing the subsidies and regulatory uncertainty that is holding back that return.
Personally, I don’t think changing Fannie and Freddie in some abrupt fashion is wise policy. And calls to eliminate Fannie and Freddie without first building for the future state would significantly harm the housing market and recovery.
Markets are only going to come at a time of asset price uncertainty if there are guarantees. So we need Fannie and Freddie. They are critical to the transition.
A healthy market needs private capital so the government – and the taxpayer – doesn’t take all the risk. It should come back in a way focused on a value exchange between the borrower – lender – investor – where everyone understands the deal they are making. And that’s what got lost in the run up to the housing crisis.
We have a lot of rulemaking and regulations going on right now. If our ultimate goal is to get some private market back in action then there are things on the table that need clarity – like QM, QRM and Basel III applications.
There has been good dialogue around QM, and I’m optimistic the final rule will strike a balance between consumer protection and access to credit. We have to be careful with all the various policy inputs into the system that we are working on this in a holistic way.
We don’t want to end up with any unintended consequences that prevent private capital from returning or further restrict sound lending and ultimately go counter to the reset we’re trying to achieve.
So, these are the questions we need to consider in a reset of the government’s role.
How do we provide a place for government financing that stays true to the mission of liquidity and access to credit?
How do we incent the return of private capital to foster more competition and to shoulder some of the risk that right now falls squarely on the American taxpayer?
To sum up, there have been a lot of recriminations over the past few years.
Now is our chance to reset. Now is our chance to move past recrimination and move toward solutions.
Now is our chance to put lessons learned to use and put our housing finance system on a more sustainable path. Now is our chance to question and challenge the truths of the old paradigm. To reshape the system to provide clarity and understanding of risk.
Now is our chance to provide a path to homeownership that once achieved is what it was always meant to be – a place to live, a place that is the reward for hard work and sacrifice, a place to put down roots.
Now is our chance to bring that American Dream home.