Sheila Bair's Remarks at the Pew Housing Conference, 'Strategies to Improve the Housing Market'

Pew held a conference on June 20, 2012 led by Senior Advisor Sheila Bair. "Strategies to Improve the Housing Market" brought together leading thinkers across the country to analyze the scope and scale of challenges facing the housing market and possible solutions. Here are Sheila Bair's opening remarks:

I would like to provide a special welcome and a thank you to the many researchers that spent the past several months exploring the different aspects of our housing and mortgage market problems and examining where opportunities may exist to improve our markets.

I would also like to thank our panelists and moderators today. I am looking forward to the discussions at hand. I have to call out Mark Zandi to say a special thank you for the amount of time you have dedicated to this discussion and to Lew Ranieri for his insights and expertise. I would also like to thank Joe Davis, Shubh Saumya, and Lara Kostakadis-Lianos of the Boston Consulting Group for their assistance in shaping these discussions and their work to draft a report summarizing the ideas explored here.

Finally, I would like to thank all of you for taking the time to attend today's conference. I hope that you will see today as an opportunity to fully engage in a pragmatic discussion regarding the ‘art of the possible' in assisting housing market recovery. I want today to be a dialogue among all of us – I want to take advantage of your substantial expertise in financing, providing housing services and designing policy and research.

Today's goal is to identify policies that address those aspects of the housing market that continue to drag down prices and homeowner equity, and that continue to limit access to credit and sound housing investments. I am interested in practical solutions that don't require Congressional action or a total re-thinking of U.S. housing policy…though that may be warranted in the long term.. Let's focus our thoughts today on what could be done tomorrow and in the near term.

You are all here today because you know that housing matters. Housing impacts every segment of our society and is present at every layer where policy intersects daily life.

Housing is one of our basic needs. For many, that housing comes in the form of homeownership-- a decision that may be one of the most financially substantial in a lifetime, involving an asset that many hope will provide wealth opportunities for both themselves and their children. Families spend a larger percentage of their annual income on securing shelter than any other type of expense. And housing matters for other equally important reasons such as stability, forming a community, and providing a means for each of us to enrich and strengthen our emotional and physical well-being.

The age, quality, and density of the housing stock in a community is also of critical importance. As neighborhoods deteriorate, vacant and abandoned properties can create a cycle of decline which is incredibly challenging to reverse. Housing values impact each other, as foreclosures can reduce neighboring house values. And the housing market matters enormously for the local tax base; that revenue funds schools, utilities, parks, and basic community services.

Housing markets matter across regions. This nation is diverse. One approach to housing is not applicable across the variety of markets that exist. It would be naïve to think so. States have varying foreclosure, taxation, and other housing regulations and programs – not to mention the variation across localities. And these policies work within a difficult balance to ensure strong functioning markets that also protect consumers from sub-standard business practices.

And nationally, enough cannot be said about how this current housing market crisis has created havoc on our economy, on the stability of our financial institutions, on the net worth across whole generations, and the stagnation of the recovery. Given the current structure of the economy it is imperative for the housing markets to begin functioning again at a higher level of efficiency than we have seen for the past several years. Yet challenges remain to achieving that outcome.

Mark will spend the next session with us walking through a wealth of data on the current situation, but let me spend just a few minutes on a brief historical perspective.

U.S. housing policy was considered a success story for many decades, helping more than two-thirds of American households to achieve home ownership – reaching a pinnacle of 69 percent in 2004. Throughout the second half of the 20th century, real housing prices were remarkably stable from decade to decade as they rose at the same pace as incomes. In the decade leading up to 2003, however, home prices for the first time began to dramatically outpace increases in income, rising by 81 percent while per capita disposable incomes were up by just over 50 percent. Then, between 2003 and 2006, average prices rose by another 38 percent, almost two and a half times faster than incomes. This divergence was not sustainable, as prospective buyers soon could not afford the price levels that had been reached.

The single greatest factor behind this change in the stability of the housing market was a drastic departure from traditional mortgage lending practices. Originating lenders maximized returns by offering subprime and nontraditional mortgages, most of which were securitized and fully transferred off the balance sheets of the originators.

As these new lending and investment practices were introduced, a variety of businesses -- including lenders, mortgage brokers, securities underwriters, and ratings agencies -- were paid up front for their services--while risks were transferred to investors who mistakenly assumed both that these businesses had discharged their responsibilities with skill and that house prices would continue to rise. The industry unfortunately had strong incentives to ignore the growing gap between house prices and incomes and to continue engaging in risky lending practices.

In 2007, that bubble burst, badly damaging homeowners and the broader economy.
In addition to families that have faced foreclosure, at least 12 million households now owe in excess of $700 billion more on their mortgages than their homes are worth. At the same time, renters in many areas are facing increased rates because families that have experienced foreclosure are turning to rentals and because potential new homeowners are unable or unwilling to enter the market.

The weak recovery in the housing market not only impacts individual families and the broader economy but also undermines funding for vital state and local government services. Property tax revenues are falling well behind the last two economic recoveries. Looking ahead, as assessed property values fall, local government may have to either override popular resistance and raise property tax rates or face the impact of the over 30% drop in home prices – to the extent that such unpopular actions are even allowed under varying state laws.

During the past three years, there have been a number of federal initiatives aimed at easing the housing crisis, but they have fallen far short of expectations and they have not really helped enough homeowners to solve our fundamental problems. Making Home Affordable, a combined effort of the Treasury Department and the Department of Housing and Urban Development, has a series of programs designed:

to help underwater homeowners qualify for low-interest-rate refinancing; and to prevent foreclosures of delinquent borrowers by lowering their interest rate and modifying other terms of their mortgage; and to provide temporary relief for the unemployed
The Administration also has a program to convert some homes into rental properties. Thus far, these programs have helped only a small fraction of homeowners and renters affected by the housing crisis.

Other actions may show promise in the future, but it is still too early to know – the recent National Mortgage Settlement and the separate agreement with the Bank of America for additional principal reductions are two examples. Portions of these agreements strike at the basic incentives that have created an overly complex relationship between borrowers, servicers, lenders and investors. The National Settlement's emphasis on providing clarity through a single point of contact for each borrower is an objective that I have supported and believe can help borrowers avoid the endless run-a-rounds that so many have complained about. If effectively implemented and enforced, the Settlement can ensure that servicers treat borrowers with the respect they deserve and that they offer a full range of loss mitigation assistance to those borrowers experiencing problems paying their mortgage.

Thus, we are starting to see some positive movement – but I think we can provide a few more solutions to ease the ongoing market frictions. Thank you for agreeing to spend the day looking to those solutions.

To start our discussion, I would like to introduce Mark Zandi, Chief Economist, Moody's Analytics Inc. Mark is cofounder of Economy.com, which Moody's purchased in 2005. Mark's broad research interests encompass macroeconomics, financial markets, and public policy. His recent research focused on foreclosure mitigation policy and the determinants of mortgage foreclosure and personal bankruptcy. He has analyzed the economic impact of various tax and government spending policies and assessed the appropriate monetary policy response to asset market bubbles. He is the author of Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis, described by the New York Times as the

“clearest guide” to the financial crisis. His forthcoming book, Paying the Price, provides a roadmap for meeting the nation's fiscal challenges. Zandi earned his B.S. from the Wharton School of the University of Pennsylvania and his M.A. and Ph.D. at the University of Pennsylvania.

Mark, in collaboration with Susan Wachter, spent the last several months analyzing the scope and scale of the excess inventory and unrealized losses in the housing market and how this is impeding a recovery in the housing market and broader economy. His research also evaluated some overall policy strategies to effectively address these problems in a cost-efficient way for taxpayers, households, and the financial system. Over to you Mark.

Strategies to Improve the Housing Market > Sheila Bair's Remarks