Paul Peterson's Speech to the 2004 International Builders Show on January 19, 2004
Prepared Remarks for
Paul Peterson
Former Chief Operating Officer, Freddie Mac
2004 International Builders Show
National Association of Home Builders
Las Vegas, Nevada
January 19, 2004
Thanks, Jerry [Howard, NAHB CEO], for that kind introduction. It is also a
pleasure to share the panel with Frank Raines [Fannie Mae Chairman & CEO]
and Gene Ludwig [Managing Partner, Promontory Financial Group]. When you think
of all the people who are dedicated to expanding homeownership, no list is complete
without these three. In particular, I want to thank Jerry for his public policy
leadership during the past year. Against a rising tide of critics against Freddie
Mac and Fannie Mae, Jerry stood his ground and declared, "The GSEs are
essential to expanding homeownership, so don't make it harder for them to do
so." Jerry, on behalf of all of us at Freddie Mac and those who care about
homeownership, you have our personal thanks for your courage and dedication.
At Freddie Mac, our responsibility is to prove Jerry right. So, let me describe
what Freddie Mac is doing to make housing more affordable, and identify one
big obstacle that is sure to challenge both of us.
The Year That Was
Homebuilders and the GSEs have an important partnership: making possible the
funds and the buildings that put people in homes. Indeed, 2003 was a tremendous
year for our combined contribution to homeownership and the economy. You created
1.8 million homes…an all-time record for you. Freddie Mac financed homes
for almost five million families—an all-time record for us. As we have
done in years past, our mortgage purchases were focused on people of modest
financial means.
In addition to putting people into new homes, we wanted to make it easier for
other families to live in the homes they already had. Our funding vehicles helped
us manage the stress that widespread refinancing caused in the capital markets.
The pay-off: almost four million families were able to reduce their monthly
mortgage obligations. That is money that was freed up for Mom and Dad's retirement,
college savings for the kids, or simply to make ends meet. And, when it came
to making ends meet, Freddie Mac's lenders were able to steer almost 50,000
other families away from the tragic road to foreclosure and be put back on the
right financial track.
Financing home loans for people of modest financial means. Making it possible
for people to take advantage of the lowest mortgage rates in generations. Helping
homeowners to keep their homes. That is what is right for homebuilders. That
is what is right for consumers. That is what is right for this nation's public
policy. And, that is the mission of Freddie Mac.
GSE Innovations
Innovation drives our business in how we source and fund loans. This is especially
true with automated underwriting and the types of securities we issue. Indeed,
these twin centers of innovation have enabled the mortgage industry to originate
far more loans than ever before.
For instance, compare the refi booms of the early 1990s with the most recent
one. Over the same time period, we saw a comparable drop in mortgage rates.
But, in the 2001-03 refi boom, the mortgage industry was able to originate three
times the volume.
Why? Certainly, there was the excellent marketing of homebuilders and lenders.
But equally important was the introduction of automated underwriting. In the
early '90s, almost every home loan was originated manually, to varying credit
standards, took too much time, and was too expensive. Today, automated underwriting
has become the standard process. Rather than waiting weeks after credit data
is received to get a secondary market decision, lenders now receive all that
information together…in about a minute. Because of this advance, the cost
to originate a loan has dropped by several hundred dollars, and lenders have
approved countless borrowers that would have been unfairly denied under the
old way. That is why lenders and brokers used Freddie Mac's automated underwriting
service—called Loan Prospector—to process almost 10 million loan applications
last year.
But faster processing wouldn't mean anything if the mortgage market didn't
have the funds to lend. That is why the other significant innovation behind
this surge in origination volume has been the debt securities issued by Freddie
Mac and Fannie Mae. Up until about a decade ago, the GSEs relied primarily on
mortgage securities to finance home loans. But, since then Freddie Mac and Fannie
Mae have created a large, additional source of mortgage funding. Through large,
steady issuances of our debt securities, we've created a viable alternative
to Treasury securities, helped developed what is known as the callable bond
market, and made our securities available in foreign currencies.
All this has vastly increased the amount of global capital that is invested
in U.S. homeownership. Indeed, without investor appetite for our debt securities,
the mortgage market would not have been able to make many of the conventional
loans that have occurred in recent years. Who here would want to face those
consumers and say, "Sorry, the bank is empty"? Not me, and not Freddie
Mac.
Freddie Mac Programs
Freddie Mac's mission to expand homeownership is never-ending. That is why
we experiment with ways to help you reach still more homebuyers. We examine
the performance of loans we have purchased and seek knowledge from homebuilders
and others in the primary market. We want to see what works and what doesn't…and
then we look for ways to modify our programs accordingly.
Over the years, this approach is how we've been able to help lenders originate
loans with downpayments as low as zero…allow for subsidized closing costs
and reduced mortgage insurance…and even tailor terms for the personal financial
practices of cultures such as Islam.
Today, we are working with you and others to reach more homebuyers and renters.
We're experimenting with funding vehicles, credit policy changes and collaborative
industry efforts.
For instance, we recently added a securities funding feature to a mortgage
program that makes it even easier for you to get people into new homes with
no downpayment. We're working with the NAHB and Wells Fargo to allow homebuilders
to fund a homebuyer's downpayment. Here, you can pay for part or all of the
borrower downpayment, up to three percent of the new home's value.
In our multifamily business, we use other financial vehicles such as forward
commitments and investments in low-income housing tax credits to help people
in need across the nation…from the Waters Towers apartments in Baltimore,
Maryland, that house elderly and disabled renters…to the Canon Barcus apartments
in San Francisco that provide quality housing and support services for AIDS
patients. Indeed, a number of our programs are designed to help you build and
rehabilitate multifamily properties.
We leverage our credit policies for even greater lift. We continuously refine
the credit scorecard that is in Loan Prospector. Recent changes we made are
making low-cost conventional loans possible for one million more homebuyers
during the next few years. These are borrowers that previously would have been
consigned to the higher-cost, subprime market.
In addition to funding vehicles and credit policies, we work with homebuilders,
realtors, lenders and government agencies in combined industry efforts that
make affordable housing possible. Our efforts include helping you build modular
homes for low-income people wanting to live in the historic district in Atlanta,
Georgia. In California, we've begun a new lease-purchase program that enables
consumers to rent a home from a non-profit agency or financing authority and
then purchase it with a mortgage at the end of the lease.
All this work expands homeownership, particularly among minorities. Because
of partners like you, Freddie Mac was able to finance homes for 600,000 minority
families last year, and an additional 600,000 families who rented their homes.
Still, as long as there is a single consumer who wants to rent or buy a home,
our work is not complete.
Looking Ahead
In 2004, we're more optimistic than most about the year ahead for homebuilders
and the origination market. We do not see mortgage rates increasing by much,
although we do expect a drop in the percentage of consumers refinancing their
homes. We anticipate housing starts to be only slightly lower than last year's
record, an origination market topping $2 trillion, and continued strong appreciation
of residential home values. Longer-term, we expect homebuilders to benefit from
a large influx of new immigrants who will need quality homes to live in. Homebuilding
will continue to be a great business.
But, one large obstacle stands in our way: Many minorities believe they will
never be able to buy a home. We're conducting research at Freddie Mac on minority
home-buying perceptions, and we already see a problem.
There's a problem when…almost half of African-Americans and Hispanics
believe that they need a 20-percent downpayment to buy a home. There's a problem
when…half of African-Americans and Hispanics believe that they need almost
perfect credit to get a loan. There's a problem when…more than half of
African-Americans and Hispanics believe that they must have the same job for
at least three years to get a loan. There's a problem when...one-quarter of
Hispanics believe that a poor credit rating cannot be improved.
These perceptions, of course, do not match with reality. We cannot—we
must not—allow them to continue. Nothing less than our shared mission is
at stake. That is why the topic of this panel—innovation—is so important.
Do we understand the problem? Yes. Do we have all the answers? No.
Still, we must begin. We can begin by making a commitment among both of us
to do more. We need your help in marketing and outreach, to make it clear to
all that getting a loan is not as hard as some might believe. For our part at
Freddie Mac, we need to redouble our efforts and work hard on new credit policies
and funding vehicles.
Certainly, the innovations both of us have made in the recent past—homebuilder
marketing, automated underwriting, new sources of mortgage funding—all
have been wildly successful…for today's market. But, they may not be enough
tomorrow. In the months and years ahead, we will need to be just as innovative,
just as passionate, and just as effective. Together, we must make sure that
no homebuyer is left behind.
I look forward to tackling this important challenge with you and your leadership.
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