Nation's Building News Online: February 2, 2004

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NAHB, Treasury Square Off
Over Regulating Fannie Mae
and Freddie Mac; Find Common Ground in Their Opposition to Privatizing GSEs

Recent interviews with Assistant Treasury Secretary Wayne Abernathy and NAHB Executive Vice President Jerry Howard on regulation of the housing GSEs find some common ground: both agree that privatization of Fannie Mae and Freddie Mac is a bad idea.

Secretary Abernathy says: "We're not supporting any proposals for privatization." CEO Howard adds: "Efforts to privatize . . . should be opposed."

But on other aspects of the debate — issues that will likely decide the future of America's housing finance system — there are some sharp differences of opinion.

To read more of what Abernathy had to say, click here. To read Howard, click here.

Building News Coast To Coast

Looks Old, Sure, But It's Faking It

As home owners increasingly seek out newly built properties with the settled-in character of much older real estate, custom homes are cropping up with such elements as antique hardware and fireplaces with already charred bricks. In line with the trend, the National Wood Flooring Association reports that more companies are selling reclaimed wood, bricks and carved stone for custom residential projects. Builders, meanwhile, are requesting old wood — which has a finer grain and lasts longer than young timber — more often. The aged material can be re-sawed into flooring, paneling, ceilings and decking for new homes. The key to making a new home appear as though it has been around for centuries, according to experts, is to chose limestone and other materials that will continue to hold up well over the years.
Los Angeles Times (01/29/04) P. F5; Eastman, Janet: www.latimes.com

Counter Culture: Stone, Composites Make Way to the Top

Today's home buyers increasingly are moving away from laminate as a surface material for their countertops. Instead, encouraged in part by lower costs as a result of automation in the manufacturing process, they are incorporating such stone and solid-surface materials as Corian, marble and granite. The most durable of the three is granite, a porous stone that requires resealing on an annual basis. Home owners can cut directly on granite countertops, as well as roll dough and place hot pots on its heat-resistant surface. Less durable but still popular is marble, which requires more frequent sealing to prevent staining. Corian, meanwhile, is a man-made material available in more than 40 different stone-like and solid-color variations. It typically is a more economical choice compared to natural stone and is easy to maintain. Sources in the building industry say that upgrading countertops, as well as bathrooms, granite, marble and Corian enhances property value for most homes and makes them more appealing to prospective buyers at resale.
Bradenton Herald (01/25/04) P. 1; Joseph, R.P.: www.bradenton.com

Demand for Maintenance-Free Living Grows Among Baby Boomers

An increasing number of baby boomers are moving from their long-time homes to single-floor, gated condominium communities that boast resort-style amenities and an active lifestyle. "This is a step between single-family and senior housing," remarks Coldwell Banker Professional Realtors general managing partner Dorcas Helfant. Baby boomers are looking to escape the maintenance tasks that accompany single-family homes; but rather than flee to Arizona, South Florida and other traditional retirement havens, many are settling down near their family and friends. In fact, a recent survey by developer Del Webb reveals that 31% of baby boomers intend to stay within three hours of their current residences. Those interested in cultural activities, top-notch medical centers and adult education courses are flocking to Raleigh, NC, and other college towns.
Florida Times-Union Online (01/28/04) Shrivastava, Anusha: www.jacksonville.com

Builders Survey Ethnic Priorities

NAHB has studied, for the first time, what different ethnic groups look for in a new home and come up with some interesting results. The findings show, for instance, that African-American home buyers want more residential space than any other group; that Asians are willing to pay significantly more than other ethnic groups for a property; and that Latinos want to pay less for their homes. NAHB research executive Gopal Ahluwalia said the trade organization decided to pursue the research because of the increasing number of minority new-home buyers each year. Across the board, the study also revealed that more than half of the poll participants would prefer a single-story home, contrary to the growing tendency among builders to put up two-story houses. Other findings include that 40% of respondents would purchase a home with no living room; that nearly a third desire a three-car garage; that 60% want two or two-and-a-half bathrooms; and that outdoor amenities such as porches, decks, patios, fenced yards and wooded lots are increasingly popular.
Washington Post (01/24/04) P. F1; Deane, Daniela: www.washingtonpost.com

A Housing Boom, Led by Boomers

Housing analysts are keeping a close eye on the home buying patterns of baby boomers, who are just beginning to retire. "As baby boomers are leaving the labor force, or preparing to leave the labor force, they are lining up their second home/retirement home," notes Credit Suisse Asset Management economist Kathleen Camilli. "Don't be surprised by a stronger than average U.S. housing sector in this decade." By 2010, agrees NAHB analyst Michael Carliner, home buying will become even more significant as even more boomers retire. This generation has had a wide-ranging influence on everything from the stock market to the automobile sector, and Carliner says boomers also will set housing trends in the upcoming years. Already, in response to their tastes and preferences, builders are developing "maintenance-free" communities for active adults and providing more and increasingly sophisticated amenities similar to those one might find in a country-club setting. Builders also are taking note that, unlike in the past, retirees do not necessarily want to live in smaller homes; and they do not necessarily wish to relocate to retirement communities far away from their family and friends.
Christian Science Monitor (01/26/04) P. 1; Scherer, Ron: search.csmonitor.com/search_content/0126/p01s04-usec.html

Super Bowl: The Big Picture

Digital technology is bringing the price of big-screen television sets down, subsequently driving consumer fixation on home theaters. Indeed, the Consumer Electronics Association reports that nearly one in three U.S. households boasts a home theater — which consists, at minimum, of a TV with 27 inches or more of viewing space combined with a VCR or DVD player and at least four speakers. In response to the boom in home-theater sales, marketers are feeding the frenzy by offering an expanding array of accessories that allow consumers to turn their residential theaters into elaborate productions. Many are choosing to punctuate the trend by adding such extras as big recliners or stadium-style seats, authentic concession stands, velour ropes and electric curtains that draw back to reveal the giant screen. Many homeowners are discovering, meanwhile, the need to spend thousands more for vibration-dampening material that keeps the surround sound from shaking other rooms in the house. In fact, the cost of outfitting a home theater — anywhere from $30,000 to as much as $500,000 — far exceeds the cost of the actual audio and video technology.
Wall Street Journal (01/30/04) P. W1; Fletcher, June: www.wsj.com

Urban Redevelopment Program Features Cheap Homes, Rich Benefits

Chicago's New Homes program sells lots at steep discounts to non-profit developers interested in revitalizing the city's west and south sides. It also gives qualified low-income buyers between $10,000 and $30,000 in subsidies to help them achieve homeownership. Claretian Associates is using the program to redevelop rundown industrial neighborhoods in southeast Chicago, with plans to build as many as 37 single- and two-family homes priced between $123,000 and $165,000 and $196,000 and $230,000, respectively. Not only will the homes be affordable to lower-income buyers, they also will be environmentally friendly and highly energy efficient. According to Claretian project manager Kathy Kelleher, the dwellings will feature low-VOC paints, efficient gas furnaces, pressure-assisted toilets, recycled-glass bathroom tiles, dual-pane windows and carpeting and wallboard made from recycled materials, among other features. A rooftop photovoltaic system paid for by the city's Department of Commerce and Economic Opportunity, Commonwealth Edison and Spire Solar Chicago will be offered to the first 12 buyers. South Chicago Workforce Executive Director David Sullivan notes that the project is unique, considering the sluggish local economy and the ward's high number of vacant lots. Redevelopment of the area will not be easy, but city officials have already sunk $80 million into public transit, improved schools, retail construction and other infrastructure upgrades.
ENR (01/12/04) Vol. 252, No. 1, P. 30; Hampton, Tudor: www.enr.com

Home View/Wish Lists

U.S. home owners want more cooking space, according to research by Domania.com. In its survey of more than 1,750 home owners, 30.8% of them named a larger kitchen as the No. 1 item on their residential wish list. With 21.3% of the votes, more storage space was also in high demand. Coming in third, 18.9% of poll respondents expressed a top desire for a master bedroom suite. In terms of what they find irritating about their neighbors, meanwhile, 29% of the survey participants said their neighbors do not annoy them. However, 27% cited "junk in the front yard" and 14% complained about their neighbors' nosiness.

Wall Street Journal (01/23/04) P. W8; Reed, Danielle: www.wsj.com

Taking Advantage of Wireless Multimedia Technology

Like their larger counterparts, smaller companies can benefit from equipping field workers with wireless technology. This lets staff members who are working away from the office have constant access to e-mails and corporate intranets. Companies may want to consider mobile phones with Internet capabilities as a way to link an office's computer systems with wireless networks. Depending on the firm, this process may range from simple to difficult. Ken Shaw, owner and president of Toronto-based All Canadian Inspection & Safety Services (ACISS) relies on a camera-equipped mobile phone to facilitate his work as an inspector for potential buyers of homes. He uses a $300 LG Electronics cell phone to take digital pictures, which are e-mailed via Telus's 1X network to clients; each picture costs only 20 cents in airtime charges to send. Similarly, George Gomory, a Realtor® with Remax Central Realty in Burnaby, British Columbia, uses an SX56 Pocket PC phone from Siemens AG to retrieve Multiple Listing Services real estate information via a company called Executive Wireless. The enabling software can vary from $42 to $229 according to appliance used, while the service can cost $10 to $18 depending on the real estate board.
Small Business Computing Online (01/27/04) Blackwell, Gerry: www.smallbusinesscomputing.com

Small Biz Gets Up to Speed

 A Sprint and Covad Communications survey of 500 small business representatives reveals that most consider their telephone to be a necessity, though they spend more time on the Internet. Broadband Internet access boosts productivity and efficiency, but many small businesses still see the Web as a research tool and opt for conference calls and cell phones over e-mail, instant messaging, and Webcasts.  Most companies choose cable broadband because it is faster, but a growing number of small businesses are adopting DSL. According to respondents, improved efficiency and productivity, industry trends, costs savings and the ability to offer online ordering to customers are the main reasons small businesses switch to broadband.
Cyber Atlas Online (01/26/04) Greenspan, Robyn: cyberatlas.internet.com

Making Sitely Changes

The availability of low-priced editing software makes it much simpler and inexpensive to design Web sites today. In order to retain their effectiveness, Web sites should focus on their intended audiences and what they want from the site, says Laurie Web-DesJardins of Webb Consulting in Lafayette, CO. Moreover, online content should be regularly updated and should also be completely revamped annually. Other things to note include avoiding lengthy pages, using proper grammar and spelling and always providing a link to the home page, clear text and a consistent look and feel. M. Teri Robnett of Whole Brain Technologies says that like other things, the Internet demonstrates evolving tastes, so a style that is popular now (such as Flash) could eventually go out of fashion. Carlos Espinosa, owner of RomanDesign in Boulder, CO, reports that a small company could expect to pay a professional Web designer up to $6,000 to build a useful Web site to which people can be referred. However, a shopping cart with "all the bells and whistles" could cost approximately $15,000 in addition to merchant fees, while a small upgrade would cost about $1,500, he says. The Cable Center on the campus of the University of Denver turned to a firm called NewGuard to develop an online newsletter, a sign-up form for events and a shopping cart, all of which were designed to cater to visitors' needs.
Boulder County Business Report (01/23/04) Ellis, Caron Schwartz: datajoe.bcbr.com

Builders Stepping Up Efforts on Behalf of Affordably Priced Housing for Working Families

Despite record homeownership rates, the nation’s communities must do much more to help working families find housing that is affordable, NAHB President Bobby Rayburn told the press last month at the International Builders’ Show in Las Vegas.

Rayburn was joined by Andrew Chaban, chief executive officer of Princeton Properties in Lowell, MA, and David Crowe, NAHB’s senior staff vice president for federal regulatory and housing policy.

“The home building industry has done a good job,” Rayburn said. “We have a homeownership rate of 68% — an all time high. American families are enjoying the fruits of a strong economy and low interest rates.

“But the picture is not perfect. Millions of the nation’s working families simply cannot afford to live in the communities in which they work. That’s why I’ve made workforce housing a central issue of my presidency,” he said.

Workforce housing is housing that is affordable to teachers, police officers, firefighters and other public servants, as well as millions of Americans in the service and retail industries.

“These are the people who teach our children, keep our streets safe and provide the services we depend on,” Rayburn said.

The biggest barrier to the production of housing that is affordable to working families, according to Princeton Properties’ Chaban, is government regulatory policy.

“Local governments make their zoning laws so that any new homes will be on large lots,” Chaban said. Those homes will not be affordable to low- and moderate-income families and any effort to develop at higher densities leads to tremendous acrimony, he added.

Massachusetts passed an anti-snob zoning law in 1969, and that has been an important tool in developing affordably priced housing, Chaban said. But even that Massachusetts law, known as 40-B, is now being challenged by communities that want to exclude affordably priced housing.

“Strip away the veneer and you get to the root of the problem — economic bigotry,” Chaban said.

Crowe cited a study released last year by NAHB that looked at the amount of housing that is affordable to teachers, fire fighters, police officers and nurses in the nation’s largest metropolitan areas. That study, “Housing for Heroes,” found that those community heroes working in central cities have less than a 33% chance of finding a home that they can afford. In the surrounding suburbs, the opportunities drop a bit further to around 30%.

“We consider 50% to be reasonable,” Crowe said.

Four things must happen if we are to solve this housing affordability problem, Rayburn said:

• First is a strong economy. Working families do best when incomes are rising and jobs are plentiful, he said.
• Second is financing — We need low interest rates, and we need healthy GSEs that help keep the secondary mortgage market strong and dynamic, he said.
• Third — sound land use policies. In many communities, the housing affordability problem is made worse by a shortage of buildable land. The land-supply shortage is often the product of policies established by local governments, including large-lot zoning and urban growth boundaries. Restrictions on multifamily housing development also contribute to the problem. And high impact fees and regulatory costs push up the cost of housing. We need local governments to reform these policies, Rayburn said.
• Fourth, we need downpayment assistance programs, tax credits that make rents more affordable, a homeownership tax credit and other special programs that can help so many families on the edge of affordability buy or rent a home that meets their needs, he said.

Housing Snapshot

Mortgage interest rates last week remained lower than expected, but they could be on the rise this week in reaction to nuances in the Federal Reserve's recent announcement that it had decided not to tighten monetary policy at the current time, while hinting that such a move is inevitable at some point further down the road. Construction spending rose to an all-time high in December, to a seasonally adjusted annual rate of $933.2 billion, led by the nation's home builders, who continued to break ground on new residential properties at a near-record pace. The price of framing lumber was down by a tad last week, according to Random Lengths, falling to $352 per 1,000 board feet, down $2 from the previous week. Prices for oriented strand board and plywood continued to advance, although at a slower pace than in recent weeks. The mill price for 15/32-inch 3-ply CDX Southern Westside plywood was $430 per 1,000 square feet, up from $245 a year earlier; and OSB climbed to $415 compared to a year-earlier cost of $174.

Mortgage Interest Rates

30 Year Fixed Rate: 5.68\%
15 Year Fixed Rate: 4.97\%
1 Year ARM: 3.59\%

Housing Starts: Dec. 2003

Total: 2.088 million\%
Single Family: 1.664 million\%
Multi Family: 397,000\%

New Home Sales: Dec. 2003 *

1.060 million

Existing Home Sales: Dec. 2003 *

6.47 million

* Seasonally Adjusted Annual Rate

Housing America’s Working Families

Getting a good education, landing a job in your chosen profession, working hard and buying a home — for generations that’s been the way to get ahead in America.

Nowhere has this idea of progress been so clearly demonstrated as in the quality and quantity of U.S. housing built during the past 50 years. Despite intermittent setbacks, the homeownership rate has risen steadily and now stands at a record 68%. At the same time, the percentage of Americans living in overcrowded or substandard housing has dropped significantly. By any standard, the United States has become the best-housed nation on earth.

These remarkable achievements that helped define a half-century of American progress, however, do not necessarily guarantee the same measure of success in the future.

Dangerous undercurrents are churning in today’s housing market. Despite very affordable mortgage interest rates, millions of working families are finding it increasingly difficult to purchase or rent a decent home in or close to the communities where they work. Many teachers, police officers, firefighters and other moderate-income workers — representing the heartbeat of any community — are working two or three jobs to meet their monthly housing expenses or are looking for housing 50 miles or more from their jobs. In many markets, the gap between those who can afford a home and those who can’t is widening at an alarming rate, and affordable rental housing is in short supply.

But the nation’s housing industry has been tested before. Time and again, home builders have demonstrated that with the proper tools and policy they can overcome major obstacles and meet the housing needs of the American people. In 2004, the 215,000 members of the National Association of Home Builders will rededicate themselves to this effort and set forth an agenda to draw attention to — and to begin to reverse — today’s growing affordability gap and to open new opportunities for millions of working American families who are unable to purchase or rent a decent home.

Housing’s Vital Role in the Economic Recovery

When it comes to the health of the housing market, everything begins with sound economic fundamentals. In recent years, the U.S. economy’s performance has been inconsistent and lackluster. The one exception has been the housing market, which has been performing remarkably well. Housing has accounted for a disproportionate share of growth in the nation’s Gross Domestic Product during the past two years, and housing production and home sales have helped prevent the economy from slipping back into recession. However, housing cannot do it alone indefinitely, and other sectors of the economy will have to rebound in order to sustain a more robust and long-term economic recovery.

The NAHB-supported tax cut and economic stimulus bill adopted by Congress last year provides numerous tax incentives for small businesses and should help trigger a more broad-based economic recovery in 2004. In addition, NAHB will continue to encourage the Federal Reserve Board to pursue the right mix of monetary policies to keep interest rates low and promote long-term economic growth.

Housing and the National Election

Critical to housing’s long-term future will be the national elections in 2004 when the American people will go to the polls to elect the President of the United States, 435 House members and 33 U.S. Senators — in addition to thousands of public officials for local and state positions. NAHB will leave no stone unturned in its efforts to elevate housing as a top national priority and to drive home the importance of providing affordable housing for working Americans. Among other things, NAHB will:

• Support pro-housing candidates in the race for 435 House and 33 U.S. Senate seats.
• Launch an aggressive voter mobilization effort to support pro-housing candidates in key races across the country.
• Raise a record $2.8 million dollars for distribution to pro-housing candidates through NAHB’s political action committee — BUILD-PAC.
• Enhance NAHB’s presence at the Republican and Democratic nominating conventions and work aggressively to include housing in both party platforms.
• Host a national symposium on “Housing America’s Working Families” to raise awareness and focus national political attention on the names and faces behind the statistics of those living at the edge of affordability — teachers, firefighters, police officers and other critical community service providers who are priced out of the housing market or forced to commute 50 miles or more to work.
• Coordinate the development and release of a comprehensive white paper on housing policy for the signature of the five major housing and housing-finance organizations — NAHB, the National Association of Realtors®, the Mortgage Bankers Association, the American Bankers Association and America’s Community Bankers.

Maintaining a Healthy Secondary Mortgage Market

Much of the credit for the nation’s remarkable Increase in homeownership and steadily rising housing standards during the past 50 years must go to the development of its world-class and highly efficient housing finance system. Central to today’s highly effective secondary mortgage market has been the development of programs by Fannie Mae and Freddie Mac to lower the cost of home mortgage credit, finance affordable rental housing and assure an ample supply of mortgage credit through a broad range of mortgage instruments tailored to the diverse needs of American households. Today, about two of every three mortgages flow through these two Government Sponsored Enterprises (GSEs).

Unfortunately, accounting and management issues at Freddie Mac have triggered an opportunistic onslaught that could reverse decades of progress. The Administration proposed moving almost all of the key regulatory oversight responsibilities for the housing GSEs from the Department of Housing and Urban Development (HUD) to the Treasury Department, which historically has displayed an anti-housing bias. Administration officials have also welcomed discussions on diminishing or eliminating Fannie Mae and Freddie Mac’s government-sponsored status.

The issue is now before Congress, and the stakes involved in how this issue is ultimately resolved are huge. Cutting GSE lines of credit to the Treasury — as one top Treasury official has suggested — would raise the cost of home mortgage credit, reverse upward trends in homeownership and undermine housing’s support to the economy and the job market. Even the Administration’s official proposal to move program and mission authority from HUD to the Treasury Department would be extremely damaging to the nation’s efforts to fulfill the goal of providing “a decent home in a suitable living environment for every American family,” which was adopted by Congress and signed by President Truman in 1949. Ironically, it also would impede efforts to achieve President Bush’s goal of increasing minority homeownership by 5.5 million.

In light of these developments, NAHB supports the following proposals for regulating the housing GSEs:

• Mission oversight must reside within an agency that has a housing focus.
• Mission oversight should include responsibility for approving new programs and establishing annual goals for affordable housing. These functions form an interrelated core of mission oversight and should not be separated.
• Mission oversight should be conducted by establishing a dedicated office whose operations are independently funded by periodic assessments from Fannie Mae and Freddie Mac.
• Safety and soundness oversight of Fannie Mae and Freddie Mac should be transferred from OFHEO (Office of Federal Housing Enterprise Oversight), an independent agency within HUD, to a new independent agency with sufficient status and expertise to regulate these housing entities and to garner the confidence of investors and taxpayers.
• Safety and soundness oversight functions include enforcement of capital standards and examination of risk management practices. The safety and soundness regulator should also have a consultative role in program oversight.
• The safety and soundness regulator must be completely independent and statutorily protected from political influences, the same as other financial institution regulatory agencies.

A Strong National Policy Agenda for Housing

At the federal level, NAHB will pursue an aggressive legislative, regulatory and legal agenda that will, among other things, improve the functioning of the nation’s market delivery system, enhance the housing finance system and lend a helping hand to working Americans living at the edge of affordability in urban and rural America. Specifically, NAHB will:

• Support congressional enactment of the Homeownership Tax Credit, which will result in the construction or rehabilitation of 50,000 affordable housing units for working Americans each year.
• Promote legislation to modernize FHA in order to bring down the costs of homeownership for first-time and moderate-income home buyers.
• Promote the development of a secondary market for land acquisition, development and construction loans in an effort to reduce housing production costs and prevent costly credit crunches such as those that have plagued the industry in the past.
• Ensure that housing programs are adequately funded and that housing gets its fair share of dollars as the appropriations bills move through Congress in 2004.
• Support the adoption of improvements in the Low-Income Housing Tax Credit program, which is one of the few federal programs available to stimulate construction or rehabilitation of rental housing for low- and moderate-income households.
• Improve the availability of housing credit in rural and other underserved areas through changes to Community Reinvestment Act (CRA) regulations and housing program innovations.
• Work directly with top officials at the Environmental Protection Agency, the Fish and Wildlife Service and other environmental agencies to encourage a more balanced environmental agenda that supports the twin goals of providing for a clean and healthy environment and meeting the nation’s housing needs.
• Pursue an aggressive litigation strategy to support court cases with critical national implications for the housing industry.

Promoting Smart Growth and Removing Regulatory Barriers

To increase housing opportunities for working Americans over the long term, three things must happen. The overall economy needs to grow at an adequate pace while maintaining low interest rates. This will raise real incomes, create new jobs and increase the purchasing power of working Americans so they can afford to rent and buy decent shelter. Second, the federal government needs to lend a helping hand to assist those Americans living at the edge of affordability. Third, local and state governments need to reform and streamline the zoning and regulatory process to meet a community’s housing needs and to allow for construction of a mix of different types of housing in various price ranges. Cumbersome regulations, excessive fees and exactions, unrelenting public sentiment against higher-density zoning and growth, and resistance to smart growth planning and zoning policies have all contributed significantly to the nationwide shortage of affordable housing. In some areas, regulatory delays and excesses have added as much as 20% to the cost of building housing.

To support regulatory reform at the local and state levels, NAHB will:

• Work with HUD, the National League of Cities and the National Association of Counties to identify and reward communities for taking positive steps in eliminating regulatory barriers that unnecessarily increase the cost of housing.
• Continue to support local and state adoption of “smart growth” planning policies that accommodate the demand for new housing and encourage higher density zoning and infill development while protecting environmentally sensitive areas.
• Provide support to local and state HBAs that are aggressively fighting anti-affordability/ NIMBY land use policies at the state or local level and are exploring alternatives to the impact fees that all too often are assessed on new homes and developments, forcing new home buyers to pay for the entire cost of infrastructure development (roads, schools, water and sewer treatment facilities, etc.) even though those facilities serve and benefit the entire community.
• Continue to support the enactment of “notice and opportunity to repair” legislation at the state level. Once enacted, this legislation will increase the availability and lower the cost of general liability insurance by reducing the incidence of costly construction defect litigation.
• Promote partnerships involving home builders, community groups and local governments to enhance affordability and increase production of affordable housing.

Tapping the Political Clout of Grassroots Members

To implement this highly ambitious agenda for 2004, NAHB will work in partnership with the leadership of its 800 local and state associations to utilize and take full advantage of the energy, resources and political clout of its 215,000 grassroots members.

Among other things, NAHB will provide regular updates and status reports on progress being made on its “Housing America’s Working Families” agenda for 2004. NAHB will also make information on the many NAHB products, services and tools readily accessible throughout the federation and will develop a “new member orientation” program and other tools necessary to reinforce the value of membership in NAHB.

This partnership between NAHB and its local and state associations will be periodically reviewed and updated throughout the year, with both NAHB leaders and executive officers of local and state associations devoting whatever time is necessary at appropriate meetings to brief members on progress to date and challenges still unmet in “housing America’s working families.”

Working with the enthusiastic and energetic support of the leaders of state and local associations and its grassroots members, NAHB will move forward aggressively in expanding housing opportunities for America’s working families in the year ahead.

Standing Up for the American Dream

The following remarks were delivered on Jan. 20 to a joint meeting of the NAHB Executive Board and Budget and Resolutions Committees during the International Builders’ Show in Las Vegas.

Let me start by saying thank you. Thank you to the home builders for another terrific year for housing in America. Thank you for your friendship and partnership with Fannie Mae. And thank you for always, always standing up for the American Dream.

You know, sometimes when we stand up together for the American Dream, cynics accuse Fannie Mae and the home builders of being in lockstep. And you know what? They’re absolutely right. And Fannie Mae is proud to be in lockstep with the people that build the homes that house America.

It is great to be here with you once again. And it seems like each time we meet, we celebrate another stellar year for housing. This century is off to a good start. In 2001, housing helped to ease the recession. In 2002, housing helped to boost the recovery. In 2003, housing helped to fuel a stronger economy.

The results boggle the mind: almost two million housing starts — the most in 25 years; over one million new homes sold — shattering the previous year’s record; over six million existing homes sold — another new record; and $3.7 trillion in mortgage originations — another new record.

The future looks bright as well. While the pace will ease up somewhat, this will still be one of the best years in history for housing.

Across America, home values keep growing. Housing starts, home sales and purchase mortgage originations remain strong. Low interest rates and rising incomes will help keep home purchases affordable. The so-called “housing bubble” is nowhere in sight.

More than ever, housing is a major force in American life, in the economy, in our communities and in our families. President Bush speaks about the virtues of building an “ownership society,” with homeownership at its core. And owning a home is the surest path for most Americans to build family wealth.

In the realm of housing, as the saying goes, “It’s all good.” But it’s not all easy. We have a big job to do this year. We who deliver the American Dream must join together to build and extend that dream.

We must meet America’s growing housing needs. We must tackle America’s toughest housing challenges. And we must preserve America’s remarkable housing finance system, the best in the world.

America has growing housing needs, because America keeps on growing. The Statue of Liberty still beckons the seekers of a better life. Our remarkable economy, prosperity, opportunity and optimism make America one of the best places in the world to live and raise a family. Unlike almost all other developed countries, the United States continues to grow.

All in all, this decade will produce some 30 million more Americans. They will produce 13-15 million new households. They will need a place to live. They will need over a million and a half new homes built every year. They will need you, America’s home builders, like never before.

And like Liberty’s torch, the American Dream burns as bright as ever. Americans want to own their homes. And they want to harness the growing wealth they will build in their homes. So in this decade, Americans will demand a doubling in the amount of funds available for housing capital. That means we must find $6-$7 trillion more in the international credit markets than we needed at the beginning of the decade.

Consumers will need low-cost, consumer-friendly mortgages, the kind that Fannie Mae is here to supply — in all communities, at all times.

So as America grows, demands more homes and more capital to finance those homes, Fannie Mae will be there to do our part for the American Dream. And we will be there to help you tackle America’s toughest housing challenges.

America may have the best housing in the world, but millions of Americans — especially minority Americans, are still overlooked, underserved and overcharged when it comes to the American Dream.

It has been over a century since emancipation; 50 years since the end of segregation; just over 40 years since Dr. King declared, “I have a dream;” and more than 35 years since the Civil Rights Act and the Fair Housing Act. But here in the 21st century, when it comes to housing, minorities are still locked in the Eisenhower era. The minority homeownership rate stands below 50% — 26 points below white Americans.

We must double and redouble our focus and efforts to close this gap. Fairness demands it, the President has called for it and the future of our industry depends on it. For the emerging markets of today will be the surging markets of tomorrow. Over the next 20 years, the Hispanic-American population will grow by 75%, African Americans by 28% and Asian Americans by 80%. These families will drive the housing market. They need us, and we need them.

We have many other tough housing challenges to tackle.

We must exterminate shady and predatory lending, so people who have homes are not fleeced out of them.

And Bobby Rayburn is absolutely right — we need to build and rebuild the housing stock that the nation and its workforce need, where they need it the most, so that public servants — teachers, police, firefighters and others — can live in the communities that count on them; so the women and men in uniform who protect and defend America can come home to the American Dream; so that families who live in the small towns, in the farm belt and on the back roads are not consigned to the hinterlands of housing; so that families not seeking or not ready to own a home still have a good roof over their head with a rent they can afford.

And Kent Conine is absolutely right — as you build the homes America needs, we need to ensure a steady supply of funds to acquire land, prepare development and finance construction. So we appreciated the support of Kent Conine and the home builders as we won HUD’s approval for our Acquisition, Development and Construction loan program.

And as you strive to meet the demand for workforce housing, we need to fight the blunt instruments of growth limitations that can stifle your ability to meet the growing demand for housing with an affordable supply.

Among our toughest housing challenges, we also must make sure home buyers everywhere — from the central cities to the country roads — can get the best mortgage at the best price and the most home for their mortgage dollar. And that is where Fannie Mae comes in, with a mission to supply the capital to meet the nation’s housing needs and challenges.

With Fannie Mae at its core, America’s housing finance system can meet this challenge. It is engineered to serve the needs of the consumers, not those of big banks. And it draws housing capital from all over America, and all over the world, and sends it to every community across the nation.

In America, housing is not dependent on bank deposits and big bank business strategies. So in America, housing is protected from credit crises, boom-bust cycles and roller coaster economic indicators. In America, housing capital flows freely to lenders and home buyers in good times and in tough times.

So in America, we don’t have to worry that when the economy sneezes, housing catches double pneumonia. Indeed, in the past three years, it was housing that nursed the economy back to health.

And only in America can we take for granted the easiest way to finance a home ever invented — a mortgage with a fixed rate, for a long term, with a low downpayment and the right to refinance without penalty at any time. With this American-style mortgage, if interest rates spike up, families don’t have to worry about the house payment eating up grocery money. And if interest rates fall, they can make a phone call and cut their house payment by hundreds of dollars. Only in America can you find these mortgages, because only in America can you find such a sophisticated secondary mortgage market.

It is this secondary mortgage market that makes the consumer’s favorite mortgage possible. It drives down mortgage costs, and it manages mortgage risks, so that ordinary consumers do not have to bear that burden.

That’s what American home owners get by having the best housing finance system in the world. And the world knows it. Most of them still rely on big banks to finance housing. Most of them only have short-term loans with high rates, huge downpayments and penalties for refinancing. Many of them often suffer credit crunches, boom-bust housing cycles and low rates of homeownership.

It is no wonder that, whenever I travel overseas to attract more capital into our system for home buyers, I am constantly asked, “How can we build a system like yours?” All over the world, investors would rather invest in our system than in their own.

Right now, discussions are underway in Washington about our housing finance system as Congress works on legislation to strengthen our financial regulator. Fannie Mae supports this effort. We want a strong regulator. It is good for our company, the housing finance system and housing.

Our challenge is to help Congress achieve a crucial goal it set forth at the start of the legislative process: First, do no harm. Do no harm to housing, which is powering the economy. Do no harm to the housing industry, the women and men who build, sell and finance the homes. Do no harm to the world’s best housing finance system. And do no harm to Fannie Mae’s mission at the core of the system.

It is our mission to help meet the nation’s housing needs and challenges — a mission to reach and serve the “hard to serve” families; a mission that strives to close the minority lending gaps; a mission that advances market-transforming technologies; a mission that tears down barriers, lowers costs and expands homeownership and affordable rental housing for all Americans; and a mission that sets and meets Big Hairy Audacious Market Transforming Goals. Like our $3 trillion in commitments to underserved families over the past 10 years, and the $700 billion that we have pledged to the President’s Minority Homeownership Initiative.

As progress on reform legislation continues in Washington, we in this room know where we stand. We like a housing finance system that supplies consumer-friendly financing. We believe in a system that bends the market to serve the underserved. We need a system that is dependable and provides a steady flow of financing. We support a system that makes it faster, easier and cheaper for families to purchase the homes you build.

We know that America’s current housing finance system is the best in the world. And we think America should keep it.

My friends, we may be meeting here in Las Vegas, the gambling capital of America, but we do not want anyone to gamble with the American Dream.

Any legislation must answer several questions: Does it create a strong, well funded and respected safety and soundness regulator for Fannie Mae and Freddie Mac? Does it help raise the trillions of dollars needed to finance housing over this decade? Does it support the innovation needed to better serve consumers? And, does it help solve the toughest housing problems facing Americans?

We will stand shoulder to shoulder with the home builders as we address America’s housing needs and challenges ahead. And we will serve side by side with the home builders as we build and extend the American Dream.

One great American who had a dream noted that, “The ultimate measure of an individual is not where he stands in moments of comfort and convenience — but where he stands at times of challenge and controversy.”

Dr. Martin Luther King, Jr. did not have housing in mind when he said those words, but he did have in mind the need to break down barriers and expand opportunity. And he did have in mind the power of unity in the face of adversity.

As twin pillars of the American Dream, Fannie Mae and the home builders are joined by a common commitment to expand housing opportunity. In the coming year, let us work together to apply the full measure of our commitment and unity to the mission we share, and the dream we believe in. Thank you very much.

An Interview With Assistant Treasury Secretary Wayne Abernathy

The following interview was conducted by NAHB Senior Vice Presidents Robert Pflieger and David Crowe on December 10.

To read an accompanying interview with NAHB Executive Vice President Jerry Howard, click here.

ROBERT PFLIEGER: Mr. Secretary, what do you believe is the mission of Fannie Mae, Freddie Mac and the Federal Home Loan Banks? And do you believe there should be changes in those charters?

WAYNE ABERNATHY: Congress was clear when they created the housing GSEs that generally their mission was to harness this nation’s unparalleled financial resources to make the dream of homeownership a greater reality, particularly for those who have been traditionally underserved, like minorities and low-income Americans. The purchase of a home is probably the largest financial allocation that most Americans will make in their lifetime, and GSEs helped make the 30-year, fixed-rate mortgage the bread and butter of our housing finance system. And today many Americans own homes who otherwise would not have had that opportunity.

Expanding homeownership is a top priority of the Bush Administration. President Bush has outlined an aggressive housing agenda that includes the American Dream Downpayment Fund, the Single Family Affordable Housing Tax Credit, simplification of the home-buying process and increased home-buying education. Congress has also recognized that homeownership is a priority for this nation and has reinforced that principle on numerous occasions.

The Administration has proposed a strong and effective new regulator for the housing GSEs because expanding homeownership is a top priority, and the GSEs play an important role in doing that. Appropriate oversight of them is necessary to ensure that the housing GSEs will be able to continue to play this role now and into the future.

MR. PFLIEGER: It has been widely acknowledged that housing has played an incredibly important role over the last couple of years in keeping the economy strong. What, in your view, is housing’s overall contribution to the growth of the economy, recently and over the long term? And what role have the housing GSEs played in that growth?

MR. ABERNATHY: There are two parts to that. First of all, let’s talk about the importance of homeownership to the economy. Treasury’s Office of Economic Policy estimates that residential investment accounts for about 5% of Gross Domestic Product overall, and sometimes it accounts for a significant portion of the growth of GDP — over 1% in the third quarter of FY 2003. The building, furnishing and maintaining of homes are extremely important as a share of our economy.

But I think probably the most significant impact that homeownership has on the economy is what it does for communities. Go to a community where most of the people rent their home. Compare that with the community where most of the people own their home, and it’s a world of difference. There’s a world of difference in the way the people take care of their homes, the investments they make in their homes, the investments they make in their communities, the roots that they put into their communities and how they participate in the life of the community. Knowing that you own your home means not only that you take better care of your home, but you tend to take better care of your community.

MR. PFLIEGER: You mean housing’s social benefits?

MR. ABERNATHY: You get more involved in local politics because you figure you’re going to be there a while, and so you’re much more likely to be a participant in the choice for the local alderman than you would be if you were renting there and not planning to be there very long. And there’s a myriad of other kinds of — you’re probably more involved in the schools. You’re more involved in the churches and other good things that take place. People tend to become more involved in the places where they own their property and the home that’s there. That’s what I think is the most significant benefit of homeownership in this country.

GSEs play a role by helping to make the 30-year, fixed-rate mortgage into a very commonplace, liquid investment that allows a lot more of our tremendous financial resources to be devoted toward helping people buy their first homes and their second home, or to expand and build upon their homes. Without that, the 30-year, fixed rate mortgage might be seen by lenders as a riskier investment.

DAVE CROWE: Why do you describe a mortgage as being a potentially dangerous investment?

MR. ABERNATHY: From the lender’s point of view, long-term mortgages are subject to a wide variety of risks, particularly when you’re talking about a fixed-rate loan. When you have a fixed-rate loan, you’re tying up money over a long period of time, and so you increase the amount of exposure that you have to whether or not someone’s going to honor their payments over that period of time. You have exposed the person who provides that money to liquidity risks, and to the risks that financial institutions may need that money for other things because they have a lot of other demands. That financial institution is exposed to interest rate risks that can occur over the life of that particular loan as rates rise and fall. The secondary markets help mitigate a large portion of that risk by spreading it among a greater pool of investors.

In a lot of other countries a 30-year, fixed-rate mortgage is a very hard thing to find. In this country, for a long period of time, the 30-year fixed-rate mortgage was something that was hard to find. We needed to find mechanisms by which financial institutions would be willing to commit large sums of money for long periods of time, and the housing GSEs have played a major role in creating those instruments and providing liquidity that allows financial institutions to make those kinds of investments an everyday occurrence.

MR. PFLIEGER: And continue to play?

MR. ABERNATHY: And they continue to play that role, they certainly do in a variety of ways. And I think it’s interesting the way the different pieces work together. You have, by and large, Fannie and Freddie that are focusing on what you might call standardized, cookie-cutter types of loans, which is what you need to do in order to securitize them. The Federal Home Loan Banks play a very important role in providing liquidity for conforming as well as non-conforming loans. A member of a Federal Home Loan Bank can use these assets as collateral to get funds from a Federal Home Loan Bank to take care of any liquidity needs that institution may have, and thereby make that bank or thrift or credit union more likely to engage in that kind of investment.

MR. PFLIEGER: What is Treasury’s view of the wide range of federal policies that support a strong housing delivery system — everything from the mortgage interest deduction, to the low-income housing tax credit, to housing’s share of the federal budget, to the government’s support of the housing GSEs?

MR. ABERNATHY: As I mentioned before, the Bush Administration has made increased homeownership a top priority, and has proposed numerous ways to make this dream a reality for more American families. Secretary Snow shares the President’s strong commitment to housing and believes that the housing sector is a crucial component of our economy. Housing is making a tremendous contribution to the current economic recovery.

It certainly is no secret that this Administration is a strong supporter of the mortgage interest rate deduction. That has been a key element, a key piece of our tax code for a long period of time and a lot of people rely upon it. It allows a lot of people to get into homes earlier than they otherwise might, and to able to free up the funds they need in order to make their monthly payments.

With regard to a number of the other pieces that are designed to help increase homeownership, President Bush proposed the American Dream Downpayment Fund in 2002, and Congress enacted it a few days ago. This program will help low-income Americans overcome what is sometimes the number-one obstacle to buying a new home — amassing the money for the downpayment. A lot of people are making rent payments that are the same or more than what a mortgage payment would be and they would love to own their own home, but they can’t put together the downpayment. They’re paying all their money in rent. They can’t put aside enough money in savings for a downpayment, but they have demonstrated the ability to make a regular monthly payment, they just do it in rent. If they can find help to get that downpayment in place, they could turn that rent into equity and homeownership. The Administration estimates that this new program will help approximately 40,000 families a year with their downpayment and closing costs.

MR. CROWE: Can you elaborate on the Administration’s homeownership goals?

MR. ABERNATHY: President Bush has set very aggressive housing goals. In June 2002, he announced that he was setting a new minority homeownership goal of at least 5.5 million new minority home owners by the end of the decade. But even though homeownership levels are higher than they have ever been before, the President is still not satisfied. He has recognized that there are still segments of the population that are below the overall national level of homeownership that we can reach with various types of assistance. That’s why this Administration has put forth numerous programs to help serve minority populations in particular. Sometimes it’s just outreach. You get folks and help them understand that homeownership is within their reach, but they just don’t have the knowledge or the understanding to put together all the different pieces. So there’s a lot of outreach being done to show them just what the steps are.

I think that the proposal that the Department of Housing and Urban Development is looking at to try to simplify RESPA and all of the processes involved with settlement are excellent ideas to try to make that whole process — which can be very bewildering to people — a lot simpler and more understandable. People hear these horror stories about home buyers going into settlement and having surprises, and they are never pleasant surprises; they’re always unpleasant. If people knew before they walked into that settlement room what their expenses were going to be, you would be taking away one of the additional obstacles to homeownership today.

MR. CROWE: Looking at the Administration’s goal to increase homeownership rates among minorities, would Treasury be willing to support federal initiatives designed to address the problems you just mentioned and expand homeownership opportunities?

MR. ABERNATHY: President Bush and this Administration are committed to helping more Americans, especially communities that have been traditionally underserved, such as minority Americans, own their own homes. In addition to the housing programs which the President has put forth that I have already mentioned, part of the package that Secretaries Snow and Martinez have proposed to Congress would give HUD additional resources to enforce the various housing goals, and part of that is to break the housing goals into some segments. This would help us achieve not just the overall goal of increasing homeownership among all Americans, but also concentrate on the sub-goals that focus on increasing levels of homeownership among various minorities.

With regard to innovation that helps us reach those goals, one of our concerns is that the GSEs, as they grow, continue to stay focused on their mission, which is to expand the envelope of people who can get their homes, who can buy homes, who can purchase homes and not that the GSEs go experimenting in other things that may have only a tangential connection to homeownership.

MR. PFLIEGER: Do you believe that the GSEs have gone beyond their mission?

MR. ABERNATHY: I don’t know if they have or not. That’s something that the supervisor would need to be able to look at. We want to make sure the supervisor has full authority to be able to look at that, so if they see a proposal that somebody wants to put forth, the supervisor needs to be able to say, “Well, that might be a very interesting proposal and it might increase the financial resources of the entity, but it doesn’t have a whole lot to do with housing. We would prefer that you did your innovating on how you can find new ways to put people into homes as opposed to new ways to increase your bottom line, which may or may not have a direct bearing upon housing.”

MR. CROWE: It could be argued, however, that a profitable balance sheet also puts the GSEs in a position to expand their support for the housing market?

MR. ABERNATHY: We are all in favor of innovation. Increasing profits isn’t the sole or the primary responsibility of the GSEs, however. In fact, there may be situations where the GSEs should be obtaining a below-market return to provide additional funding to housing markets. That might not bring the full 15% return that they might be accustomed to. It might bring them only a 5% or a 10% return, but it’s still a positive return, and that’s the kind of market that Congress said they ought to be involved in.

MR. PFLIEGER: You have been quoted in the media recently questioning the financial condition of Fannie Mae and Freddie Mac, and, let me quote you directly,“we really don’t know what’s going on.” Do you believe that taxpayers face an imminent threat?

MR. ABERNATHY: No, I don’t think they pose an imminent threat. I think if there were an imminent threat, there would be certain signs that we would see. But the real issue is that we need a strong, credible regulator that will be able to detect developing problems before they become major problems, and currently we don’t have the kind of regulator or the kind of disclosure from the GSEs that would allows us to do that.

For example, Freddie has yet to live up to its commitment to register under the 1934 Securities Exchange Act, and they said that they most likely will not do so until 2005. They have finally put forward their annual report, but they said they aren’t going to give any quarterly data for 2003 until at the earliest June of 2004. I can’t imagine that investors are well served by a major corporation like Freddie Mac conducting business that way. While Fannie Mae was able to register under the 1934 act almost a year ago, Freddie has not, and until Freddie does that, there are important elements of disclosure that are not available, and so our ability to catch problems early on is compromised.

MR. CROWE: Would you say that’s a major concern?

MR. ABERNATHY: I am concerned that there could be significant problems developing, and the current level of disclosure does not allow regulators to catch those problems before they become disruptive to the role the GSEs play in the housing markets and the financial system. This is a further reason that we need a new, strong and credible regulator.

MR. PFLIEGER: Isn’t that OFHEO’s job right now?

MR. ABERNATHY: I think it is, but OFHEO, doing the best they can with what they have, were still caught by surprise when Freddie had its accounting problems. I think that suggests that over time, in spite of the people at OFEHO doing the best they can, they just do not have the resources, focus, stature and authority to do the job that needs to be done.

MR. CROWE: Do the GSEs pose an imminent threat?

MR. ABERNATHY: No, I have no reason to believe that is the case, but that being said, we don’t have the same disclosure for those corporations as we do for other corporations in America, and certainly not the world-class disclosure rules required for financial institutions. In fact, if you look at corporations in America, the level of disclosure we have for financial corporations is even greater than what we have for corporations in general. The reason why you need that is because, as we saw — as we have seen in many financial institutions that have melted down in the last 20 years or so — when they go bad, they can go bad very quickly just because of the nature of financial institutions. Money is so fungible and it moves so quickly, and because confidence is such an important part of the health of any financial institution, that’s why, perhaps more than a corporation that’s in the manufacturing business, we need to be able to have the confidence that they’re operating in a safe and sound manner early on.

MR. PFLIEGER: That leads me to another question. Wall Street doesn’t seem to have expressed any lack of confidence in the GSEs. It seems, though, that you have lost confidence in them.

MR. ABERNATHY: I would say that we are concerned that the level of supervision and disclosure is not adequate, and we believe that the housing finance markets will be better served if there is a new, credible regulator.

I believe that the market has responded to the problems at Freddie differently and perhaps not as severely as if similar problems had been uncovered at a non-GSE. That may be due to the fact that many market participants believe that the federal government would step in if one of the GSEs were to default, even though the bonds state on their face that they are not guaranteed by the federal government.

MR. CROWE: Do you think that’s what’s supporting the stock prices of Fannie and Freddie?

MR. ABERNATHY: I don’t know if it affects their stock prices as much as it affects their bond prices. Their cost of funds certainly benefits from that assumption. Their stock prices, I think, have been influenced to some degree. If you compare Freddie’s stock prices with Fannie’s, there is a very significant difference in terms of the price-to-earnings ratio. I think Freddie’s is about half of what Fannie’s is in terms of price-to-earnings ratio, reflecting at least some unease, some disquiet, about Freddie’s condition.

MR. PFLIEGER: During a Senate Banking Committee hearing on Sept. 23, Senator Sarbanes asked all the panelists to express their views on the idea of privatizing the GSEs. Let me ask you the same question. Does the Treasury Department — the Administration — support privatizing the GSEs?

MR. ABERNATHY: We don’t have any plans to promote privatization. We’re not supporting any proposals for privatization. That has not been on our agenda or even in any of our discussions.

MR. CROWE: What about the line of credit extended to Fannie and Freddie?

MR. ABERNATHY: The discussion that we have been engaged in and our focus over the last several months have been on establishing the appropriate supervision for Fannie and Freddie. We’ve been focusing on getting the right regulatory structure. But let me just point out that, with regard to a line of credit, you have to understand that it is not really a line of credit, but rather the opportunity — the authority that the Treasury has to purchase the securities of Fannie and Freddie.

But we have also said on multiple occasions that if Congress wants to look at other issues and would like us to engage in discussion with them, we will do that. But the discussions that we have initiated and our focus are on getting the regulatory system right.

MR. CROWE: But opening that door does suggest you might be amenable to it.

MR. ABERNATHY: It means if Congress wants to open the door we will have that conversation, and then we will have to decide what kind of policy we have on it. We have not taken a policy position on it nor have we had a policy discussion about whether that is a good idea or a bad idea. But if Congress thinks that there is merit to it and wants us to engage in that, then we will engage in a policymaking process and see if we have a view on it.

MR. PFLIEGER: Have you encouraged Congress?

MR. ABERNATHY: In that regard, no. I think if you look carefully at what Secretary Snow said when he testified before the House and I think re-echoed when he testified before the Senate, he emphasized that the most important thing we need to do is get the regulatory system right, and that’s what our main focus has been. But again, if Congress wants to deal with this issue or others, we’re certainly open to engage in that conversation.

MR. CROWE: Let’s shift to a discussion about who should regulate the GSEs. Recently, there’s been speculation in the press and elsewhere about appointing a totally independent regulator. And you have stated previously that Treasury’s first priority is setting up a solid, world-class regulator for the GSEs. What are the characteristics of a truly independent regulator that you would feel comfortable with? Is this a point where the housing community can find some common ground and reach a compromise?

MR. ABERNATHY: What’s most important is that we get the details of the regulator right. The supervisor has to have all the authorities that are needed to carry out its job. That includes full authority over both elements of capital, with minimum capital and risk-based capital. It includes authority over all of the elements of prudential supervision, including authority over new activities. And it includes having an independent source of funding. It includes being able to go to the courts on its own dime, on its own ticket, without having to solicit permission to do that from the Justice Department.

Then people want to get into the question of where to put that entity. We have made it clear that if you want to put it in Treasury, there are certain requirements that need to be met, but that’s only if people want to place that entity into Treasury.

MR. CROWE: Those are the only conditions for an independent regulator?

MR. ABERNATHY: Well, again, the Administration has consistently said that there are certain elements that are essential to an effective, prudential regulator. Secretary Snow outlined those elements in his testimony before the House of Representatives Financial Services Committee in September. The Administration’s requirements for this new regulator are drawn from the powers and authorities that other world-class regulators have in this country and elsewhere.

MR. CROWE: And you said new program activity?

MR. ABERNATHY: Yes, we believe the new regulator must have authority over new activities.

MR. PFLIEGER: You’ve reportedly taken the position that new program authority for the GSEs should be placed under the new regulator, that it cannot remain at HUD and that that position is non negotiable. Is that correct?

MR. ABERNATHY: One of the essential elements of an effective regulator is the ability to approve new activities, not just new programs. You cannot point to an effective, world-class regulator of financial services that doesn’t have that authority.

MR. CROWE: The regulator’s ability to essentially veto a program on financial safety and soundness grounds is not sufficient?

MR. ABERNATHY: It’s not just safety and soundness. There are other elements that tie into it. There are a whole variety of risks that financial regulators look at when they’re looking at the activities of the institutions they are regulating. There are certainly the safety and soundness issues with regard to the financial aspects, but there’s also reputational risk, there are legal risks that they look at, there are management risks. Does this institution have the ability to manage these activities and how do these activities interact with the other activities of the institution? Do they have appropriate ability to understand all the aspects of the activity and where it might lead? All of those things need to be taken into account and looked at.

It’s done in a very effective way with those agencies that have that power, and it’s done in a way that doesn’t slow down the ability to bring to market new products. If you look at America’s banks today, they are the world innovators. When it comes to financial services, it’s the United States that develops the new financial services, and they do it within a system where the bank regulators have authority over those new products.

MR. CROWE: Could you see this independent regulator — independent of Treasury —operate as a “board,” with equal standing between HUD and Treasury?

MR. ABERNATHY: As you know, the type of regulator, whether it is within the Treasury Department or a separate agency entirely, is still an issue that Congress is examining.

MR. PFLIEGER: As part of this discussion over how the new regulator is set up, is there an opportunity for industry to participate?

MR. ABERNATHY: There is, particularly for those who are the users and beneficiaries of Fannie’s and Freddie’s products.

MR. PFLIEGER: Like the home builders.

MR. ABERNATHY: Yes, like the home builders, like home buyers and people who supply other aspects of that, the financial institutions that originate the mortgages; all of those need to be looked at.

I think there need to be some conversations with Fannie and Freddie, but keep in mind that these institutions were created by Congress to serve certain purposes of Congress. Therefore, Congress, the government, will play the major role, because these are government-sponsored enterprises, and the government ought to have the significant say in how they’re going to be supervised. And so, while they ought to be consulted with, I don’t think their views ought to determine what the final product is.

MR. PFLIEGER: So you might see a role for the housing industry in that dialogue. Again, I don’t want to put words in your mouth, but in the event that there is a discussion about creating an outside agency board to regulate the GSEs, you see a role for the housing industry to have a seat at the table for those discussions.

MR. ABERNATHY: I think whatever we do with regard to GSE supervision that that process ought to include a discussion with those who rely upon the services of the GSEs to make sure that what we’re creating is going to be able to meet their needs. And as I say, that includes the people who build the homes as well as the people who sell the homes as well as the people who buy the homes and the ones who finance them and originate the mortgages. I think all of those people ought to be involved in that process to make sure that we’re having a system that will be robust enough to continue the great benefits we have of this wonderful financial system for housing and finance.

MR. CROWE: Fannie and Freddie both supply capital to the multifamily market as well as the single-family sector. Do you envision a major a role for Fannie Mae and Freddie Mac in facilitating the flow of capital to the multifamily market?

MR. ABERNATHY: I think in our discussion we have been talking about basically the context of single homes, but the GSEs do play an important role in the multifamily market as well. And frankly, if you include the Federal Home Loan Banks, a lot of that money also goes into providing rental homes, and that’s important as well. There are a number of people for whom, for whatever reason, their best option is a rental home, and we don’t want that segment of the housing market to be neglected either.

MR. PFLIEGER: You have stated a preference for regulating the Federal Home Loan Banks under the same regulatory umbrella being proposed for Fannie and Freddie. Does this make sense given the significant differences in the structure and operation of Fannie Mae and Freddie Mac versus the Federal Home Loan Banks?

MR. ABERNATHY: They are different. They’re similar in the markets that they serve, but I think they’re complementary in many ways as well.

But I think you can accommodate supervision of Fannie and Freddie and the Federal Home Loan Banks in the same agency, provided you have two divisions within that agency. There is some area for overlap, but there are also separate structures. You have 12 institutions that are cooperative in nature. They are created as mutuals, mutual institutions in essence, in effect. And then you have two that are for-profit entities, and they have different structures and different market forces that affect what they do.

There’s also a good deal of overlap. Certainly in the backroom operations, making sure you have your legal team, your financial analysts, your accounting staff and your examination staff. You could have that same set of staff to provide you the kind of resources you need, whether you’re looking at the Federal Home Loan Banks or Fannie or Freddie. In fact, one of the benefits of putting them together in one institution is you would address one of the problems you have with examination staff for Fannie and Freddie today. If you’re a career examiner at OFHEO, your whole career you’re going to look at either Fannie or Freddie, and it’s hard to discover what best practices might be.

The examination process is a give and take. The examiners are on the one hand coming in with a jaundiced eye, with a critical eye to see what can be improved, but they’re also learning. They’re learning about the good practices underway in one place that they can then carry to the next institution they look at. That happens in the banking world all the time. When you’re dealing with Fannie and Freddie, they are so much alike it’s hard to bring anything new to one or the other. But if your examiners are examining Fannie Mae this year, and next year they’re looking at the Federal Home Loan Bank of San Francisco, there may be some good lessons that they can learn from those different reviews that they can benefit each of them.

MR. PFLIEGER: One reason you have given for having new GSE programs approved by the safety and soundness regulator is to eliminate the bifurcation of Fannie and Freddie’s oversight by HUD and OFHEO. But under your proposal, HUD would still continue to establish and enforce Fannie and Freddie’s affordable housing rules. Doesn’t this also represent a bifurcation of mission oversight if new program approval powers are moved to a different regulatory entity? Why are you concerned about bifurcation in one case but not in the other?

MR. ABERNATHY: The best place for housing goals to be set and monitored is with the experts at HUD. The goal setting is not part of the supervisory process. But, while Fannie, Freddie and the Federal Home Loan Banks help us meet those goals, they are ultimately financial institutions. The new supervisor should have all the powers necessary to be a world class financial regulator, including new activity approval.

The benefit in keeping goal setting and new activity approval somewhat separate is that HUD can look at those goals without being subject to the day-to-day supervisory responsibilities and concerns and worries. HUD can focus on what the housing market needs, and whether or not the GSEs need to stretch a little bit to meet these goals. The supervisor will look and say, “Go ahead and stretch, but as you’re stretching we’re going to make sure you’re not snapping. My job is to make sure you don’t snap and that you stay focused.”

HUD sets the target, the supervisor looks at it to see whether or not the bow you were using is a good bow, whether your arrows are straight. But let HUD set the target.

MR. PFLIEGER: Let me conclude by thanking you for participating in this interview. Before closing, are there any other points you would like to leave with NAHB’s 215,000 members?

MR. ABERNATHY: Well, perhaps — and the only thing I would add that we haven’t covered here yet is our view that the need for having a good, effective supervisor is not going to go away. The need is probably going to increase, the mission responsibility that they have is so important that we can’t allow ourselves to get by much longer with inadequate supervision of these housing GSEs. We have to make sure that they’re safe today and that they will be safe tomorrow to be able to continue their mission.

To read an accompanying interview with NAHB Executive Vice President Jerry Howard, click here.

An Interview With NAHB Executive Vice President Jerry Howard

The following interview was conducted by NAHB Senior Vice President David Crowe in late December.

To read an accompanying article with Assistant Treasury Secretary Wayne Abernathy, click here.

DAVID CROWE: What does the housing industry believe is the mission of Fannie Mae, Freddie Mac and the Federal Home Loan Banks? Should there be changes in their charter?

JERRY HOWARD: I find it interesting that the Administration has been so critical of Fannie Mae, Freddie Mac and the Federal Home Loan Banks recently. The fact of the matter is that Fannie Mae, Freddie Mac and the Federal Home Loan Banks play an integral role in implementing the Administration’s federal housing policy.

These entities have evolved into extremely critical components of the nation’s housing delivery system. Their mission is to provide liquidity and stability to the housing credit markets, particularly in areas that otherwise would not be adequately served. By their Congressional charters, these government-sponsored enterprises (GSEs) receive several privileges and legal exemptions to assist them in achieving their housing mission. With the help of these GSEs, more than two-thirds of the nation’s households are home owners. In addition, these GSEs play an important role in the financing of affordable rental properties. Much of this is due to the public/private partnership established by Congress more than a half-century ago.

Efforts to diminish their GSE status or misguided attempts to overhaul their regulatory oversight could impair the ability of these enterprises to perform their critical role in the housing finance system. Changing the GSEs’ agency status or removing the housing perspective from their regulatory oversight could have negative ramifications on the housing finance system. Some of these negative impacts could include higher mortgage rates, increased volatility in the cost and availability of mortgage credit (especially for affordable housing), lower homeownership rates, fewer affordable rental units and reduced mortgage product and technological innovations.

MR. CROWE: It has been widely acknowledged that housing has played a particularly important role over the past couple of years in keeping the economy stronger than it would otherwise have been. How has government policy contributed to this effort? And what role do you think the housing GSEs have played?

MR. HOWARD: Housing has been huge, and NAHB is pleased there is such wide recognition that the housing market has been the key engine of growth in recent years. The housing sector continued to excel in 2003, with new home sales achieving a record performance of more than a million closings. Single-family home construction totaled nearly 1.5 million units in 2003 and multifamily activity, while more subdued, still posted a respectable showing, pushing total housing starts above 1.8 million units.

While low interest rates and favorable demographics spurred demand, these results would not have been possible without the support of the finance system for housing. The effectiveness and resilience of this system is the result of a steadfast commitment of federal policy makers to improving the nation’s housing conditions and opportunities. The bedrock of the housing finance system is a liquid and vibrant secondary market that is the product of the activities of Fannie Mae and Freddie Mac. These enterprises have not only contributed to the affordability of housing credit, but also have taken the lead in expanding the menu of affordable housing programs and products. The Federal Home Loan Banks also continue to play an important role both by providing liquidity to housing lenders and by developing innovative programs to address housing needs.

MR. CROWE: What is the housing industry’s view of the wide range of federal policies that support a strong housing delivery system — everything from the mortgage interest tax deduction, to the Low Income Housing Tax Credit, to housing’s share of the federal budget and the government’s support of the housing GSEs? Are there ways in which the federal government could improve its support?

MR. HOWARD: The United States’ housing delivery system exemplifies a healthy balance of private and public resources that provides greater housing opportunities for all. The federal government’s support of the housing finance system, in partnership with financial institutions, and via the provisions of mortgage insurance and guarantees, is crucial to a stable and growing secondary market.

As I mentioned, government-sponsored enterprises provide critical links between the national and global financial markets and the housing finance system, further enhancing stability and growth. And direct federal expenditures serve to reduce the cost of decent and safe housing to affordable levels.

Finally, the U.S. tax system has been used for decades as an effective and efficient policy tool that expands housing opportunities without elaborate and expensive bureaucracies. Tax incentives distill public policy goals into economic terms, and tax payers react in the marketplace as they would to any other economic signal.

While we are the best-housed nation, there’s always room for improvement. For example many well-intentioned federal regulations, primarily aimed at environmental concerns, have unintended adverse impacts on housing affordability. We believe that environmental protection can be equally effective if the economic impact of these laws and regulations is evaluated against the environmental benefit. This is not currently required, but should be.

Also, housing policy should undergo review and refinement as housing and community development needs shift and evolve. The housing “rocket scientists” have come up with an idea for a new tax credit to spur minority homeownership and economic revitalization of downtrodden communities, and legislation to establish such a program is now before Congress. We need to continue to add new housing policy tools, as well as fine tune the proven mechanisms.

MR. CROWE: To what extent are you concerned about the current condition or operation of Fannie and Freddie?

MR. HOWARD: We are not aware that anyone, even Fannie’s and Freddie’s harshest critics, is claiming that a crisis is looming. These companies are in solid condition, as OFHEO continues to certify. The accounting problems at Freddie Mac certainly are real, but it’s a case of being more profitable than previously stated. Both companies continue to meet very tough capital tests with flying colors and we see no evidence of erosion in their financial health. We wish other companies were in as good a shape.

MR. CROWE: The housing industry has been adamant in its opposition to taking control of the GSE programs away from HUD and putting it in the hands of the Treasury. Why is it so important for this authority to remain at HUD?

MR. HOWARD: It’s quite simple — HUD is the only cabinet agency with a thorough understanding of, and extensive involvement in, housing-related issues. I have a high regard for the Treasury’s ability to oversee the safety and soundness of Fannie Mae and Freddie Mac’s operations. But those who care about housing are extremely skeptical of Treasury’s intentions in volunteering to be a “world-class” housing-GSE regulator because, time and again, they have expressed an anti-housing bias in their policy statements and actions. This is a historic bias that goes back for decades and has been apparent in both Democratic and Republican Administrations.

That just doesn’t seem like the kind of regulator you want to have in charge of deciding the types of things Freddie, Fannie and the FHLBanks can and cannot do. NAHB strongly believes that Fannie Mae’s and Freddie Mac’s ability to spur innovative solutions and to develop new products that increase homeownership will continue only if the mission of these corporations is regulated by an agency that understands and is immersed in housing-related issues.

HUD has proven itself to possess the capacity to adequately evaluate the potential benefits to housing from the GSEs’ innovation and advancement in products and to ensure that the GSEs do not stray from their statutory mission. To make a good thing better, HUD’s program oversight could be strengthened through the establishment of an independently funded office within HUD. Having an office within HUD dedicated to mission oversight of Fannie and Freddie would be preferable to the current situation where GSE oversight is conducted through the Office of Housing with few dedicated staff and staff from other HUD offices are detailed on an ad hoc basis for GSE oversight duties.

Of course, there would be staffing, administrative and operational costs to achieve this increased regulatory scrutiny. One way to minimize the costs to taxpayers is to handle it by assessing Fannie Mae and Freddie Mac to fund the new HUD office.

The new program approval process is another area where it seems like people are trying to substitute regulatory bureaucracy for common sense. The current process rightfully limits prior approval to new programs, which are defined as very broad undertakings unlike what is currently being done. Others are proposing to significantly broaden what would have to be approved to include any new business activities. Submitting each new activity to the approval process envisioned by the Administration would result in such micromanagement of the GSEs’ innovations that they would be unable to respond to changing market conditions in a timely fashion. The result would be to stifle or severely inhibit development and implementation of valuable new mortgage products and technological innovations that have helped to dramatically expand homeownership in the country.

MR. CROWE: There has been speculation in the media and in Congress about what an independent regulator would look like and that it could possibly be a board. Is there possibly room there to compromise? Given that there are some strong differences between the Administration and the housing industry and within Congress about the role of a new independent GSE regulator, particularly over the issue of program oversight, do you perceive any common ground between these two views that might suggest the possibility of a compromise?

MR. HOWARD: The discussions about who should regulate the housing GSEs have been like performing exploratory surgery on the central nervous system of the housing industry and the economy in general. No one wants to jeopardize the housing finance system that is the envy of the world. But, many people feel passionate about their views. And rightly so. After all, we’re not talking about widgets, we’re talking about peoples’ homes.

Here is NAHB’s perspective plain and simple: the regulatory framework for the GSEs should be credible and effective to ensure these organizations fulfill their mission in a safe and sound manner. If every policy maker focuses on this goal, I’m certain the outcome will be a world-class regulator. Things get bogged down when people focus on protecting their turf. I’m pleased that the Administration, lawmakers and key policy makers have resumed discussions.

As I mentioned before, NAHB strongly believes that HUD is the appropriate agency to regulate the mission of Fannie Mae and Freddie Mac, including approving new programs and establishing affordable housing goals. However, we’d be willing to explore the feasibility of establishing an independent GSE regulator outside of Treasury so long as that entity has a thorough understanding of and extensive involvement in housing-related issues. The regulator could be structured with a governing board of directors that includes HUD officials and representatives from the housing sector on the board to ensure the GSE regulator possesses sufficient housing-related expertise.

MR. CROWE: Treasury Assistant Secretary Wayne Abernathy has suggested that there might be a role for the housing industry in the discussion over how the new regulator is set up? What do you believe the industry’s role should be and what points do you believe need to be emphasized if that dialogue should arise?

MR. HOWARD: I wouldn’t say there “might” be a role. I’d say there must be a role. It would be a huge mistake to turn discussion on GSE regulation into a free-for-all referendum of our highly successful housing finance system. Decisions that have not been vetted by those who will have to live with them could have catastrophic consequences for housing. NAHB urges a careful and thoughtful approach on GSE regulation and believes such a course will produce tremendous rewards to those with most at stake in the process — America’s home owners and renters.

NAHB’s involvement in the discussion over how the new regulator is set up would add the wisdom, knowledge and experience of over 215,000 direct participants in the production of housing and related activities. In fact, here is what NAHB members believe should be the guiding principles of the GSE regulatory reform debate:

The first principle is that the GSE status of these institutions must be maintained. Efforts to privatize, withdraw any of the federal privileges and legal exemptions or otherwise diminish the ability of the GSEs to provide housing financing at the lowest possible cost should be opposed.

Our second guiding principle is that the GSEs should fulfill their public mission by conducting activities authorized by their charters in a safe and sound manner and by promoting access to mortgage credit to address the needs of affordable housing throughout the nation.

Third on our list of principles for reform efforts is that the regulatory framework of the GSEs should be strong and credible, possess adequate authority and resources and reflect the differences inherent in the charters and operating structures of the GSEs. Further, the regulatory framework should foster competition among the GSEs to develop and implement innovative, low-cost funding and other programs to meet the nation’s housing credit needs.

Fourth, the mission oversight of Fannie Mae and Freddie Mac (including approval of new programs and enforcement of affordable housing goals) should be conducted by the Department of Housing and Urban Development or another entity with a thorough understanding of, and extensive involvement in, housing-related issues.

Fifth, we believe that the safety and soundness oversight of Fannie Mae and Freddie Mac should be conducted by an independent regulatory agency through rigorous examinations, enforcement of regulations (including capital standards) and transparency, without unnecessarily impairing the ability of these GSEs to accomplish their mission.

The sixth of our guiding principles is that the recently implemented risk-based capital standards for Fannie Mae and Freddie Mac should be allowed to remain in place for a period of time sufficient to evaluate the effectiveness of the new standards.

And seventh, the regulation of the mission and safety and soundness of the Federal Home Loan Bank System should reflect the uniqueness of the system’s mission, cooperative operating structure, charter type and other characteristics. This is best accomplished by having a regulator dedicated solely to FHLBank System oversight or by having a separate FHLBank System oversight division if a single agency regulates all of the housing GSEs.

To read an accompanying interview with Assistant Treasury Secretary Wayne Abernathy, click here.

Housing Provisions Fare Fairly Well in 2004 Appropriations Bill

The FY 04 omnibus appropriations bill — a $373 billion measure that combines seven spending bills into one giant package to fund the federal government through Sept. 30, 2004 — was signed into law by President Bush last month and contains several provisions of note to the housing industry.

The Edward Byrne Discretionary Grant program, which is beneficial to the Home Builders Institute's Project CRAFT (Community, Restitution and Apprenticeship-Focused Training) in Tennessee, received a significant funding boost to $159 million from $94 million in FY 03. In addition, the legislative language specifically praises HBI and its work on Project CRAFT, and recognizes the program as “a model intervention technique in the rehabilitation and reduced recidivism of adjudicated youth.”

In other notable issues related to HBI, the workforce development arm of NAHB, Jobs Corps and the Carl D. Perkins Vocational Education Grants each received an increase in funding in FY 2004, rising to $1.55 billion and $2.12 billion, respectively. The Perkins program provides important funding for many of the nation’s vocational education programs, including those that provide instruction in the construction and residential building trades.

Workforce Investment Act monies came in on par with last year at $5.16 billion, while the Responsible Reintegration of Youth Offenders program received a $50 million appropriation; the Administration had requested eliminating its funding. NAHB had urged Congress to continue to support this program, which HBI uses to help fund its Project CRAFT initiatives.

The VA/HUD Appropriations bill was rolled into the FY 2004 omnibus and lawmakers maintained several programs near their FY 03 levels, including Brownfields Redevelopment ($25 million), Housing Counseling Assistance ($40 million), Rural Housing Economic Development ($25 million), the HOME Program ($1.93 billion), Youth Build ($65 million) and the Partnership for Advancing Technology in Housing (PATH) program ($7.5 million).

The PATH program is vitally important to the NAHB Research Center, and NAHB worked aggressively to maintain its appropriations level after the Administration proposed removing its funding.

The Zero Energy Buildings program, also of interest to the NAHB Research Center, received a reprieve after it was initially eliminated from both the House and Senate FY 2004 appropriations bills.

Working with Sen. Harry Reid (D-NV), NAHB was able to reinstate the program during conference negotiations, which ultimately resulted in a $4 million allocation for FY 2004.

Of concern to NAHB are appropriations levels for two Department of Housing and Urban Development programs — Sec. 8 and Hope VI. While Sec. 8 received an overall boost of $1 billion, the legislation failed to provide any funding for new vouchers, focusing solely on voucher and contract renewals, a move that NAHB opposed.

Although the Administration had proposed to end funding for the Hope VI program, which provides grants to revitalize public housing, appropriators designated $150 million to keep it running. While this funding level keeps the program from being eliminated, it represents a significant drop from the FY 03 level of $570 million.

Funding levels for rural housing programs in FY 04 achieved mixed results compared to the previous fiscal year. While the Sec. 515 direct loan program ($116 million) and Sec. 538 guaranteed loan program ($100 million) appear to be maintaining funding at or near last year’s levels, the Sec. 521 rental assistance program and Sec. 502 housing loan guarantees have taken deep cuts.

Sec. 521 allocations were slashed from $726 million to $584 million and more than $300 million of the Sec. 502 loan guarantees appears to have been moved into the Sec. 502 direct loan program.

Funding for the Sec. 502 housing loan guarantee program fell to $2.725 billion from last year’s $4.26 billion. The program guarantees low-interest loans to low-income individuals and families who receive a home loan directly from the Rural Housing Service (RHS). Because the RHS provides loans to those who cannot qualify for a conventional loan, the program creates homeownership opportunities for many more Americans than might otherwise be possible. NAHB had urged Congress to fully fund the program.

Modular Home Builder Tells President Tax Cuts Key to Economic Outlook

At a roundtable convened in Manchester, NH, on Jan. 29 by President Bush to discuss the state’s economic outlook, Joseph Landers, president and CEO of the Claremont-based modular home building firm, Customized Structures, Inc., offered strong support for a White House plan to make the tax cuts passed in last year’s stimulus package permanent.

Representing the local housing industry, Landers applauded the President for his Administration’s commitment to provide safe, affordable housing for all Americans.

“Mr. President, on behalf of my company’s 135 employees, I would like to thank you because your tax cuts are working,” said Landers.

While his company has been in business for 20 years, Landers said that the last three have been the best. Future prospects are so positive that the firm has just purchased a new manufacturing plant three times larger than its current facility and plans to hire between 100 and 125 new employees over the next nine months.

Provisions in the 2003 tax bill — which lowered income tax rates, increased small business expensing to get more people back in the workforce, provided bonus depreciation for business investments, phased out the costly estate tax, reduced capital gains and dividend rates and boosted the child care credit — are all due to expire in coming years.

“I remain positive that you will be successful in permanently extending the current tax provisions that have helped strengthen the economy while adding new legislation your Administration is supporting, such as the homeownership tax credit, to enhance housing affordability,” he said.

In a private session with the President before the start of the roundtable discussion, Landers told President Bush that the Home Builders & Remodelers Association of New Hampshire (HBRANH) and NAHB supported his tax policy and are working with the White House to help extend current tax relief and enact the homeownership tax credit.

“In New Hampshire, economic and housing activity are on the rise. And the same is true throughout the rest of the nation. Allowing current tax relief to expire will put a drag on housing and the economy,” said Landers.

The homeownership tax credit, legislation that is pending in both chambers of Congress, would help to bridge the gap between the cost of developing affordable housing and the price that buyers with modest incomes can afford to pay for a home.

If enacted, the legislation is expected to result in the construction of 50,000 homes annually in economically distressed areas across the country.

Regulatory Effort Threatens Innovations in Mortgage Market

Innovations by Fannie Mae and Freddie Mac that have helped increase home buying opportunities and have supported the record volumes of mortgage originations of the past few years could be seriously hampered by ongoing efforts in Washington to clamp down on the programs of the two Government Sponsored Enterprises (GSEs), leaders from those institutions warned at the International Builders’ Show in Las Vegas last month.

As regulatory legislation for the housing GSEs moves forward, there are those who accuse them of “being too responsive and innovating too quickly,” said Franklin Raines, chairman and CEO of Fannie Mae, and they “want to have the government approve every new product and activity” that is proposed to help improve the mortgage market.

That, he said, would throw a “monkey wrench” into the process of innovation that is being driven by technological advances in automated underwriting and would result in higher financing costs and less demand.

“We are staking the future of Fannie Mae on the ability to innovate on behalf of customers,” said Raines. In the past decade his institution has geared up for mass customization of mortgage lending, he noted, by investing hundreds of millions of dollars to redo systems that were created in the era when all loans were 30-year, fixed-rate.

Five years ago, Raines said, Fannie Mae didn’t buy any loans from impaired credit buyers; today it is buying $40 billion worth of those mortgages a year. Similarly, it last year bought $15 billion in loans with downpayments of 5% or less.

He listed several other innovations that have arrived on the scene or are in the works: interest-only loans; loans that allow borrowers to skip payments without being in default; acquisition, development and construction financing for builders and developers; loans for teachers requiring payments only during the nine months of the year when they are working; faster amortizing mortgages for people who are retiring; and more.

Paul Peterson, Freddie Mac’s chief operating officer, said that innovations in automatic underwriting and access to global financial markets have enabled the mortgage industry to originate far more loans than it was capable of before.

He said that lenders were able to originate three times the volume of loans during the 2001-2003 refinancing boom than they handled during a comparable boom in the early 1990s, when the pipeline swelled and lenders kept interest rates artificially high because they were unable to handle the huge influx.

“In the early '90s, almost every home was originated manually, to varying credit standards, took too much time and was expensive,” said Peterson. “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.”

“Housing is threatened,” said Eugene Ludwig, managing partner of Promontory Financial Group in Washington, D.C., by “a drift away from support for innovative housing finance and away from homeownership as a key element of social policy.”

Ludwig said he was a believer in the value of third-party supervision, but in the current efforts for regulatory restructuring he finds it troubling that “the debate has had an aura of cutting back Fannie and Freddie and nothing about increasing innovation and homeownership.”

Economists See Little to Dampen Housing Surge in 2004

Expecting the Federal Reserve to maintain its low-interest rate policy for most, if not all, of this year, economists at the International Builders’ Show in Las Vegas last month predicted only a modest decline in housing production in 2004.

And if their forecasts for housing activity turn out to be wrong, they said, this year could actually be better than 2003, when overall production was the highest in 25 years and single-family starts and new home sales both set records.

David Seiders, NAHB’s chief economist, said he is betting that the Fed holds off from tightening monetary policy until just after the November elections, leaving long-term mortgage interest rates “pretty much flat.”

Seiders forecast that mortgage rates would move from an average 5.9% in the current quarter to 6.4% during the last quarter of the year, but noted that they were “5.6% right now,” below expectations.

“Interest rates are now lower than had been expected, and the rates may move up less than projected in the months ahead,” he said. “Thus, the risks to NAHB’s housing forecast for 2004 are mainly on the upside, and there is a possibility 2004 could even surpass the excellent performance of 2003.”

David Berson, chief economist for Fannie Mae, said that inflation is the most important economic factor for housing, and that until the Fed sees it rise from its current 0.5%-1% range closer to a more comfortable 2%, it will have no reason to tighten monetary policy.

“It may be a while to see core inflation move up,” Berson said, “and it could decline a bit more in the first half, keeping the Fed on the sidelines for a longer period.”

With mortgage interest rates unlikely to move up very much, “this could be the fourth consecutive record year” for the housing industry, he said, but in all likelihood it won’t be, partly because buyers who might have bolstered the market this year moved up their buying plans last year when they saw mortgage rates start heading higher.

Berson forecast a record $1.2 trillion in mortgage originations for home purchases this year, up from $1.1 trillion in 2003, but refinancings will tumble from $3.7 trillion last year to $0.6 trillion in 2004.

Frank Nothaft, chief economist for Freddie Mac, said this year’s modest increase in mortgage originations to buy homes would be attributable to 5%-6% price appreciation.

Nothaft said he expected mortgage originations to decline by 40% overall, with a 60% decline in refinancings, which would account for about 35% of the mortgage market.

Adjustable rate mortgages should hold on to their current share of the market, which is 25%, he said.

Noting some problems in the multifamily sector with slowing vacancy and absorption rates, Nothaft said that “the rental market has stabilized on the whole” and there should “no further deterioration.”

Although he would like to see the federal deficits on a downward path, Nothaft said that they were responsible for stimulating the economy, are “not nearly a record” as a share of the Gross Domestic Product, and “the ability of the economy to finance the deficit will improve over time as the economy strengthens.”

Like his colleagues, Nothaft expects good economic growth, declining unemployment, rising family income and low interest rates for 2004, which “translates into a very brisk housing market.”

Don’t Miss NAHB’s Spring Construction Forecast Conference

See what's on the horizon for the housing industry at the semi-annual gathering of the country's premier economists and finance experts. Get the latest forecasts on housing starts, project budgets and other economic bellwethers at the Spring Construction Forecast Conference on April 21 at the National Housing Center in Washington, D.C. Visit the Web site for more information.

2003 Another Banner Year for Single-Family Home Sales

Sales of new single-family homes topped one million units in 2003, establishing a new record high for the third consecutive year, the Commerce Department reported last Wednesday.

“The numbers, while amazing, should not be a surprise to most builders,” said NAHB President Bobby Rayburn. “The sales pace has been excellent throughout the last six months, primarily fueled by low mortgage rates and strong house price performance, and the market fundamentals are in place for this pace to continue into early 2004.”

Total new single-family home sales for 2003 reached 1.085 million, up 11.5% from the previous record of 973,000 in 2002.

For December alone, new home sales hit a seasonally adjusted annual rate of 1.060 million units, down 5.5% from November’s upwardly-revised pace of 1.117 million units.

“The sales pace was strong throughout the fourth quarter, and while we anticipate a slight decline in 2004, it is predicated on a projected rise of mortgage rates as the year progresses, to 6.5% by year’s end,” said NAHB Chief Economist David Seiders. “However, interest rates are currently lower than had been expected, and the rates are not projected to move up in the near future. Consumer confidence in housing is still strong, and housing continues to be an important contributor to our nation’s economy.”

Sales for last year totaled 189,000 in the Midwest, 306,000 in the West and 512,000 in the South — all records for those regions. While the Northeast’s 79,000 sales fell short of an all-time high, they represented a 21.5% increase over 2002.

In December, the sales pace was down 8.1% in the South and 11.2% in the West, and it was up 8.7% in the Midwest and 12.2% in the Northeast.

The inventory of new homes for sale was 374,000 at the end of 2003, a 4.3 months’ supply at the December sales pace.

“The inventory situation still is healthy despite moderate increases during the final months of 2003,” Seiders said. “Most of the recent increase has been for units still under construction, and the length of time that completed units are on the market actually has been declining to a median 3.7 months in December.”

Don’t Miss NAHB’s Spring Construction Forecast Conference

See what's on the horizon for the housing industry at the semi-annual gathering of the country's premier economists and finance experts. Get the latest forecasts on housing starts, project budgets and other economic bellwethers at the Spring Construction Forecast Conference on April 21 at the National Housing Center in Washington, D.C. Visit the Web site for more information.

Home Resales, Mortgage Rates Surpass Expectations in December

With the pace of existing single-family home sales continuing to advance in December, home resales in 2003 easily shattered the previous year’s record, rising 9.6% over 2002 to a total of 6.1 million, the National Association of Realtors® (NAR) reported on Jan. 26.

Existing-home sales rose 6.9% in December to a seasonally adjusted annual rate of 6.47 million units.

David Lereah, the association’s chief economist, said that he continues to be surprised by the strength of the housing market.

“We’ve been expecting the pace of home sales to ease, and a decline in November seemed to indicate a more sustainable pace, but the rebound in December — the second highest monthly pace on record — shows there’s still a lot of life in this market,” he said.

“The biggest factor” behind the resurgence in sales, he observed, has been “a resumed decline in mortgage interest rates, which have been much lower than most analysts expected.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 5.88% in December, down from 5.93% in November. Mortgage rates have declined further in January.

NAR President Walt McDonald said that, “Given the demand from a growing number of households in an improving economy, we can expect sales to remain close to record activity this year.”

December’s rate of home resales was up 2.9% in the Northeast to 720,000 units, 5.3% in the South to 2.58 million units, 7.9% in the West to 1.77 million units and 9.4% in the Midwest to 1.39 million units.

Don’t Miss NAHB’s Spring Construction Forecast Conference

See what's on the horizon for the housing industry at the semi-annual gathering of the country's premier economists and finance experts. Get the latest forecasts on housing starts, project budgets and other economic bellwethers at the Spring Construction Forecast Conference on April 21 at the National Housing Center in Washington, D.C. Visit the Web site for more information.

Eye on the Economy

David F. Seiders, NAHB Chief Economist
 The housing market wraps up 2003 in fine style and heads into 2004 with a lot of steam …

Housing starts increased further in December, closing out an incredibly strong fourth quarter and capping off a year that far exceeded the expectations of both private and government forecasting communities. Total housing starts were up by more than 8% for the year, the single-family component grew by more than 10% and even the beleaguered multifamily sector managed a small increase — supported by strength in the for-sale (condo) component.

Home sales also closed out the year with a lot of strength, and 2003 saw new annual records for both new and existing homes — as new-home sales topped one million for the first time and existing-home sales climbed above six million units. All major regions posted record home sales in 2003 and sales prices climbed to all-time highs in all regions as well.

Extraordinarily low mortgage interest rates were the key drivers of home sales and housing starts in 2003, and rates on both fixed- and adjustable-rate home loans actually moved down during January 2004 — provoking increases in applications for mortgages to buy homes as well as to refinance outstanding mortgages. Furthermore, inventories of both new and existing homes on the market were slim at the end of 2003, paving the way for further strength in single-family starts as well as solid rates of home price appreciation.

NAHB is forecasting modest declines in home sales and housing starts in 2004, primarily because of an anticipated firming up of the interest rate structure as the year progresses. But there’s some down-side risk to those interest rate forecasts and some up-side risk to the housing forecasts. Indeed, incoming data show that the danger of price deflation in the U.S. economy is not yet behind us, that the productivity wave is keeping labor markets weak and that both these factors have been weighing on the bond market and our central bank.

The Fed holds monetary policy steady but begins to craft an exit strategy …

The Federal Reserve held monetary policy steady at the Jan. 28 meeting of the Federal Open Market Committee (FOMC), maintaining the 1% federal funds rate target it first established on June 25 of last year. Furthermore, the FOMC decision once again was unanimous.

The FOMC’s public statement contained an assessment of recent economic performance that was quite similar to the assessment delivered at the conclusion of the last FOMC meeting on Dec. 9, although the Fed had to stretch a bit this time to make the case for an “improving” labor market (resorting to unspecified indicators other than new hiring). The FOMC’s characterization of the risks to sustainable growth, and to the inflation situation, were virtually identical as well.

But the FOMC altered the bottom-line assessment of how it views policy prospects going forward, dropping the statement that “policy accommodation can be maintained for a considerable period” and saying that the FOMC “can be patient in removing its policy accommodation.” This subtle shift actually was a loud heads-up that weakened the Fed’s apparent open-ended commitment to the 1% funds rate and reminded the markets that short-term rates will have to go up at some point. The knee-jerk reactions in financial markets sent long-term interest rates up and stock prices down.

NAHB’s forecast still shows a 1% federal funds rate until the Nov. 10 FOMC meeting, but the fed funds futures market priced in higher probabilities of earlier increases on the heels of today’s FOMC statement. We still believe that a rate hike late in the year is the best bet.

Consumer confidence is reviving slowly, held back by on-going concerns about the labor market …

Consumer confidence (Conference Board series) picked up in January, following a bit of erosion in December. But the overall measure still was well below the pre-recession peak and not far off the cyclical low last spring. Furthermore, the improvement has been paced by the forward-looking expectations component, while consumers’ assessments of the present economic situation have remained pretty much in the doldrums.

The Conference Board stressed that consumers’ view of current economic conditions in January “remains both weak and volatile” and “strongly hinges on improvements in the labor market.” Ironically, anticipated improvements on the job front helped to lift consumer expectations about the economic situation six months down the line. Consumers seem to be expecting the same thing that NAHB is forecasting and that the White House undoubtedly prays for every day.

Monetary and fiscal policies are “working” despite the persistently weak job market …

The persistent weakness of the labor market (both job creation and hourly earnings) through the end of 2003 does not mean that “stimulative” monetary and fiscal policies are failing to work. After all, both types of policies are designed to stimulate spending by consumers and businesses, and the immediate measure of success is a higher rate of economic output (GDP). Improvements in the job market normally follow a pickup in growth of economic output, although it’s fair to say that the time lag is inordinately long this time.

The double-barreled policy stimulus actually has been quite dramatic. The Fed’s aggressive easing of monetary policy through mid-2003 reduced interest rates and increased credit availability, and the current benefits include higher bond and stock values as well as a lower dollar. On the fiscal front, the tax-cut legislation enacted on July 1 has boosted disposable personal income, provided incentives for business capital investment and strengthened stock values (lowering the cost of equity capital). It’s perfectly clear that this package of economic policies has stimulated both spending and economic output.

But a major surge in growth of labor productivity enabled the business sector to meet the stronger demand for economic output in the second half of 2003 with little net increase in payroll employment and with only minor increases in average hourly earnings. History suggests that such a pattern is unlikely to persist much longer. Decent job growth should emerge during the first half of 2004 and growth of average hourly earnings should pick up in the process.

Jobs matter most on the political front, and growth in jobs and earnings is not yet assured ...

The anticipated improvements in the labor market could be prevented, of course, by persistently high productivity growth and/or a slower-than-expected rate of economic