FROM THE OFFICE OF PUBLIC AFFAIRS

March 9, 2004
JS-1226

Acting Undersecretary for Domestic Finance Brian Roseboro
Mortgage Bankers Association Annual Washington Leadership Conference
The Economy and the Housing Market

Good morning. Let me begin by thanking Cheryl Crispen and the Mortgage Bankers Association for inviting me here today. I am happy to have this opportunity to discuss the economy and Administration policy issues that affect the housing market.  

The economy:

Often, to appreciate where you are, you need to know where you have been.  The past three years have presented the nation with monumental challenges: an economic recession causing unemployment and federal deficits to increase, slow global economic growth, horrific terrorist attacks on the homeland, and the revelation of long term festering corporate scandals eroding investor confidence. With the President’s leadership, the Administration responded to the challenge. We provided timely economic stimulus with across the board tax cuts for everyone who pays income taxes. We lowered taxes on business investment and dividends. We pushed for corporate reform with “accountability”, and we responded with authority and resolve in the war on terrorism.

These steps have achieved results. The US economy grew at over 8% and 4% for the 3^rd and 4^th quarters of ’03 respectively and is projected to grow over 4% this year – the third consecutive year the U.S. economy will grow faster than most other industrialized economies. The economic recovery is “for real”; jobless claims have fallen, the unemployment rate is dropping and is currently below its average level for the 70’s, 80’s and 90’s. The economy has experienced six consecutive months of job growth and has added 364,000 jobs over the last six months, including 21,000 new jobs in February.  The Institute for Supply Management’s manufacturing index (ISM) signals rapid growth as manufacturing purchasing managers reported expanding employment for the fourth consecutive month in February after 37 months of contraction. Non-farm productivity growth remains very strong increasing at an annual rate of 4.1% since 2001. Over time higher productivity translates into faster income growth and a higher standard of living..

Further indication that the economy has turned from recession to recovery is after tax or real disposable income has been rising – consumer household wealth is at record levels. Business investment in equipment and software – yes, including high tech - is returning to the rapid growth levels seen before the “2000 bubble burst”.  The stock market has rallied adding over $4 trillion in market capitalization in the past 12 months. More companies are paying dividends in response to more favorable dividend tax treatment. Financial restatements have leveled off helping to shore up investor confidence.  Inflation is at a record low.  As a percent of GDP both the level of federal debt and federal interest expense on that debt is historically low. Most importantly, the Administration has presented a budget and is committed to a plan that will cut the deficit in half in 5 years by promoting economic growth and restraining discretionary spending.

Did the Administration’s policies really lead to this turnaround? What would be the picture without the steps taken by the Administration to provide tax based economic stimulus? Well, real GDP would be as much as 3 percent lower. By the end of 2003, the unemployment rate would have been more than 1 percentage point higher and as much as 1.6 percentage points higher by the end of 2004 – as many as 2 million fewer Americans would be working today.

The President’s jobs and growth policies have put the economy on the road to recovery but we are not satisfied. The President has outlined a six-point plan for building on the success of his jobs and growth agenda to create even more job opportunities for America workers. A recent report sponsored by American manufactures stated that many of these proposals are necessary to further economic growth:

• making tax cuts permanent so families and businesses do not face tax increases starting next year
• making health care costs more affordable and predictable
• reducing the burden of frivolous lawsuits on our economy
• ensuring an affordable, reliable energy supply
• streamlining regulations and paperwork requirements and
• opening new markets for American products

Housing

Achieving and maintaining a healthy economy without a healthy housing market would be impossible. The continued health of this sector remains a critical part of the President’s strategy to return the economy to sustainable health. Let me be crystal clear, affordable housing is an important priority for this Administration. As you are well aware, the housing market is still booming. Stimulated by continuing historically low mortgage rates, more people are buying homes than ever before and more Americans have refinanced than ever before. More than two thirds of Americans own a home – a record high. More single family homes were purchased in 2003 than in any other year on record. The President understands the importance of home ownership in the “American Dream” and believes that even in this well performing sector we can do better.

That is why he has set a goal of increasing the number of minority home owners, whose home ownership level is only around 50%, by at least 5.5 million by the end of the decade.

Further, it is precisely because of the Administration’s commitment to the housing sector that we are pushing so hard for GSE regulatory reform. The GSEs’ contribution in assuring financing for home ownership should not be taken for granted. And nor should we take for granted the necessity to insure the safety and soundness of their operations and activities. The stakes and consequently risk have been raised significantly for our economy as the GSEs have been successful in helping to advance the “American Dream”. With growth in their issued debt tripling since 1996, to $2.6 trillion, it is only prudent to ensure proper, updated, credible regulatory oversite.  Oversite not intended to stifle innovation and opportunity but instead to insure stability for home owners, future home owners, global fixed income markets and the U.S. economy. 

Our objective is straightforward - establish a regulatory regime comparable to the stature, powers, and resources of other world class financial regulators.  The reforms the Administration sees as necessary, builds upon the “three pillars” of financial services regulation: market discipline, supervision and examination, and capital requirements.  Further we also strongly believe their special housing mission should be strengthened to assure that they serve the public interest.  The Administration will continue to work closely with House and Senate leadership on this issue.

Terrorism Risk Insurance

We are also aware of the importance to your industry and the economy of the Terrorism Risk Insurance Act (TRIA) that is scheduled to sunset on December 31, 2005. TRIA was passed to address disruptions in the market for terrorism risk insurance caused by the events of 9/11 and was signed into law in November 2002. It played a critical role in stabilizing the industry. By establishing this  temporary Federal program of public and private risk sharing for insured commercial property and casualty losses resulting from acts of terrorism, the private and commercial housing & building sectors were able to maintain stability and contribute to the nations economic rebound.

TRIA’s was designed to allow time for the private sector to rebuild capacity and re-enter the market for providing terrorism risk insurance.  The Act requires that Treasury "assess the effectiveness of the Program and the likely capacity of the property and casualty insurance industry to offer insurance for terrorism risk after termination of the Program, and the availability and affordability of such insurance".  The Act further requires that we report to Congress no later than “June 30, 2005” on the results of our evaluation.  In order to provide Congress with a comprehensive and useful report, Treasury anticipates needing the entire time that Congress gave – until June 30, 2005 – to conduct the study and draft the report.  Any earlier decision would be based upon incomplete information and could provide an inaccurate assessment.

As part of the process of evaluating the effectiveness of TRIA, Treasury has undertaken a nationally representative survey of policyholders and insurers that is designed to collect data on insurance coverage purchased and premiums for terrorism risk covered by TRIA.  The first wave of the survey is in the field, and participants will be asked to respond on two additional occasions. The survey responses along with information gathered from state insurance regulators, the insurance industry, and policyholders will form the basis for our evaluation of the effectiveness of TRIA. 

Conclusion

New job figures show the importance of continued pro-growth economic policies and the danger of policies that would raise taxes on the American people and hurt the recovery and future job creation. Our economic outlook has improved significantly and we have promoted polices that will help make the recovery sustained and substantial. But our job is not finished yet: we want more job creation so that every American looking for work has a job. We will work to make tax cuts, which have been at the heart of our economic rebound, permanent. We are working on reducing the cost of health care and expanding coverage. We will continue work on strengthening Social Security, pension security, expanding free trade, tort reform, energy diversification and environmental safety.  We will continue the fight to control federal spending. And we will continue to work with you in the housing community to insure that sector’s continued vitality and bright future.