WORD ON THE STREET: As we approach the second anniversary of the September 2008 global financial crisis, I'd like to give you my view on how far we've come, what we've accomplished, and what lies ahead. But in doing so, I'm going to spend less time talking about what got us here – as important as that is – and focus more on the outlook going forward.
That's not because I am here to give upbeat forecasts about the next few years – we all know that we still have a lot of work to do before the housing market is back on track.
However, I'd like to suggest that some positive things are already happening, both at Fannie Mae and in the industry. This progress provides a basis for some cautious optimism as we move forward. I believe that we are seeing across the U.S. housing market – from borrowers, lenders and everyone with a stake in the future – what I would call a "new realism."
Step by step, we are putting in place a new foundation for our industry. It's a foundation based on the right lending standards and on a broad re-examination of what constitutes sensible risk. Building a strong foundation is more important than perhaps ever before, and here's why.
According to the Harvard Joint Center's latest report on housing, the number of households in America is expected to grow over the coming decade. The study projects an average growth of anywhere from 1.25 million to 1.5 million households per year, depending on immigration. This rate of growth in household formation would well outpace the last five years, when growth was less than 1 million households per year.
We need to make sure that we are preparing the housing market for this spike. We need to make sure that we've learned from the lessons of the past – and that we're building a system that prevents housing bubbles and busts.
To look at this in more detail, I'd like to focus on a couple of trends in our business that haven't been dominating the headlines – but are quite significant for the future:
- First, Fannie Mae's new book of business, which shows that the stronger lending standards we adopted going into 2009 are starting to pay off;
- Second, our progress in helping struggling borrowers through an effort across our company that is unprecedented;
- Third, the role that Fannie Mae has played in keeping the market moving by providing more than $1 trillion in funding; and
- Fourth, what we are doing to change Fannie Mae for the future, as the debate over the government-sponsored enterprises (GSEs) starts to take shape.
First, our new book. What's behind this book is one of the basic lessons of the crisis. As an industry, we can't just put people into homes; we have to make sure they can keep their homes. Otherwise, everyone suffers – the borrower, the mortgage industry, the financial system, and the economy. Earlier this year, we conducted a national survey of consumer attitudes about housing and homeownership. We wanted to find out how the crisis affected their views. And the results go right to that sense of realism that I mentioned earlier.
While a lot of people still aspire to own a home, 60% thought it would be tougher to get a
loan today – and they're right. A solid majority of renters assume it will be harder for their kids to buy a home – and they're right, too. But this is for the right reasons. We need to make sure people are ready and prepared for homeownership so that they can beÂ successful homeowners.
Across the board, we see a much deeper understanding of how credit, income, job security and a down payment could stand in the way of buying a home. This is all healthy. It means we have a good chance to put in place a sustainable housing recovery – one with the right mix of owners and renters in this country. That also means getting in a position to qualify for a mortgage may take longer than it has in the past.
At the same time, the housing finance industry has put itself in a stronger, more sensible place. Across the board, we've returned to commonsense lending standards. The question is, will those standards stick once the market recovers?
This is not academic to Fannie Mae. We have a duty to support a healthy housing market, given our central role in the system. That's why we're strengthening our lending standards. We're emphasizing safer products, especially long-term, fixed-rate loans. We're also asking for better credit quality, better and more complete documentation, and better appraisals on the properties. By adopting these standards, we have begun to build a new book of business with some of the highest-quality loans we have ever seen.
Let me give you some specifics from our last filing.
Loan-to-value ratios, on average, are nearly 70%. In a market where many homeowners have limited or no equity, 30% equity is quite strong. Next, credit scores average about 760, which FICO rates as "top tier." By comparison, the median FICO score is around 712, and subprime is below 620.
Another key factor is loan types. Over 90% of our new borrowers have plain, old-school mortgages – long-term, fixed-rate loans. And finally, the number of subprime loans in our new book is zero. If you take all of these factors together, we're building the strongest book of business we've seen in the last decade.
It's also worth noting that our average guaranty fees on single-family loans have actually come down from 2008 to 2009. Because we price for risk, when loan quality goes up, our guaranty fees go down. Now hearing all of this great news about our new book of business, you may ask, "Well, what about your housing mission?" Let me be clear – we have not forgotten our mission.
To the contrary – last year, Fannie Mae helped to provide financing to more than 1.7 million low- and moderate-income families, more than 1 million families living in underserved communities, and nearly 760,000 very low-income households. Affordable lending was roughly 50% of our business last year.
As you can see, Fannie Mae's business is still focused on low-, moderate- and middle income families. We're making sure these Americans have the same access to mortgage credit as upper-income families. New realism doesn't mean turning our back on the families who need us. Our stronger lending standards simply make sense.
First, they're better for homeowners. Borrowers with these new loans are more likely to keep their homes as long as they want. With fixed rates for long terms, their loans give them shelter from years of interest-rate swings.
Second, these stronger loans are better for the mortgage market. And here's why. Since the start of 2009, Fannie Mae has backed about two out of every five new single-family mortgages securitized in America. In all, we've purchased or guaranteed more than 3.6 million conventional single-family loans. So just by strengthening our lending standards, we've ensured that a large share of the market will be more safe and sound for many years to come.
Helping struggling borrowers
We all recognize, of course, that even as the industry regains its footing, we still have millions of borrowers who took out loans during the boom-and-bust years. Some of them took out the wrong loans. But many [borrowers] today cannot make their payments because they lost their jobs or lost their earnings. Across the board, an estimated 5 million homeowners are three or more payments behind on their mortgages. These borrowers are seriously delinquent. That means they're in danger of losing their homes.
In its scope and reach, the effort to help U.S. homeowners is unprecedented. And while there have been bumps along the way, there are many good things happening.
The Treasury Department appointed Fannie Mae to administer its Making Home Affordable program for homeowners whose loans are owned by Wall Street and other firms. We also have nearly 1 million seriously delinquent borrowers on our own books that need help. We don't want these families to lose their homes. The cost to them, to their neighborhoods, to the housing market and to our company, is quite significant. So we have a very straightforward process to fight foreclosures and cut our losses.
We have one of the largest foreclosure-prevention operations in America. We have over 2,200 people, mostly in our Dallas offices, working exclusively on containing losses and preventing foreclosures. Everything we're doing is geared toward encouraging borrowers to work with their servicers to find the best solution.
Step one is borrower outreach. Many borrowers still don't know how to get help. And many fall victim to scam artists. So we're working every avenue to make sure borrowers have the information that they need. For example, we've helped loan servicers send out more than 5 million solicitations to delinquent borrowers. We're urging them to apply for trial modifications under the Treasury program.
We're also opening ‘mortgage help centers’ in hard-hit communities. Miami is open. Chicago and Atlanta are next. And there are more to come in the fall. And very soon, we'll be taking further steps to help borrowers know more about their options to save their homes.
Step two in the process is refinancing. Many borrowers could lower their payments by refinancing. But millions have lost equity, so they can't qualify for a traditional refinancing. Or, they'll need to add mortgage insurance, which cuts the savings. We have two options for these borrowers. Under the Treasury program, borrowers with GSE-backed loans can refinance their homes – without additional mortgage insurance – even if they're underwater.
Fannie Mae also offers other streamlined refinancing options for our borrowers under our "Refi Plus" initiative for loans that do not qualify for the Treasury program. So far, nearly 500,000 borrowers have taken advantage of these refinancing options.
Step three in the process is loan modifications. There's been a lot said about theÂ effectiveness of the current programs. But they are having an impact. The Treasury program has started almost 1.3 million trial modifications. And between the Treasury and Fannie Mae, we've completed roughly 600,000 permanent modifications or other home-retention workouts since the start of 2009. That's more than half a million families that have been able to stay in their homes through modification or other means.
Step four: If the modifications don't work, we have other options that are better than foreclosure. We can offer a short sale or deed-in-lieu of foreclosure. Over the past two years, we've streamlined our pre-foreclosure sales and increased them by more than tenfold. We also have a new program called "Deed for Lease," in which borrowers can rent back their homes while they seek other housing.
The final step in the process is to put the home back in use. Over the last two years, we have sold over 200,000 foreclosed properties. We give a first look to owner occupants over investors, because occupancy helps to stabilize neighborhoods. Fighting foreclosures is grind-it-out work. But we're making progress.
Over the past few months, our serious delinquencies have stopped increasing. In fact, recently, they've started coming down. The vast majority of our credit losses are coming from loans that were originated between 2005 and 2008. The book prior to 2005 is solid. And, as I mentioned, the post-2008 book is very strong. So the focus of our credit-loss containment is on those loans we acquired two to five years ago.
As we focus on helping borrowers, let me touch on our policy regarding "strategic defaulters." As most of you know, there are borrowers who can afford to make their mortgage payments, but decide to walk away. Recently, we extended our lock-out for strategic defaulters: We now require these defaulters to wait seven years, instead of five years, to qualify for a loan that we'll back. Our goal is to have a policy that strikes the right balance. We want to encourage people to get help, and we want to ensure there are appropriate penalties for those who simply walk away, because it hurts America's neighborhoods.
Funding the housing market
In addition to playing a central role in helping struggling homeowners, Fannie Mae plays a crucial role in funding the housing market. This role has taken on added importance over the past two years. We all know that when the market collapsed, private investors pulled out or went under, and the government provided the GSEs with substantial support to ensure we could stabilize the market. Since then, some private capital has come back. But as long as the housing market is shaky, mortgage funding will be at risk.
Today, Fannie Mae is the No. 1 supplier of housing funds in America. Over the past two years, we've provided more than $1 trillion in liquidity to the market through our purchase and guarantee of both single-family and multifamily loans. This funding is critical. It keeps the market moving, allowing lenders to continue to offer new financing for home buyers, as well as rental housing. Our market presence today – addressing the crisis – is about double our presence in 2005 – during the height of the bubble – when the market largely went around us.
It's been said many times [that] liquidity is the lifeblood of the housing market. Liquidity is why the GSEs were created – to make sure lenders have plenty of money to lend for safe loans, for all families, for both rental and single-family housing, in all communities, at all times – no matter what's going on in the economy, even when private money decides to pull out. That's the vital role we are playing today.
As we look forward, the role we play in the market will very likely change. Policy-makers in Washington are now working on the future of the housing market – and debating how the GSEs will fit into that. I am not going to comment on those discussions. But our company knows that change is coming. We understand that many options are on the table, and we feel confident that we are taking the steps necessary to prepare for allÂ outcomes and put the company on the right track.
As the discussion continues, I believe the greatest contribution that Fannie Mae can make is to stay focused on the job we have to do – and do it well. That means doing everything we can to strengthen our new book of business, help struggling borrowers and cut our legacy losses, keep funding the mortgage market, and prepare Fannie Mae for the future of housing finance.
We're committed to serving a key role in building a better future for housing. But we cannot do it alone. We have to work together and proceed thoughtfully. There are many options to choose.
Michael J. Williams is president and CEO of Fannie Mae. This article was adapted from a July 28 speech Williams gave before the Women in Housing and Finance Luncheon in Washington, D.C.