DC Dispatch: Donovan Reinforces Obama Regulatory Reform

The newly appointed secretary for Housing and Urban Development used an appearance before some of the nation's real estate editors and writers to outline President Barack Obama's new proposal for regulating the financial industry as well as to catalog the success of the president's new foreclosure prevention program.

"Our first responsibility is to stem the tide of foreclosures sweeping the country and keep people in their homes," said HUD Secretary Shaun Donovan at the National Association of Real Estate Editor's 43rd Annual Real Estate Journalism Conference, boasting that the new Neighborhood Stabilization Program has provided more than $6 billion to communities across the country.

Donovan also noted that the president's new foreclosure prevention program, dubbed Making Home Affordable, has been gaining traction. He said 16 servicers representing 80 percent of the mortgage market have signed contracts to participate in the program, and close to 200,000 modification offers have been sent to homeowners, with close to 40,000 alone in the previous week. Although Donovan said he's happy with the early results, he won't be totally satisfied with the success of the program until it reaches millions of borrowers.

"Now is the time for servicers to step up their efforts," said Donovan, noting that lenders can only participate in the program if they agree to reducing mortgage payments on loan modifications to a "truly affordable" level, which has been set at 31 percent of the borrower's income.Donovan admitted that "we can't stop every foreclosure," but said the foreclosure prevention plan is designed to slow the "freefall" in the market, something he said has happened since the the president took office.

"I think we are seeing that bottom happen," he said. "We need to see further evidence."

Before outlining the president's new financial regulatory proposal, Donovan touted the results of the recently implemented $8,000 tax credit, which is now available for borrowers to use as a down payment in some cases. He emphasized that the tax credit is not a loan and will therefore give first-time homebuyers "instant equity." Citing figures from the National Association of Home Builders, he said the tax credit is expected to stimulate 160,000 home purchases, 100,000 of those from first-time buyers.

Donovan alluded to the fact that most of these first-time home buyers will use financing from the Federal Housing Administration, but said he wants private lenders to "play a bigger role."

"FHA is again stepping in to ensure home ownership to assist home buyers (private) lenders can't or won't assist," he said, adding that the administration would be asking Congress for an additional $400 billion to cover insurance on the additional volume of loans the entity is handling.

Donovan finally outlined President Obama's proposal to establish a "Consumer Financial Protection Agency" to regulate the mortgage industry. The three principles behind the program:

1. Transparency: a simple mortgage disclosure will be provided to every borrower.

2. Simplicity: lenders will be required to offer "plain vanilla" mortgage products to every borrower.

3. Fairness: brokers will not be paid upfront but over time based on loan performance, prepayment penalties will be restricted and loan originators will be required to retain 5 percent of the loan's risk on their books.

"Brokers and originators will have a vested interest in the loans they originate," Donovan said.