Freddie Mac Initiatives Address Workforce Housing - 12/13/2004 - Mortgage Loan Refinance Debt Equity

Freddie Mac Initiatives Address Workforce Housing

Workforce housing is something I feel passionately about — partly because of my own life. I grew up in a working class home in Boston, with my cousins living upstairs and downstairs from us. It wasn't technically multifamily housing. But I preferred our name for it anyway: The Irish Battleship.

My parents had to really stretch to afford the place, and that made a lasting impression on me. Decades later, Freddie Mac's role in this symposium tells you how seriously we take the growing crisis in workforce housing.

This is a broad, cross-cutting issue. Far from being limited to mortgage finance, it raises fundamental questions about the nature of our society.

We also meet at a time when people are asking fundamental questions about the nation's economic direction and policies. That includes the appropriate shape, scope and regulatory regime for the housing Government Sponsored Enterprises (GSEs), Freddie Mac and Fannie Mae.

So what I'd like to do this afternoon is really step back and speak to both of these broad sets of questions.

First, I want to discuss the progress Freddie Mac is making to become a mission-driven company. I'll update you on some of our mission initiatives — including those on affordable and workforce housing — that can make a real difference in the lives of America's families.

Second, I'd like to discuss the enduring role and value of the GSEs. Because Freddie Mac can only make good on its mission — and your organizations can only make good on theirs — if the GSEs remain strong and vibrant. And that requires our partnerships with you to be strong and vibrant as well.

At the outset, let me say how proud I am of what the housing industries have achieved together.

During the past four years, our combined efforts have produced all-time highs across the board. Home builders constructed more than seven million new homes. Mortgage lenders originated more than $11 trillion in home loans. Freddie Mac financed homes for 17 million families. Realtorsฎ and others sold more than 31 million homes.

And what did all this accomplish?

Together, we helped raise the U.S. homeownership rate to an all-time high. By refinancing conventional mortgages, we enabled millions of families to ease their financial burdens and tap almost half a trillion dollars in home equity. Last year alone, about a third of all growth in personal consumption was housing-related. Over the last few years, all this housing activity made for a milder and shorter recession — and a stronger, less cyclical economy.

In short, when America needed the housing industries most, we produced our best results ever.

But as today's symposium makes clear, our best has not been enough. Because our job is far from being done. That is especially true in the emerging market — minorities and new immigrants — that as you know will be the source of most of our growth in the coming years.

These are families our industry has not fully served. But they are the ones who hold a key to our future.

So here are some of the things that Freddie Mac is doing to make home possible — affordably — for more Americans.

First, we've launched a major initiative called "Project Greenlight." It includes:

• New mortgage products that green light more loans
• A redesigned A-minus program that lifts more families out of the subprime market
• New outreach tools that expand the pool of potential borrowers
• Even broader access to all of our affordable products through our automated underwriting service

Now we are about to take the next step. A new mortgage suite called "Home Possible" will provide a new level of credit flexibility — so our affordable housing programs can include more of the families they're supposed to serve. As a result, our lowest downpayment mortgages can go to more eligible families with lower credit scores, taking out more types of loans, buying a wider range of homes.

This is no small pilot program. "Home Possible" will mean home sweet home for hundreds of thousands of families.

And to make it easier for families to buy a new construction home, we're making our automated underwriting decisions good for six months rather than four. This will give home builders extra time to put the finishing touches on a new home without risking the loss of a qualified buyer.

As a government sponsored enterprise, Freddie Mac must keep thinking about home buyers after they move in the front door. We cannot simply ignore what could force them out the back door.

That's why we're testing a new type of high-touch servicing on affordable loans. This experimental program makes counseling services available to home owners at any time — not just on the brink of foreclosure.

A second area we're emphasizing is the needs of working families. A leading example of this is the "Workforce Home Benefit" program. This is a soup-to-nuts, customizable program that dozens of employers are using to offer mortgage assistance to as many as 175,000 working families.

And through "Home Possible," we're now making our most flexible loan terms available to working families that serve our communities.

Of all the issues that bear on affordable housing, our most direct leverage is obviously on mortgages. But as a GSE with a broad public mission, we cannot sit by and pretend the supply of affordable housing doesn't matter — even if our direct influence on it is less.

So a third major push of ours is to increase the supply of affordable housing. We've started with multifamily housing.

We are pursuing a significant initiative with home builders and the AFL-CIO Investment Trust. Together, we're going into a dozen high-cost areas and creating 10,000 new apartments. And we're targeting these units for those who need them most — working families earning an average wage.

Through a new program that supports small loans, we're expanding our multifamily business to reach the entire market.

We're also investing more aggressively in low-income housing tax credits. Supported by the GSEs, these credits are the primary means the market uses to create and preserve apartments for low-income families.

And we're changing the way we do business by delegating underwriting on certain affordable loans to experienced lenders — a move that will finance thousands of additional apartments next year.

Our fourth and final major effort is reaching out to more families who may be interested in homeownership. In the emerging market, studies confirm that we cannot expect new home buyers to always come to us.

That's why Freddie Mac is doing more than ever in the area of counseling, education and outreach. Together with many partners, we're helping consumers build a good financial record; dispelling myths about the mortgage process; teaching families how to detect and deter predatory lending; and helping them adjust to paying the mortgage.

We're even sponsoring a study with the home builders to learn what all these new families want in a home.

We're also using a new version of Loan Prospector with a select number of lenders and housing counselors — not to make underwriting decisions, but simply to decide whether families are financially ready to apply for a loan. Most of the families are minority, first-time home buyers who would not ordinarily be in the system. About 30% of those who have gone through the process turn out to be ready for homeownership.

As you can see, these efforts are teaching us important lessons. And we had already learned that home buyer counseling before the purchase can reduce default rates on certain loans by as much as a third.

So these new programs are not touchy feely stuff. They have very real business implications for our reaching and serving the emerging markets.

And one such implication is already proving itself out. I'm encouraged that a lot of lenders say they see a real change at Freddie Mac. They're embracing our renewed focus on mission because they face increased regulatory and business pressures of their own. And because lenders realize that our outreach and other tools will also help them penetrate the emerging market, we've started to be much more competitive in buying a representative mix of their affordable business.

That's real progress. Given the vast loan volumes we deal in, it will take time for our numbers to rise to the high standards we've set. But our direction is clear — and we're not turning back.

Of course, simply buying more affordable loans can never be all that we demand of ourselves. Because responsible leadership is about more than numbers on a page. It's about doing the right thing for the families we all serve.

Please don't get me wrong. Measurable goals are important and we expect to be held accountable. For example, our HUD goals represent a sharp increase over the next few years — and we will make truly massive efforts to meet them.

But as important as these goals are, they do not reflect all of our responsibilities as a GSE. Our mission drives us to expand housing opportunities for ALL Americans. And we cannot tolerate predatory lending or neglect other parts of our congressional mandate.

When the country's largest circulation newspaper runs two consecutive front-page spreads on predatory lending — as happened this week — then we know it's not just an industry issue, it's a national concern we must meet head-on.

After all, we are here not only to help people buy homes — but also to keep them. We don't want to look back and find that in our zeal to help families, we actually hurt them and their neighborhoods.

These are the principles that have motivated us to lead the industry in combating predatory lending. It's why we don't buy or guarantee home loans with excessive costs. And it's why we've led the secondary market in policies that are reforming the subprime market.

That's the Freddie Mac I want to see. Pursuing ambitious initiatives. Meeting stretch HUD goals and improving on other important metrics. But always taking the high road as we do so.

That's the difference between how we could behave as just another giant financial institution — and how we must behave as a GSE worthy of our charter.

Now it's no secret there is a major legislative debate coming on the GSEs. It's one I welcome. Reform is necessary and we embrace it. We look forward to working with the Administration and the Congress to put to rest any doubts that our regulator has all it needs and all it takes to do the job right. And we are committed to working closely with the home builders and other valued partners throughout this process.

There is one way we could lose this debate. And that would be if the discussion ignored the immense benefits of the current system and took us for granted.

You know better than anyone that the world's finest housing system wasn't built in a day. It took decades of innovation and hard work. Most of all, it took strong partnerships among home builders, lenders and a secondary market anchored by the GSEs, including Freddie Mac.

It wasn't always this way. Years ago, when our system was very different, housing starts stopped, and home lending dried up, all because the market ran out of mortgage money.

So back in 1970 — the year of Freddie Mac's birth — the country considered creating a secondary market for conventional mortgages. The legislation was controversial. A number of high economic officials were firmly opposed, saying there was no need for a secondary market.

The president of NAHB at the time, Louis Barba, told Congress: "The lack of a stable supply of residential mortgage funds … has brought this industry to the brink of disaster and is steadily worsening an already serious housing shortage."

President Nixon agreed. He was a strong proponent of the legislation creating the secondary market — telling Congress that dips in the business cycle would no longer result in "discriminatory disabling of housing."

Congress and the President got it right. Credit is the lifeblood of the housing industries. The housing GSEs have attracted global capital, created new mortgage tools and served as a shock absorber when the broader financial markets locked up.

As a result of the GSEs' success and influence, housing today is less vulnerable to the business cycle than ever before. So that this year, for example — even with rising interest rates — total home sales will eclipse the previous high by almost 10%.

I saw this kind of success first-hand long before I joined Freddie Mac. In the early 1990s, I was a bank regulator in New England. A credit crunch had gripped my region. Home builders were hit particularly hard by regulation that backfired and limited their access to credit from certain banks.

But the residential mortgage market was surprisingly unaffected. That was due to the GSEs, and the liquidity, stability and affordability we provide — no matter what the economic environment.

At Freddie Mac, we believe this nation remains firmly committed to low-cost homeownership. So we welcome reform. But let's ensure it is reform that strengthens our system, instead of weakening it.

Our charter — conveying our special abilities and responsibilities — is what enables us to pursue our affordable mission effectively. It's also what allows us to bring innovative products to market, and to make it faster, easier and cheaper for families to buy new homes.

The unintended consequences of a bad bill would endanger all that.

So our critics can't have it both ways. They can't demand that we meet ambitious goals and at the same time strip away what makes us unique and treat us as if we were just another couple of private-sector financial institutions. Because those kinds of changes would make it all-but-impossible for us to serve our mission.

And they would harm our partners just as they would harm the families we serve.

That's why we will be working for a bill next year that improves the regulatory environment and keeps America's family-friendly system of housing finance the best in the world.

We hope the coming debate can be based on the facts. We hope it reflects the economic merits.
 And we hope, as well, that in this debate we will earn a good share of your confidence and support. Because we know where we stand. We stand with housing — and everyone who wants to build it, finance it and make it affordable for all.  And we hope that you will stand with us, as well.