How HUD is Building a Housing Market that Works for Everyone

Secretary Julián Castro highlights the Federal Housing Administration’s 2015 Annual Report to Congress at New York University Stern School of Business.

Without question, America is at its greatest when hard work is rewarded with opportunity. America is where Henry Ford dreamed of making cars affordable for families and invented the moving assembly line to make it happen. It’s where two guys in their twenties developed a photo-sharing app called Instagram and, 17 months later, sold their company for $1 billion. And it’s where Ursula Burns made her journey from public housing to the corner office at Xerox, where she became the first African American woman to lead a Fortune 500 company.

For generations, the chance to own a home has been at the heart of this basic bargain. It’s represented a place to build a life, an avenue to accumulate wealth, and an accomplishment to take pride in.

The Federal Housing Administration (FHA) has, for more than 80 years, been a tool helping American families to achieve their dreams of homeownership. And after years of intentionally excluding communities of color, FHA — now a part of the Department of Housing and Urban Development (HUD) — has become a source of hope by insuring loans to half of all African American and Latino homebuyers in recent years. It helped build the middle class, and opened doors for underserved families that would’ve otherwise been closed to them. And since the housing crisis, FHA has stepped up to assist the recovery. Now, after more than six years, we’ve reached a point we can say that our nation’s housing market is reemerging as an engine of economic prosperity.

“FHA has opened doors for underserved families, it has insured loans for half of all African American and Latino homebuyers in recent years.”

A Stronger FHA

It’s no secret that 2008 was the beginning of some difficult years for the American people. The financial markets buckled and private mortgage lenders froze. That’s when FHA stepped up and came to the rescue. FHA gave folks a place to go to refinance or get credit. It put a floor under the market.

Independent economists say that FHA prevented housing prices from dropping another 25%, home sales another 33%, and construction another 60%. It saved 3 million jobs and half a trillion dollars in economic output.

FHA rescued the housing market, but that increased exposure came at a cost. Our Mutual Mortgage Insurance Fund — FHA’s main funding source — suffered significant losses, largely due to the loans insured from 2007 to 2009. This put FHA’s reserves below the Congressionally-mandated 2 percent capital reserve ratio.

To right this, we took aggressive action to improve our underwriting standards:

1) We introduced a credit score floor.

2) We now require a higher down payment from borrowers with a FICO score under 580.

3) And we’ve imposed higher minimum net worth requirements for lenders.

These actions worked. In Fiscal Year 2014, after falling into the red, FHA got back in the black thanks to $21 billion in growth to the fund over a two-year period. And that progress continues today.

I’m proud to report that in Fiscal Year 2015, the Federal Housing Administration’s Mutual Mortgage Insurance Fund has reached a capital ratio of 2.07% — the first time since 2008 and a year faster than independent experts predicted.
The Federal Housing Administration’s Mutual Mortgage Insurance Fund has reached a capital ratio of 2.07% — the first time since 2008.

We have fully restored our fiscal health.

Two percent shows that we’ve found the right balance between strengthening our finances and fulfilling our mission. Two percent shows that reducing our annual premiums was the right move for the housing market and — despite what the critics say — didn’t hurt our bottom line. Two percent shows that our books are among the strongest in our history with cash reserves going up and delinquencies going down. And two percent shows that FHA is in its best position in years, and looking ahead, we’re going to use our strength to serve the American people.

“I’m pleased to report that we’ve restored the Mutual Mortgage Insurance Fund’s fiscal health.”

MIP Reduction: Bolstering the Housing Market

How did we do this? Our approach in making this happen is simple: have faith in people who’ve established a record of responsibility. Level the playing field for those who’re ready and willing to buy a home. In doing so, spark billions of dollars in economic activity — from the construction site, to the realtor’s office, to the local hardware store.

President Obama has already put safeguards into place to prevent the abuses that got our nation into the housing crisis. Now, to keep up our economic momentum, it’s time to focus on giving folks the opportunity to lift themselves up.

That’s why, last January, FHA lowered our Mortgage Insurance Premiums. Too many folks had been priced out of homeownership. Premiums had risen 145% in response to the crisis and suddenly FHA was collecting an average of $17,000 in fees on a loan when the average risk was a loss of $4,700.

Hardworking, responsible Americans of the present were being charged for the mistakes others made in the past.

Now, I work in Washington, DC — a place where you can’t walk down the street without attracting some criticism. So, of course, some folks criticized the MIP reduction: they said it would damage FHA’s fiscal health and continue a cycle of busts and bailouts.

Nothing could be further from the truth.

Today, the housing market is better off because of our actions. Our total volume is up 50% over the first six months of the year compared to 2014. And we served 75,000 new, responsible borrowers with credit scores of 680 or below — folks that the conventional lenders were shutting out.

Folks like Paul and Tomeka Gueory were shut out. A few years ago, Paul injured his back while on the job and needed spinal surgery. Then they lost everything during the housing crisis. The Gueorys moved in with family, and told me how they fought every morning to keep a smile on their faces for their children. Although they were down, they weren’t done. They didn’t give up. Paul got better, and they kept working, and saving, and striving, and dreaming. And all that effort paid off when they bought a house thanks to FHA and its MIP reduction.

The Gueorys are proof that when you invest in the American people, when you give hard-working folks opportunity — our nation benefits.

Our housing market is full of momentum again. Sales of existing homes are the strongest in years. Home prices are at the highest levels since 2007. And families have built nearly $6 trillion in housing wealth since April of 2009.

This progress in housing is strengthening the overall economy: a record 68 straight months of private sector growth. More than 13.5 million new jobs. An unemployment rate cut in half. Wages are on the rise. It’s clear that when FHA expands opportunity for American families, the housing market rises and the entire economy becomes stronger.

That’s what we do at HUD: we invest, we support, we strengthen. We’ve been doing it for decades and we’ll keep on investing to grow the middle class and strengthen the housing market.

Complete remarks from Secretary Castro’s speech at NYU Stern School of Business.