Thank you for having me join you today. My work with realtors dates back to 1992, when I was serving in the Ohio House of Representatives. The Ohio Association of Realtors teamed up with me to pass legislation requiring sellers of residential real estate to disclose to prospective buyers any material matters that might affect the value of the property. Although I did not realize it at the time, the work we did together would start me on an eventual career in consumer protection, first as the Ohio Attorney General and now as the first Director of the U.S. Consumer Financial Protection Bureau. It is my great honor to be able to serve my country in this unexpected way, and I am grateful for the direction that the realtors provided to me, back in the day.
Let me also describe some lasting lessons I took away from that experience over twenty years ago. First, I learned that businesses proud of their profession can show concern for protecting consumers and can act on that concern. For you see, the Ohio Realtors came to me with their idea for legislation, not the other way around. Second, I learned that strong consumer protection does not undermine free markets, but can improve them where buyers and sellers can have clear and accurate information.
Third, I learned that when consumers can count on markets working for them with no ambushes and no surprises, they gain the confidence and trust to take part in the market rather than shying away from its unknown dangers. Fourth, I learned that good work on consumer protection can be very hard; it took strenuous effort to pass that law, and more effort with the Ohio Department of Commerce to settle the many details of the residential seller disclosure forms so that they were practical and appropriate. Each of those lessons learned in my relative youth is equally valid in the work I do today to address consumer financial issues all across the country.
It was also in Ohio, in 2004, that I encountered the foreclosure crisis for the first time. I was serving as the Franklin County Treasurer, and in the normal property tax collection cycle we saw that an unusual number of people in central Ohio were losing their homes. So we assembled a broad coalition of people and groups that we called the “Save Our Homes” task force. Although I am not a fan of early breakfasts, I undertook a speaking tour of a dozen or more realtor groups in and around Columbus. I met an unusual number of people who were impressively peppy at that time of day. Many of them were beginning to perceive the foreclosure problem, and many were willing to make some time to help.
The problem was puzzling to us all, for there was no recession at the time. We researched the history of home foreclosures and found that the most common causes were job loss, death, disability, and divorce. None of that seemed to explain what we were seeing. We also mounted a public information campaign. “Call your lender” was the earnest but naïve advice we offered to people in trouble.
We did not yet realize that the securitization of mortgage loans on Wall Street had so thoroughly disrupted relationships between homeowners and their lenders. When we began these efforts, we had no idea that the problem would linger for more than a decade. We could not anticipate that it would spread to become a national epidemic that would cause a financial crisis and the worst economic conditions of our lifetime, bringing tough times for realtors in particular.
Let me tell you a story of how stunningly widespread the harm was. When I was pursuing the process to persuade the Senate to confirm me to my current position, which ultimately came out well in the end, I had a long conversation with Senator Johnny Isakson from Georgia, himself a long-time real estate professional. He described a trip he had taken to Afghanistan in 2008, with a stop-off first in Kazakhstan, halfway around the world. (Let me add that the Senator has told the same story in public speeches as well.) He told me that he had noticed on the ride from the airport that many projects under construction were only half completed, with cranes idled and chain-link fences blocking off the worksites.
When he asked government officials if the day was a holiday, they said no and asked why he had thought so. He told them what he had seen and they said: “U.S. subprime-backed securities.” He said, “I beg your pardon?” Then the story came out that the bank of Kazakhstan had bought a boatload of our mortgage securities, had been forced to write down their market value, and had to stop funding construction projects in their own country for some time thereafter. Quite a dramatic and unexpected story, it seemed to me.
Although the American mortgage market was deeply damaged by reckless lending, it remains the single largest consumer financial market in the world. Since the broader economy crashed in 2008-2009, the housing market has been gradually recovering, but it has consistently lagged the pace of recovery in most other sectors over the past six years. Many possible explanations have been offered for this situation, despite historically low interest rates.
Last June, the Federal Reserve’s Open Market Committee offered a thoughtful account of why housing has lagged the economic recovery, listing nine factors: (1) restrictive credit conditions; (2) high down payments; (3) low demand among young homebuyers carrying student loan debt burdens; (4) shortage of lots; (5) low inventories of desirable homes for sale; (6) an overhang of homes associated with delinquencies or foreclosures; (7) rising construction costs; (8) an aging population; and (9) demand for multifamily units at the expense of single-family homes.
These factors are all affecting progress in the housing market, and the situation raises grave concerns not only for realtors, but for all of us who care about people’s financial health. The best research available consistently demonstrates that homeownership remains the most certain gateway to building wealth for middle-class Americans. And many people, including many young people, are missing out on this gateway entirely, despite what has been a prolonged and unprecedented period of low interest rates, which cannot and will not last forever.
It is notable that these factors slowing the housing recovery are largely independent of any regulatory effects. As directed by Congress, our Ability-to-Repay rule was designed to ensure that lenders will offer only those mortgages that consumers can actually afford. Also known as the Qualified Mortgage or QM rule, it protected the housing market against a return to reckless lending by putting new guardrails in place. This is an example of the kind of sound regulation that can help restore consumers’ confidence and trust in the marketplace.
Since the time our mortgage rules were implemented, we have not seen dramatic changes as some had feared. I recall seeing some rash predictions, such as that the price of mortgages would double and the volume of mortgages could be halved. But by the time these rules went into effect, lenders had already retreated from the worst sorts of lending that took us into the financial crisis. We also took steps to keep our new rules from affecting the broader market in an intense or abrupt fashion. The mortgage and housing markets continue to heal from the great damage done by the financial crisis, with foreclosure rates and delinquencies continuing to fall. Home values have been improving and the number of homes that are underwater is falling in most local markets. The Mortgage Bankers Association was in to see us recently, and they are projecting a 14 percent increase in mortgage purchase lending volume in 2015.
So a core purpose of our new mortgage rules was to help restore reliability to the mortgage market. When people take out a loan to buy a home, they must have confidence that they are not being set up to fail. With such confidence, they can actively engage in seeking a good outcome that meets their needs. They can choose the lender and the product with the terms best suited to their budget and their vision of the kind of home they want.
This depends on people being empowered to shop around, but we know it can be difficult to shop for a mortgage with as much care as we shop for a home. The experience can be intimidating, especially with all the paperwork. That is why we have launched our various “Know Before You Owe” initiatives to empower consumers. We aim to reduce the information gap between lenders, who understand mortgage pricing inside and out, and consumers, to whom the process can often feel like a mystery. People have much more power than they may realize to take control of their financial outcomes. Shopping for a better deal can translate into real savings – even in the short run, and especially in the long run.
To achieve that goal, we recently launched an initiative to help people harness their power. We call it “Owning a Home,” a set of online tools with the information consumers need to make good decisions and talk to lenders with confidence. Owning a Home walks consumers through the home-buying experience, from the start of the process all the way to the closing table. You can assist your clients by helping them find and use these tools, which include a guide to loan options and a closing checklist, written in plain language, along with a tool in early beta release that lets consumers explore what interest rates may be available to them. We will be adding more tools during the year to give people a comprehensive and comprehensible picture of the entire home-buying process.
You know best that informed customers tend to be successful customers. By sharing these resources with your clients early in the home-shopping process, you can reduce risks that might arise at closing by educating and informing them about their purchase. Unlike other tools that may get in your way by trying to sell things to your clients, our sole agenda is to enable your clients to know before they owe. To learn more, visit our website at consumerfinance.gov.
Our work to help consumers be savvy shoppers also extends to improving mortgage disclosures. Congress decided it had seen enough of the duplicative mortgage forms that had to be distributed to consumers at the application stage and again at the closing table. So it gave the Consumer Bureau the task of writing a regulation that would integrate those overlapping forms into one single form at each stage of the process.
This August, our “Know Before You Owe” rule will become the new reality in the mortgage market, replacing the TILA-RESPA disclosures that were redundant and confusing. The new forms will help consumers understand their options, choose the best deal, and avoid costly surprises. The forms are consumer-tested to be more user-friendly, which will ease the process and improve the consumer experience, which is something many realtors work hard to achieve.
Another change coming in August concerns the timing on when the forms must be provided to consumers. At the outset, mortgage applicants will be able to get a single form, known as the Loan Estimate, from more than one lender and make a true apples-to-apples comparison across lenders. This single form replaces both HUD’s Good Faith Estimate and the Fed’s initial Truth-in-Lending Disclosure Statement. Consumers will also receive a single form, known as the Closing Disclosure, three business days before closing. It replaces both the HUD-1 and the Fed’s final Truth-in-Lending Disclosure Statement. This timing gives consumers the opportunity to review the costs and key terms before getting to the closing table, making the closing process itself smoother, more transparent, and less intimidating.
For many people, this is the biggest financial commitment they will ever make. So they need adequate time to understand any potential concerns before they sign and they should be able to avoid last-minute surprises. Closing agents and creditors will need to finalize their fees in advance, and they may need your help in doing so. But the three-day requirement should not interfere with a successful closing, as some have claimed. In fact, there has been some serious misunderstanding about what kinds of major changes would cause a delay of the closing date, so I want to take a moment to clear that up right now.
The timing of the closing date is not going to change based on any problems you discover with the home on the final walk-through, even matters that may change some of the sales terms or require seller’s credits. On the contrary, we listened carefully to your concerns and limited the reasons for closing delays to only three narrow sets of circumstances: (1) any increases to the APR by more than 1/8 of a percent for fixed-rate loans or more than 1/4 of a percent for variable-rate loans; (2) the addition of a prepayment penalty; or (3) a change in the basic loan product, such as moving from a fixed-rate loan to a variable-rate loan. That is it. We recognize that various other things can and do change in the days leading up to the closing, so the rule makes allowances for those ordinary changes without delaying the closing date in ways that neither the buyer nor the seller may be able to accommodate very easily.
In short, with these forms in consumers’ hands before closing, you can help your customers more effectively know before they owe. And because potential homebuyers look to their real estate professionals for guidance, we need to partner effectively with you if we are going to change the culture of mortgage shopping. These changes are a notable improvement over the old forms, and we believe that consumers will benefit from being able to shop effectively, compare loan options, and avoid unpleasant surprises at the closing table.
We also recognize that change on this scale is not easy. This rule, though dictated by Congress, represents a major undertaking for the industry, requiring close coordination among lenders, settlement agents, vendors, and real estate professionals like you who work every day with homebuyers. We faced the same issues with our first set of mortgage rules, where the law limited us to a 12-month implementation period, yet industry worked hard to make a successful transition on time.
We learned from that experience, and so from the time this rule was finalized in November 2013, we have focused on supporting industry implementation so the market will be ready when the rule takes effect in August. We also heard extensive input from all parties and opted to provide a 21-month implementation period. All of our hard work with industry is reflected in what we are now hearing, which is that most market players have put themselves in position to be ready by August, and others are getting ready as well. Yet we continue to receive a great deal of input on this issue, and as always we are listening closely in order to consider and assess that input.
We also recently debuted a more consumer-friendly edition of the booklet people receive when they apply for a mortgage to buy a home. “Your Home Loan Toolkit: A Step-by-Step Guide” is a resource that helps potential homebuyers understand their credit, define what “affordable” means to them, pick the mortgage type that works for them, and shop with several lenders to find the best mortgage for their particular circumstances. The toolkit is written in plain language and presented in a reader-friendly format. We have made it widely available both online and in printed form, so you can give it to your customers before they shop for a loan.
The toolkit features interactive worksheets and checklists, conversation starters for discussions between consumers and lenders, and research tips to help consumers find key information. It is designed to be used with our new “Know Before You Owe” disclosure forms, and we encourage you to consider distributing it to prospective clients as early as possible in the home-buying process. You can find the Home Loan Toolkit on our website at consumerfinance.gov, along with instructions on how to order physical copies. In the coming weeks, we will also post specific instructions on how you can market the toolkit, which we encourage you to do.
We also have some further work underway to improve the mortgage closing process. It has to do with electronic closing solutions known as “eClosings,” which can lead to more knowledgeable and empowered consumers and a smoother and more efficient process for everyone involved. The use of electronic documents can make it simpler and more convenient to achieve early delivery of the information – giving the consumer time to read the documents, consult with family members or professionals, and ask questions of the lender. It also allows for embedding links to educational materials, which will allow consumers to reference these materials while they are reviewing the loan documents both before and during the closing.
Shifting to an electronic process can also create more consistency and accuracy, since automated processes should make it easier to detect any discrepancies. We have heard repeatedly that errors and delays are a big source of frustration for consumers (as well as realtors), so anything that can be done to mitigate that problem is a welcome change.
By spurring the adoption of eClosings, we can also reduce costs. It is faster to send documents between lenders, investors, and other stakeholders electronically than by mail or other means of delivery. Time saved translates into tangible monetary benefits for lenders and more review time for consumers. So last spring we announced a pilot project to better understand the benefits and risks of eClosings. The goal of our pilot is to evaluate whether electronic closings can increase efficiency, expand consumer understanding, and minimize surprises at the closing table. We chose our participants last summer and look forward to analyzing the results of the project soon, which we suspect will be quite positive.
All of these “Know Before You Owe” mortgage initiatives embody the central purpose of the Consumer Financial Protection Bureau, which is to ensure that empowered consumers have access to markets that are fair, transparent, and competitive. This is good for consumers, for the honest businesses that serve them, and for the American economy as a whole.
Our important new set of mortgage rules is creating a cleaner mortgage market – one that is more stable and that will aid our nation’s economic recovery. When people shop only for the home and not for the mortgage because¬¬¬ they are intimidated by the process, it hurts them and it hurts the overall market. One of our responsibilities is to educate and empower consumers. We are working to change the culture of how they obtain mortgages in this country by making critical information more readily available and making it easier to shop around.
We have seen all too clearly that when consumer financial products are misunderstood or misused, they can do real damage to people’s lives. Consumers need to make the best choices that fit their circumstances – nobody can do that for them – and they need to be responsible for the choices they make. At the Consumer Bureau, we are seeking and finding ways to help them get exactly where they want to go to improve their financial futures.
Please join us in supporting this important and exciting work. In turn, we applaud you in doing your part for our country by introducing more people to the joys and benefits of homeownership. I feel very confident in predicting that the housing recovery will show up this year and will help sustain this economic recovery into the future. Through your persistent efforts to put people in the right homes, you are continuing to make our nation better and stronger. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.