Richard F. Syron's Speech to the National Association
of Home Builders Annual Meeting on January 12, 2006
Prepared Remarks for Richard F. Syron
Chairman and CEO Freddie Mac
National Association of Home Builders Annual Meeting
Joint Meeting of Executive Board, Budget and Resolutions Committees
Orlando, Florida
January 12, 2006
Thank you, Dave [Wilson]. You had some big shoes to fill this year – and that's exactly what we saw you do. Freddie Mac is very grateful for all your hard work on GSE issues. And we know it's not because all your customers were the ones rushing out to get conforming loans. So thanks for standing up for the entire housing sector – and for homeowners everywhere.
Let me also congratulate David Pressly in his new role. It's been a pleasure to get to know you and we look forward to a productive partnership.
And I am grateful once more to Jerry [Howard] and the Home Builders for letting me address this important joint meeting.
It's a pleasure to join you again in Orlando. The last time I was to speak here, hurricane Wilma was buffeting the area and I had to cancel my trip. So it's great to be here without a storm raging.
Unfortunately, the better weather does not mean it's all blue skies ahead for housing.
Although 2006 should be another strong year for our industry, there are some potential clouds on the horizon.
Fixed mortgage rates have gone up more than half a percentage point since June – and adjustables are up nearly a full percentage point.
Affordability pressures are a growing concern.
The housing market is cooling from a perhaps unsustainably torrid pace.
The Gulf Coast hurricanes have complicated the broader economic picture for housing.
And now, on top of all that, there are a number of proposals making the rounds in Washington that could do serious harm to housing and our broader economy. Ultimately, I believe the root of these proposals is the belief that too great a share of GDP goes to housing.
Some of these troubling proposals are in the area of tax reform, and I want to share some thoughts with you on this subject.
Other potentially damaging proposals are in the area of GSE regulatory reform, and I'll say a word about that as well.
Afterwards, I'll discuss the economic picture and prospects for housing in 2006.
And finally, I want to reflect on our respective Katrina relief efforts, because I think they reveal some important things about both the Home Builders and Freddie Mac.
My remarks this morning have one overarching goal. I want to identify the policies and prerequisites we need to keep housing an important engine of the economy … a source of stability and opportunity … and the most valuable egg in the American nest.
The success of housing rests on several pillars. They include a homebuilding industry that is agile, innovative and robust. GSEs that tap the global capital markets to keep credit flowing. And tax policies that treat housing as the merit good – the special benefit to our society – that it is.
Now, I'd be happy to debate the root question of whether America overinvests in housing. But let's have a debate that's straightforward, complete and in context.
That kind of debate would take into account both the relative costs and benefits of the subsidies we give to housing; compared with those we give to agriculture, say; or energy; or any number of other industries in this country.
And, critically, that kind of debate would not just look at the federal tax burden on housing. It would look at the total burden – including state and local taxes.
We know that property taxes, roughly speaking, amount on average to about one percent of a home's value per year – every year.
In addition, you know better than anyone that new construction can be subject to impact fees which, in the highest-cost jurisdictions, can amount to over $100,000 for a single new home … before you ever break ground.
And there's one more important point, which I believe has not received the attention it deserves. Namely, what do the taxes and fees on housing pay for?
They pay for essential local services – most notably, education. That's a uniquely American approach.
So the question is, do we really want to make changes in the tax code that would have the net effect of reducing our ability to support our public schools? At a time when states and localities are already starved for resources?
I don't want to imply that I'm simply against everything the President's Advisory Panel on Tax Reform has done. For example, the Panel's proposed mortgage interest tax credit deserves further study, as helping lower income families is a goal we all share. There are many other ways to help lower-income families obtain housing as well. Just one example is the District of Columbia's tax credit for first-time homebuyers.
I know the Panel's proposals concern you deeply. Because of our housing mission, these proposals trouble Freddie Mac, as well. And we believe they ought to be meet some pretty clear and demanding tests. Specifically:
Changes to the tax system should not impair the value of America's existing homes. This is the best nest egg America's families have. Yet by some estimates, the proposals would reduce the value of houses nationwide by an average of 10-15 percent.
Reform should not raise taxes on middle-class homeowners and it should not discriminate against homeowners who live in high-cost areas. We estimate that if these proposals became law, the effective after-tax cost of a median-priced home in California could increase by something like 25 percent. One of the flaws of these proposals is that they pit high- and low-cost areas against one another.
Finally, we oppose any change that eliminates or impairs the value of the low-income housing tax credit. The reason is simple. This is the largest and most efficient source of low-income rental housing in the United States.
Before any such changes were seriously considered, the American people should be consulted – which I know the Home Builders have already begun to do. And as the people make their voices heard, Freddie Mac believes our nation will continue to give housing the priority it deserves.
I have the same basic belief in the area of GSE regulatory reform.
Let me try to cut to the heart of the matter, because I know that Freddie Mac's retained portfolio is an issue whose importance you appreciate. So I'll summarize just four of the reasons why cutting it back arbitrarily would be a serious mistake – for homeowners, for home builders, for all but the biggest banks, and for the U.S. economy.
One, our retained portfolio serves our mission. It helps support our affordable housing activities and stimulate demand for affordable loans. Indeed, a substantial share of the mortgages in our retained portfolio qualify under one of our three affordable housing goals. Our portfolio also is home to the lion's share of our multifamily business – and 90 percent of these loans are goal qualifying.
If we cannot buy mortgages and issue GSE debt to finance them, then an important source of liquidity for the U.S. housing markets will be compromised. Our response to hurricane Katrina is a big recent example of how vital our retained portfolio is for our mission.
Our critics claim that GSE debt and mortgage-backed securities are interchangeable. But that's not what portfolio managers – and increasingly, foreign investors – tell me. The truth is, if we can no longer buy mortgages and issue debt, there will be substantial disinvestment from housing. Again, our mission will be harmed. Already, there is international concern.
Two, our portfolio is very conservatively managed and regulated. Our demanding public disclosures and stress tests show this.
Three, our portfolio growth is subject to strong and increasing market discipline and competition. Since the beginning of 2000, the retained mortgage portfolios represented by the five largest banks and thrifts have grown twice as fast as the combined portfolios of Freddie Mac and Fannie Mae. In other words, the free market system is already limiting our growth. So the supposed need to cut the GSEs down to size is becoming more and more outdated.
Four, eliminating the GSE retained portfolios would only further concentrate risk in the financial system. Already, just three banks own nearly 40 percent of all U.S. banks' mortgage backed securities. So eliminating our retained portfolios means more concentration of risk, not less. It means fewer choices for the thousands of medium-sized and community banks who may lack good alternative access to the capital markets. And it means less support, over time, for the longer-term, fixed-rate mortgage that has been such an important thing for housing in the United States.
In short, the debate about systemic risk is what economists call misspecified; it's a sideshow. This country already tried relying entirely on the banking system to finance housing. The resulting debacle was the S&L crisis. And there's no good reason to take that risk again.
So much for the key policy issues we're both facing – the politics of the business. What about the state of the housing industry in 2006 – the business of the business?
For starters, let's acknowledge that the housing industries have a lot to be proud of. Aside from modest pullbacks in starts and sales, the current expansion in residential fixed investment has lasted for 14 consecutive years. That's the longest housing boom on record. As a result, millions of Americans are better housed today than they were at the start of the 1990s.
And during the past five years, our combined efforts have produced all-time highs across the board. Home Builders constructed roughly 9 million new homes – with housing starts last year reaching a 33-year high. Real estate professionals sold over 36 million homes – with total home sales setting five consecutive annual records. Mortgage lenders originated well in excess of $14 trillion in home loans. And Freddie Mac financed homes for more than 20 million families.
Housing deserves great credit for keeping the 2001 recession relatively mild and short. Since then, its role in the economy has grown.
All this means the stakes for housing policy today are extraordinarily high. Because even a modest downturn in housing would be felt throughout the economy – from construction to banking and real estate; to such big employers as Home Depot and Lowe's; to the most economically critical factor of all, consumer spending.
My own view is that we will see a material slowdown in housing this year – but this slowdown is from record levels. Housing starts and home sales will remain strong by historic standards. Price growth will likely be more in line with long-term historical averages, rather than the double–digit rates we've seen recently.
Simply put, we're coming down from Mount Everest levels of activity. But 2006 still should be a good year at base camp – hopefully leveling out at a high plateau.
At this point in the cycle, a "soft landing" that allowed incomes to catch up with house prices would be very healthy. A crash landing provoked by bad policy decisions would not. I believe a soft landing is achievable – even likely – but it won't be soft at every airport.
***
The Home Builders understand the importance of housing both in good times and in times of crisis. That's why you responded so generously after Hurricanes Katrina and Wilma – donating and raising more than $2.5 million to date. And because thousands of your own builder members have been affected, the Home Building Industry Disaster Relief Fund has been wisely focused in part on getting the building industry back on its feet. Freddie Mac applauds your efforts and we were proud to contribute to your Fund.
Freddie Mac is also doing our part to respond to the Gulf hurricanes. For example:
- We are helping affected borrowers – in ways that include an unprecedented mortgage payment holiday.
- We are helping lenders – by purchasing mortgages in the lenders' pipeline that were closed prior to the hurricanes.
- We have taken humanitarian steps – committing more than $10 million to hurricane relief efforts.
- Finally, we are helping displaced families on the Gulf Coast – using our retained portfolio to buy up to $1 billion in mortgage revenue bonds.
All these steps underscore Freddie Mac's capacity and commitment to help protect America's homeowners, our housing finance system, and the broader economy, from the shock of unexpected events.
The hurricanes are not a one-off for Freddie Mac. Congress designed us to play this kind of stabilizing role for housing. As proof, consider just a few of the many other times we have acted to prevent bad situations from getting worse.
We were a source of stability and strength for housing in the credit crunch of the 1980s. We stepped in after the Russian debt crisis of 1998 and the implosion of Long-Term Capital Management. And we did so again after the 9/11 attacks, when the GSEs took the lead in helping the mortgage markets keep on going – and thus helped housing become a driver of the economic recovery that eventually followed.
***
Last year, when I spoke to this meeting, I expressed the hope that we would stand together in the debates affecting housing. Those debates are not over. But we have stood together and I appreciate it. Our country's homeowners and our economy are the better for it.
This year, I hope we will again stand united. For if we do, the GSEs can continue to make the U.S. housing finance system the most liquid and efficient anywhere. And the federal tax code can continue to encourage housing as a special source of strength for our families, our communities and our country.
Thank you very much. I'm happy to take your questions.
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