Origination Views

Affordable Mortgages Help Pave Way for Recovery

By Timothy F. Geithner

Mr. Geithner, secretary of the U.S. Treasury, testified before the congressional oversight panel on Sept. 10 on the progress mortgage origination and financial markets have made toward recovery and what he believes the government still needs to do. The following are excerpts from his prepared text for that testimony.

Our nation has traveled a great distance over the past year.

The emerging confidence and stability of September 2009 is a far cry from the crippling fear and panic of September 2008.

The consensus among private forecasters is that our economy is now growing; the financial system is showing signs of repair; and the cost of credit has fallen dramatically.

For example, American families are spending less each month on mortgage payments. Because of near historically low interest rates, a family with an average 30-year mortgage is saving around $1,200 each year.

The Administration attacked the housing crisis across multiple fronts using various authorities. We boosted demand by implementing a new homebuyer's tax credit in the Recovery Act, which over 314,000 Americans have used to date. We supported historically low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac, including through a $200 billion increase in stock purchase agreements, enabling American families to reduce the cost of their monthly mortgage payments by refinancing. Given that many Americans were unable to refinance because their loan to value ratio was above 80, we expanded our refinancing program to include borrowers with loan to value ratios up to 125, providing the opportunity for more underwater homeowners to refinance.

Because of these early signs of progress in each area, we are now in a position to evolve our strategy as we move from crisis response to recovery, from rescuing the economy to repairing and rebuilding the foundation for future growth.

As we enter this new phase we must begin winding down some of the extraordinary support we put in place for the financial system.

But we must remember that it took years for this crisis to take hold. Given the extent of damage done to the financial system, the loss of wealth for families and the necessary adjustments after a long period of excessive borrowing around the world, it is realistic to assume recovery will be gradual, with more than the usual ups and downs.

Going forward, we must continue reinforcing recovery until it is self-sustaining and led by private demand. The classic errors of economic policy during crises are to act late with insufficient force and then put the brakes on too early. We are not going to repeat those mistakes.

Unemployment is still unacceptably high; the mortgage market, outside those covered by Fannie Mae and Freddie Mac, is still significantly impaired; commercial real estate financing remains extremely strained; small businesses are still grappling with unusually tight credit in part because they have few alternatives to banks for loans; and as job losses continue, families are finding it increasingly difficult to meet their mortgage payments causing foreclosures to rise.

We are going to do everything necessary, for as long as is necessary, to make sure American families and small businesses see sustained, material improvement in their lives. In addition, the critical imperative we face as a country is making sure that the same vulnerabilities in our system which gave rise to this recession are not allowed to trigger another. To do that, we must pass comprehensive regulatory reform legislation by the end of the year.

The Administration's proposals are focused on three key areas: protecting consumers, making the financial system more stable, and creating better tools to respond to financial stress in large, interconnected institutions.

There is broad agreement that consumer protection needs to be stronger. Achieving this objective requires mission focus, market-wide coverage and consolidated authority, none of which exist in today's system. That is why we are proposing a Consumer Financial Protection Agency to make sure that responsible Americans receive the protection they deserve and access to fair and transparent mortgages and credit cards.

The need is undeniable. With 78% of American families using credit cards and 44% carrying a balance, deceptive terms and practices affect nearly every family. More than half of the high cost loans at the center of the mortgage crisis were made to middle class families and in middle class communities. And yet there was no federal regulator dedicated to consumer protection.

To make the system more stable, we have proposed requiring financial institutions to hold more capital and manage liquidity risk more effectively; closing loopholes in regulation; requiring stronger federal supervision of all major financial firms; putting the market for over-the-counter derivatives under a comprehensive system of regulation; evolving the Federal Reserve's authority to create a single point of accountability for the consolidated supervision of all large, interconnected firms; and creating a Financial Stability Oversight Council to bring together all regulators to identify emerging risks and coordinate responses.

And to provide the government better tools to respond to future crises, the Administration has proposed new resolution authority. The Administration's proposal gives the government a legal mechanism, similar to the authority that the FDIC already has for managing the closure of insured depository institutions, to more effectively manage the wind down of large non-bank financial institutions in a way that protects taxpayers.