Federal Reserve Board Chairman Alan Greenspan told the National Association of Home Builders in Houston on Jan. 28 that it needs to work more closely with the banking industry to promote homeownership. Here are excerpts from Mr. Greenspan's remarks:
Housing finance is another area where gains can be made in promoting homeownership. Working with lenders, you can increase the efficiency of loan originations and underwriting. The objective here is to allow more people to qualify for home purchase.
During the 1980s, many of the innovations in housing finance were new mortgage products - adjustable rate mortgages and other loan designs that better matched the loans' terms to the borrowers' financial circumstances.
Also important was development of new mortgage securities that tailored cash flows to investors' needs. Now during the 1990s, more of the innovations in housing finance are coming as improvement in the way mortgages are underwritten, originated, and serviced; streamlining the loan application and origination process; and ensuring that the down payment and income requirements, and interest rates charged, accurately reflect the credit and prepayment risks involved in making those loans.
More generally, lenders must further improve their ability to assess risk for all types of real estate lending. The housing industry would be ill-served by lenders unwilling to take any risks, but you are equally ill- served by a financial community that takes excessive, avoidable risks.
Some of the overlending that led to the credit crunch was in multifamily housing. This sector subsequently paid the price, as multi-family starts fell in the early 1990s to the lowest level of the past 35 years.
With many commercial banks and other credit suppliers now vigorously increasing their mortgage lending for multifamily and commercial mortgages, the challenge to these lenders is to avoid the excesses of the past, both the excessive risk-taking of the mid-1980s and the indiscriminate cutoffs of creditworthy borrowers seen during the crunch. Lenders need to take a longer-term view of the prospects for projects, in both good times and bad.
As you plan for the years ahead, one key determinant of your business that has clearly improved since last we spoke is the demographic outlook. ...
The good news for home builders is that new Census Bureau projections point to a much more vigorous demographic underpinning for your industry over the balance of this decade. More immigration and longer life spans have substantially increased forecasts of adult population growth, and the likelihood is that housing demand in the 1990s will be as good as in the 1980s. ...
In addition, the ever-growing stock of housing brings with it increased demand for remodeling, additions, and other improvements. Last year, expenditures on residential improvements were nearly half as great as the total value of all new homes built, and this market is certain to remain a big part of your business.
Your industry epitomizes the flexibility and resourcefulness required to adjust to and exploit demographic changes, technological breakthroughs, and new forms of mortgage finance. But you face enough challenges without having to confront a volatile macroeconomic environment. ...
In the realm of fiscal policy, the simple fact remains that deficits are damaging because they pull resources away from private investment, reducing the rate of growth of the nation's capital stock. Less capital - that is, less plant and equipment - means less-productive workers, which means lower incomes and less housing demand. And the deficit drives up long-term interest rates in the private credit markets.
Over the past two years, the Congress and the administration have taken important steps to put the federal deficit on a more favorable trend. The new Congress brings new ideas about how to proceed from here.
There are various ways to reduce the deficit. Some are, in my opinion, preferable to others. But whatever path is chosen, it is important that the momentum toward reducing the deficit be maintained.
In addition to moving on the deficit, the federal government is poised to modify various housing programs, including the FHA, which last year was the funding source for about 10% of your customers.
I know you are participating in those discussions and urge you to continue to do so, because your input is important if these programs are to be run more efficiently and to be better targeted to achieve their intended purposes.
As for the Federal Reserve, we are striving to provide a stable platform for business generally, and for home building in particular. ... A failure of monetary policy to contain inflation has brought great hardship on the mortgage market and home building industry in the past, by engendering wide fluctuations. Over a 10-year time frame, the cumulative number of homes built is little affected by interest rates.
The average number of homes built from one decade to the next is driven largely by population change. What interest rates do affect is the severity of shorter-term home building cycles, that is, how the decade's total is distributed by years.
The most recent tightening of monetary policy began almost a year ago. Some have criticized these rate hikes. But I am convinced that if we had not acted, your business would have suffered. Mortgage rates actually began to rise in late 1993, three months before the first tightening move by the Fed. Absent the tightening, mortgage rates today may well have been much higher than they actually are.