Some of what jay does that they governor is serving on the federal Market Committee and getting regular talks on the economy, Monetary Policy and Financial Stability. But if they know from my own base of the site, a lot of what jay and others think of is behind the scenes and its not a visible to the public, including all the administrator work of the Federal Reserve board in overseeing the Federal Reserve system, which is a big job even when it is fully staffed, but of course there are currently three vacant seats on the board and jay tells me is chairing four of the seven am looking forward to a regulator sometime soon in the form of new governors to fill the vacancies. Before joining the senate, jay has distinguished career in Investment Banking and private equity world, including a partner in the group from 1997 to may 2005. Assistance in financing the Treasury Department and the early 1990s. In preparing for this event, i came across a transcript of his confirmation hearing in 1990 to become assistant treasury secretary for domestic finance. I thought it was significant that in his opening statement, the proposals for the safety and soundness of fan and friday noting in exchange for federal backing which at that point was only implicit in the gop, and i quote, should be required to be strongly capitalized and submit to effective and appropriate supervision. They were unfortunately not followed and now more than a quartercentury later, we are still dealing with fallout from having failed to ensure the safety and soundness. Without further ado, please join me in welcoming governor jay howell. [applause] good morning. Thanks very much. Ask your aei for this invitation and thank you for all of you for coming on this rainy morning. My topic today is the urgent need for fundamental reform or Housing Finance, which is the great Unfinished Business to post financial crisis reform in my view. I should start by saying the Federal Reserve is not charged with deciding or evaluating proposals for Housing Finance reform, but we are responsible for regulating and supervising Banking Institutions to ensure their safety and soundness and more broadly for the stability of the Financial System. A robust and well capitalized, wellregulated Housing Finance system is vital to achieving this goal for me longrun health of our economy. We need a system that provides mortgage credit in good times and battery broad range of credit worthy borrowers. What reforms have addressed some of the problems in a precrisis system, theres broad agreement that job is far from done. The status quo may feel comfortable today, but it is also unsustainable. Today the federal governments role in Housing Finance is even greater than it was before the crisis. The overwhelming majority of new mortgages with government backing in a highly concentrated securitization market. That leaves us with taxpayer liabilities and Systemic Risk. Its important to learn the right lessons from the failure of the old system and we can also apply lessons from postcrisis banking reform. Above all, we need to move to a system that attracts ample amounts of private capital to stand between the housing sector credit risk and taxpayers. We should also use Market Forces to increase competition and help drive innovation. The financial crisis in 2009 in the economy has just completed its eighth Consecutive Year of expansion. We are at or near full employment. The Housing Market is generally strong, although still recovering some regions. To preserve these games, we need to ensure stability of the Financial System and with that goal in mind, we are nearing completion of a comprehensive program to raise standards for most systemically important banks. Fundamental Housing Finance reform including reform to address the ultimate status of the indian friday remains on the todo list. His memory of the crisis as memories of the crisis fade, the next few years may present our last best chance to finish this critical reforms. Failure to do so would risk repeating mistakes of the past. I will spend just a couple of minutes on a precrisis system before moving on. Congress created fannie mae in 1938 and thank you in 1970 and for years, many are institutions presently preserved their core mission of enhancing availability of credit for housing. In the 1980s, spinning friday helped facilitate developing a securitization market. They purchased and bundled Mortgage Loans and sold the resulting. Fannie and freddie guarantee payment of principal and interest on the nds and with this guarantee in place, investors took the risk of changing Interest Rates in the gse is coming to the risk of defaulting on the underlying mortgages. Thanks to the growth in certain the categorization chemistry and freddie had dominated u. S. Housing finance system late 1980s. This precrisis system did his job for many years are promoting standardization, structuring security with a broad range of investor Risk Appetite in guaranteeing sunni and freddie brought greater liquidity to mortgage purpose and made mortgages more affordable. The system ultimately failed due to fundamental flaws in its structure. In the early days of securitization, the chance that gse would fail to honor its guarantee is entirely remote. The question always loomed in the background. What are the credit risk of a gse were to become solvent and could not perform . Would congress allow them to fail to honor its obligations when the potentially devastating impact that would have on wordage funding and Housing Markets more broadly. The law stated explicitly the government did not stand behind the gse is thin and freddie frequently pointed out in order to avoid tougher regulation. Nonetheless, investors understandably came to believe that the two gics were too big to fail in the implicit federal guarantee behind obligations. In the end, the investors were right of course. The implicit government guarantee also meant investors and that includes banks, gse themselves another investors around the world did not do careful Due Diligence on the underlying mortgage polls, the securitization also enable declining standard. Of course this is not just a problem with the gse is privatelabel securitization to help enable standards. Over time, the system that incentive caused the two gics to change behavior and take on ever greater risk. They have become powerful advocates for their own bottom line, providing essential Financial Report for a political candidate who support the agenda. Legislative reforms in the 1990s than the private structure led management to expand their Balance Sheets to enormous size underpinned by capital, high shareholder returns in compensation for management. These and many other fact there is led to extremely lax Lending Conditions in the early 2000 became the area of low dock and nodoc loans. These practices contributed to the catastrophic failure of the housing system in nine years ago in september 2008, cne and freddie were put into temporary conservatorship and received tax payer rejections totaling 187 billion change. Although there are significant regional differences, National Tissue having housing prices have fully recovered from the 35 drop during the crisis. Mortgage default rates have returned to precrisis levels. Mortgage that is available. Theres also been meaningful progress in reforming the old system. In 200 2008 congress enacted the housing and economic recovery act which among other things created the fhfa model of the fdic. Under fhfa oversight that you gses retained portfolios have declined to about half of their precrisis size and are expected to continue on that downward path. The fhfa in the gses have been working to develop a market for the gses to lay off the credit risk. These transactions have raised about 60 billion in private capital that now stands between taxpayers and mortgage credit risk in the portfolio. In addition of the creation of a common securitization platform should strengthen the gses securitization infrastructure and facilitate further reforms with an eye towards enhancing competition. New regulations have been put in place since the crisis with a goal of encouraging sound underwriting of Mortgage Loans. Today lenders need to make a goodfaith effort to determine the bar where has the ability to repay the mortgage. Moreover, if the lender provides a qualified mortgage contract to the borrower, then delete it needs to meet certain other requirements. For example, some contracts feature such as interest only. Or negative amortization. Up front. And fees are limited as well. Turning to todays challenges, these reforms represent movement and the right direction but they live as well short of where we need to be. Despite the gses significant role in this market there is no clarity about their future. When they were put into conservatorship, treasury secretary paulsen noted that, quote, policymakers must view ds next. As a timeout when we stabilize gses while we decided their future and structure. Almost nine years into this timeout the federal governments domination of housing sector has grown and is greater than it was before the crisis. Fannie, freddie, the fha and the department of Veterans Affairs now by the combined share of 80 of the purchased Mortgage Market with the remaining 20 held by private Financial Institutions. After reaching nearly 30 of the market before the crisis, private label securitization has dwindled to almost nothing today. The two gses remain in government conservatorship with associated contingent liabilities to u. S. Taxpayers. Van every have remained in just over 270 billion of profits to the treasury, more than paying back the government initial investment however under current terms of the contracts that govern access to refunds, their capital will decline to zero by january 1, 2018. Today fannie and freddie have more than 5 trillion of corporate debt outstanding which is widely held and receives various forms of a special regulatory treatment. And because of this scale piece in a price continue to serve as a board of standard significant counterparty to other firms. While mortgage credit is available, widely available to most traditional mortgage borrowers, those with lower Credit Scores they significantly Higher Standards and lower Credit Availability van before the crisis. Imagine we can all agree that we do not want to go back to the poor underwriting standards used by originating prior to the crisis, but it may also be that the Current System is too rigid and a lack of innovation and product choices limited mortgage Credit Availability to some credit what household. According to an american banker survey, in 2016 only 9 of mortgage originations failed to meet qm contract criteria, down from 16 in 2013. The same survey reported almost onethird of u. S. Banks make only qualified Mortgage Loans, despite the fact fha and gse available mortgages are exempt from the requirements until gender 2021 or until Housing Finance report is enacted, whichever date comes first. The post crisis Reform Program for our largest banks presents an appropriate standard against which the Housing Finance giants should be judged. After eight years of reform our largest Banking Institutions are now far stronger and safer, common Equity Capital held by the eight u. S. Globally systemic important banks has more than doubled to 825 billion of about 300 billion before the crisis. After the crisis revealed significant underlying vulnerabilities, these institutions now hold 2. 3 trillion and highquality liquid assets, or 25 of their total assets which is far higher than before the crisis. Under rigorous annual stress tests, these banks must demonstrate a high level of understanding of the risks and the ability to be understood. I to survive severely adverse economic sinners with high levels of post stress capital. They also had to file regular resolution plans that it made an significantly more resolvable, should they fail. All of these measures were implemented to reduce the risk that a future crisis will result in taxpayer support and to help ensure the Financial System could continue to function, even in event that one of these banks were to default. Its ironic that the Housing Finance system should escape fundamental reform efforts. The housing bubble of the early 2000 was after all an essential proximate cause of the crisis. Housing is the single largest asset class and our Financial System with total outstanding Residential Real Estate owned by household of 24 trillion, and roughly 10 trillion and singlefamily mortgage debt. While postcrisis regulation has address mortgage lenny from the Consumer Protection standpoint, the important risk to taxpayers and the broader economy and the Financial System have still not been robustly addressed. The most obvious and direct step forward would be to require ample amounts of private capital to support Housing Finance activities as we do in the banking system. We should also strive for a system that can continue to function even in the event of a default by any firm. No single Housing Finance institution should be too big to fail. Greater amounts of private capital could come to a variety of sources, including through the entry of multiple private guarantors who would insure a portion of the credit risk the risk sharing agreement or through expanded use of credit used transfers. Although private capital of must surely be part of the reform effort, there may be limits to growth of risk that we can credibly expect the private sector to ensure. It is extremely difficult to properly price the insurance of catastrophic risk, the risk of a severe, widespread housing crisis. In both the private sector Insurance Industry and the government have struggled with this. Particularly without too smooth the consistent collection of premiums with the irregular payout of potentially enormous losses that may be needed only once or twice in a century. Losses can be correlated across Asset Classes and geographies in these catastrophic events which can render risk the version, risk diversification strategies ineffective. Fannie and freddie have successfully transferred some credit risk to the private sector but have thus far avoided selling off much of the catastrophic credit risk. Arguing that doing so is not economical. After promising legislative initiatives have moved forward but falling short of enactment, the air is again the thick with Housing Finance reform proposals. As i make in at outset, Housing Finance reform has important implications for the Federal Reserve oversight of Financial Institutions and for the use economy and its Financial Stability. While i would not presume to judge these reform proposals, i will offer some principles for reform. These principles are based on the Lessons Learned from the older systems collapse anthony experience of postcrisis banking reform. First, we ought to do whatever we can to make the possibility of future housing bailouts seem as remote as possible. Not seen, but be as remote as possible or housing can be a volatile sector and housing is often found at the heart of financial crisis. Excuse me one second. Housing can be a volatile sector and housing is often found at the heart of financial crises. Housing institutions were not and are not structured with that in mind. Extreme fluctuations and Credit Availability for housing her to vulnerable households can reduce affordability and availability, and as weve seen, can threaten Financial Stability. As with banks the goal should be to ensure that our Housing Finance system can continue to function even in the face of significant house price decline and severe economic conditions. Changing the system to attract large amounts of private capital would be a major step towards that goal. The question of the governments role in the new system is a challenging one for congress. Many other wellknown reform proposals include some role for government. Some argue the government cannot avoid bearing the deep in the terror risk of a catastrophic housing crisis. A number of proposals incorporate a government guarantee to cover this catastrophic risk to take