Remarks of Under Secretary Miller at the National Housing Conference Annual Policy Symposium

The follow remarks were given by Mary John Miller, the U.S. Department of the Treasury's Under Secretary for Domestic Finance, on the importance of legislative housing finance reform and the administration’s view on the future of Fannie Mae and Freddie Mac. View the original speech on the U.S. Department of the Treasury website.

June 13, 2014

Thank you all for this opportunity to kick off a meeting that will be full of spirited discussion on housing policy.

I believe this group shares our focus on one of the most pressing issues facing the country today, creating a fairer and more sustainable housing finance system. The Administration remains committed to making sure that all Americans are well-housed and reforming the housing finance system remains the last big piece of unfinished business left from the financial crisis.

While we can all point to areas of the housing market that are stronger (and I plan to in this speech), the recovery has been uneven and many potential homeowners continue to struggle to obtain mortgages. For those borrowers with perfect credit, the market appears to function much as it did before, but this is not the experience of many Americans trying to buy a home.

The uncertain future of the GSEs contributed to lenders’ reluctance to serve all credit-worthy borrowers, and this has effectively shut many Americans out of the purchase market. The crisis also made it significantly harder to find affordable rental units as the demand for rentals has increased, while at the same time new affordable multifamily rental properties have become more difficult to finance.

These constraints on the mortgage and rental markets persist despite a significant government presence in the housing market, both through FHA and other government insured loans, and our continued capital support for the GSEs. Almost six years after entering conservatorship, taxpayers remain at risk of having to support the GSEs during another downturn.

This status quo, where Americans bear a significant amount of the risk in the housing market in exchange for a system that does not serve all credit-worthy borrowers, is not acceptable. We must create a new housing finance system that better serves the needs of American taxpayers, borrowers, and renters.

Last August, the President articulated a set of principles that have served as touchstones as we work to create this new system.

Acknowledging the outsized role of government in the housing sector, the President called for a return of private capital to the center of the system.

He called for an end to the GSEs’ failed business model, where private shareholders and executives benefitted at the expense of taxpayer losses.

The new housing finance system must also provide borrowers widespread access to safe, responsible products, including the 30-year fixed rate mortgage.

A reformed system would also support affordability and access for renters and first-time homeowners.


We are pursuing these priorities on several fronts, but before I talk about some of our work, I want to assess current housing market conditions.

In the wake of the financial crisis, the ensuing drop in home prices contributed to the severity of the recession and led to a wave of mortgage defaults and foreclosures. The Administration took decisive action to stem this tide by directing TARP funds to struggling homeowners. Our TARP housing programs and our broader economic stimulus measures helped end the drop in home prices. Today, home prices have recovered about half of their losses stemming from the crisis.

The ongoing recovery has helped reduce the number of underwater borrowers by nearly half over the past three years, from over a quarter of all borrowers in 2010 to slightly less than 13% of borrowers last year. The share of severely underwater borrowers, those that have mortgages that exceed property value by more than 125%, has fallen even more dramatically, from over 11% in 2010 to less than 5% today.

Much of this home price recovery has been due to demand from investors. The wave of foreclosures in 2008 and 2009 created a glut of Real Estate-Owned inventory that needed to be put back into productive use. Investors have purchased and rehabilitated many of these properties and turned them into rental housing. Getting that inventory back into circulation is unequivocally good.

According to recent reports, the renter-occupied share of single-family housing stock increased from about 12 percent in 2005 to approximately 15 percent in 2011. Since 2007, conversions of homes to rentals have added far more to available rental stock than has new multifamily construction.

But as prices have risen, investor demand has slowed. This shift is making clearer that there is a lack of more traditional home purchase activity. So we ask, “Where is the traditional home buyer?”

The lingering effects of the financial crisis on employment, wealth accumulation, and rising personal debt, including student loans, have depressed demand from traditional homebuyers. These effects are both making it more difficult for households to purchase homes and have slowed household formation rates, which fell during the recession and remain well below historical averages.

The economic consequences of the crisis and recession have also begun to affect the way Americans view homeownership. Surveys indicate that consumers still view owning a home as an important goal and would seek to buy a home if able. However, they are beginning to see homeownership as less of a compelling investment opportunity. A recent MacArthur Foundation study found that 64% of consumers polled think families are less likely to build equity and wealth through homeownership today than they were 20 or 30 years ago.

Greater numbers of Americans have also begun to view renting a home as more appealing than buying. When asked about their ability to achieve the American Dream, 58% of those polled thought renters could be as successful as homeowners.


These evolving views on homeownership underscore our emphasis on ensuring that all Americans are well-housed. We need to do all that we can to help support access to affordable mortgage credit for responsible borrowers. At the same time, we need to encourage the development of affordable rental properties to meet the increased demand from those who choose not to buy a home.

The Administration and FHFA are working to make sure channels for credit are open. Many lenders remain concerned they will be forced to repurchase or indemnify loans they originate for guarantee by the GSEs or FHA insurance. In response to this concern, lenders use their own credit overlays, effectively shrinking the potential pool of GSE- and FHA-eligible loans even further.  Both FHFA and HUD have recently announced initiatives to help provide greater clarity for lenders that should begin to reduce their use of credit overlays. Treasury supports these efforts and we will continue to work with HUD and FHFA on making further progress.

FHFA has also recently made clear that they will maintain the GSEs presence in the multifamily market and has provided the GSEs with additional capacity to fund targeted affordable and small multifamily housing projects. In light of the increasing number of renters today, we believe this will help provide much-needed additional affordable rental stock.

While these measures reflect real progress on promoting access and affordability for future renters and buyers, we must do more to make sure channels for credit return to normal. For example, the tax exempt housing bond market, another source of single and multifamily housing credit, has not yet fully recovered.

Prior to the crisis, tax exempt bond issuance through state and local housing finance agencies (HFAs) provided a significant funding source for single and multifamily housing. In 2007, state HFAs issued approximately $23 billion in tax-exempt housing bonds. This volume had dropped by nearly half, to approximately $12 billion in 2013.

Pursuant to our authorities under the Housing and Economic Recovery Act of 2008 (HERA), in October 2009, we announced the New Issue Bond Program (NIBP). This program allowed housing finance agencies to issue new housing bonds to support affordable mortgage and rental options. Working with FHFA and the GSEs, Treasury purchased $15.3 billion of Fannie Mae and Freddie Mac securities backed by HFA bonds.

Through the NIBP, we supported over one hundred thousand new mortgages for first time homebuyers, as well as refinancing opportunities to put at-risk, but performing, borrowers into more sustainable mortgages. The NIBP also supported development of tens of thousands of new rental housing units for working families. We set out to create a program that would keep the important mission of state and local HFAs going through the worst of the financial crisis and it worked.

Unfortunately, our authority for NIBP has expired, and the tax-exempt housing bond market has still not fully recovered. The enduring weakness of this market has had a particular impact on the growth of multifamily development.

We need to take further action to support financing for affordable rental housing. Unsubsidized affordable housing developments often operate on thin profit margins, where a higher rate mortgage can destabilize the project and leave operators with insufficient cash flows to maintain the property. For subsidized developments, reducing the mortgage interest rate means narrowing the financing gap that Low Income Housing Tax Credits and other government programs must fill, enabling limited public resources to go farther.

FHA’s multifamily Risk Sharing program offers an important opportunity to support affordable multifamily housing. Under Risk Sharing, state and local HFAs and other qualified lenders underwrite and make FHA-insured loans. If a loan fails, FHA pays 100% of the claims to the investors and recovers a share of any losses from the HFA.

Historically, this program has been very successful, with over a thousand multifamily risk-sharing loans originated by HFAs since the program began in 1992. However, as I already noted, the financial crisis has left HFAs unable to fund these mortgages efficiently. Acquiring low-rate financing is critical to standing up affordable multifamily developments and, in many cases, can determine the viability of a project.

Allowing FHA risk sharing loans to be securitized by Ginnie Mae would help provide state and local HFAs with the low-cost capital they need to provide affordable mortgages and rental units in the communities they serve. However, we need legislation to give Ginnie Mae this authority. This has been an Administration priority since 2013, and we urge Congress to act.

In the meantime, Treasury is exploring options to provide assistance to HFAs within its existing authority. We are working with HUD to see if any existing sources of federal FFB funding may be available for loans already guaranteed through FHA’s Risk Sharing program. This could present a viable interim solution and we hope to say more in the near future.


Our ongoing efforts within the Administration, and those of FHFA, are critical to continuing the recovery of the housing market and access for borrowers and renters. However, these measures do not eliminate the need for comprehensive housing finance reform. Everything we are doing administratively is directed towards ensuring better outcomes for renters and homeowners, but these efforts attack only the symptoms of an unhealthy housing finance system.

We need to address the underlying cause, an unsound business model where the majority of housing credit is backstopped by the taxpayer. The fundamental misalignment of incentives at the GSEs, where private gains were made possible through the public’s risk of loss, helped exacerbate the crisis.

Some believe that the GSEs’ recent profitability argues against this basic fact. Critics of reform would suggest that we can simply recapitalize the GSEs and avoid difficult decisions around creating a new system. Opponents of reform usually fail to mention that the GSEs’ profits for the last two years have consisted largely of tax-related one-off gains and legal settlements.

Their profitability has also been driven by income from their retained portfolios, which benefit from being funded through Treasury capital support at low rates the private market cannot obtain. While these portfolios remain significant sources of income, the GSEs are required to shrink them by 15% each year. The GSEs will not be able to replicate the levels of revenue they achieved over the past two years. In short, adequately recapitalizing the GSEs would take longer than many realize or would admit.

Even if truly rehabilitating the GSEs were possible, recapitalizing them adequately would take at least twenty years. During these 20 years, the taxpayer would remain at risk of having to bailout the GSEs during another downturn. We would also be signing up for another 20 years of underserving responsible credit-worthy Americans seeking to buy a home.

The results of their April stress tests help drive this home. Under an economic stress scenario similar to the most recent crisis, GSE-forecasted credit losses would be so great that an additional $190 billion would have to be drawn from the Treasury to support the companies over a two-year period. This is slightly more than the amount taxpayers invested in these companies from the beginning of their conservatorships.

There is no quick fix solution around this. Only legislation can protect taxpayers by responsibly winding down the GSEs and replacing them with a system where a government guarantee is transparent and explicitly priced.


We must do better and I believe we can. We’ve had five years to think about it. Over the past year, we have participated in an incredibly lively debate about the shape of the housing finance system. Senators Johnson and Crapo, building off of the work of their colleagues, Senators Corker and Warner, have crafted a housing finance reform bill with strong bipartisan support. The Administration, along with academics, housing experts, consumer groups and other stakeholders has been actively engaged with the Senate Banking Committee on this effort.

Last month, Senators Johnson and Crapo successfully voted this bill out of Committee. This is no small feat given the political dynamics in Congress right now. All the more so because the work of the Committee has been painstaking.

I often say that this piece of legislation is not a “message bill.” The drafters took great care in creating a bill that works, although I admit it’s not a quick or easy read!  But their efforts have resulted in both a significant substantive and political achievement that takes an important step toward creating the system the President envisioned last August.

In getting this bill voted out of Committee, the Senators have solidified points of broad agreement among policymakers on both sides of the aisle. Setting these markers down has not merely advanced the debate on housing finance reform, it has fundamentally changed it.

Those of us who are working on reform no longer ask whether there should be a government role in the housing market, we are defining it. We are no longer debating the merits of countercyclical authority so the government can help mitigate a downturn; we are working on determining the best tools and triggers for that intervention.

The work of the Senate Banking Committee has also changed the debate around affordability and access to the housing system. With broad acceptance that a government guarantee is necessary in order to support stability in the housing market, comes the mandate that the benefit of that guarantee accrue to all credit-worthy borrowers.

The Johnson-Crapo bill offers important measures to help make sure that the new housing finance system is fairer and more open than the one we have today.

The bill includes a market-based incentive fee assessed on all guaranteed securities to support affordable housing by funding new and existing housing programs and making it economical for market participants to pursue underserved borrowers. The bill also requires that multifamily guarantors ensure that 60% of the rental units they finance are affordable to low-income families at origination.

An often overlooked element of the bill extends the benefit of a government guarantee to a host of loan originators who have not been part of the GSE-centric system. If this bill were to become law, state HFAs and community development financial institutions, among others, would be able to originate eligible mortgages thereby granting them access to the secondary market. This, in and of itself, would make it significantly easier for mission-oriented entities to provide affordable mortgages to historically underserved borrowers.

These gains are significant and those of us focused on access and affordability should seek to solidify and refine them. And, most importantly, secure them for those who need them most.

We look forward to continued engagement with the Committee and other members of Congress as they evaluate the bill. We encourage all interested stakeholders to engage as well. The momentum of reform depends on trust. With your continued focus and support, I am confident we can protect taxpayers while creating fairer and more sustainable housing finance for generations to come.

Thank you.