Prepared Remarks of CFPB Director Rohit Chopra at the Center for American Progress Housing Summit

Thank you to the Center for American Progress, Senator Smith, Representative Ocasio-Cortez, and everyone involved in today's summit.

For far too many Americans, rent is far too high. Student debt has been a damper on accumulating a downpayment, and homeownership feels so out of reach. Our speakers today have rightly focused on ways to build more supply, make rent more affordable, and offer a path to homeownership.

Today, I'm going to focus on another set of Americans: existing homeowners, the tens of millions of people with mortgages. First, I want to discuss yesterday's decision by the Federal Reserve to reduce the target federal funds rate and how this will affect those homeowners. Second, I want to discuss what the CFPB is working on to make sure millions of families can take advantage of lower rates by refinancing their mortgage. I want to close by discussing a serious looming risk for existing homeowners with mortgages: cancellations and rate hikes when it comes to homeowners insurance.

As always, my remarks today reflect the views of the Consumer Financial Protection Bureau (CFPB) and do not necessarily represent the views of any other part of the Federal Reserve System.

The CFPB is the mortgage industry's primary regulator when it comes to fair treatment and honest dealing with families. So, when it comes to housing and homeownership, we are constantly thinking about mortgages. The CFPB was established as a unit within the Federal Reserve System after the subprime mortgage crisis tanked the global economy.

Yesterday, the Federal Reserve's Federal Open Market Committee voted to cut the target federal funds rate by 0.50 percent. This cut is the first cut after a series of rapid rate hikes from the Fed starting in 2022. Remember, the Fed works as a price-setting agency to influence the cost of borrowing money throughout the economy. These rate hikes had a major impact on housing markets.

Within the housing and mortgage industries, there was real debate about whether high interest rates were contributing to higher shelter costs, rather than reducing them. By increasing the cost of funds, this reduced the amount of financing available to developers and builders to construct more units. But what was more conclusive was the enormous impact on fixed-rate mortgages.

Since bottoming out in January 2021 at 2.65 percent, mortgage rates rose over five percentage points, peaking at 7.79 percent in October 2023, a level not seen since 2000. A mortgage payment on a $400,000 loan today is $877 higher, on a monthly basis, from January 2021. These historically higher rates have significantly decreased housing affordability, and it means that millions of people who bought homes in recent years feel locked into high rates.

With markets expecting even lower rates, the question now is whether the benefit of lower interest rates will alleviate the high monthly costs of mortgages for those with high rates, especially those taken out in recent years. If we can collectively refinance millions of mortgages in neighborhoods across the country, it will be a huge boost for those families and their local economies.

During the pandemic, mortgage interest rates fell dramatically as the economy shrunk. Many families buying a home were able to lock in rates below three percent and, unsurprisingly, the mortgage industry generated massive volumes of refinancing savings for homeowners who had the credit profile, the income, and the home equity to take advantage of the opportunity. Researchers at the Federal Reserve Bank of Boston found that total consumer savings from mortgage refinancing from January 2020 to October 2020, during the refinancing boom, was $5.3 billion annually, with the typical household saving $279 a month, which adds up to thousands of dollars per year.

With lower rates expected on the horizon, we see a path for significant savings for the millions holding a mortgage with an interest rate above five percent, and especially positive for the seven million mortgages with rates greater than six percent.

One analysis suggests that about 2.5 million borrowers could refinance at today's rates and see their interest rates decrease by at least three quarters of a percent. If interest rates fell another point to 5.5 percent, more than seven million borrowers could potentially benefit. Further reductions would increase the addressable market even more.

However, the CFPB is concerned that many homeowners will not benefit from the lower rates. According to some analyses, in past refinancing cycles, minority homeowners were less likely to benefit, even when considering differences in income, home equity, and credit profiles. We also know that incentives in the market tend to favor refinancing higher balance mortgages, leaving out many homeowners from less affluent neighborhoods. Consider that while millions of homeowners locked in historically low rates in 2021, millions of other borrowers did not, either by choice or by circumstance. For some, that missed opportunity represents thousands of dollars each year. Ensuring that a broad swath of homeowners can benefit this time around will be critical.

To prepare for the easing of interest rates, the CFPB launched an effort to find ways to spur more mortgage refinancing.

Specifically, the CFPB is exploring whether we should amend existing mortgage regulations to streamline the refinancing process and to reduce closing costs. When an existing or competing lender is seeking to refinance a loan with a much lower rate for a substantially similar mortgage, it may not be worthwhile for the lender to repeat many of the steps that were taken during the purchase process. We are especially interested in the costs and time taken to refinance a mortgage that are exclusively related to complying with federal mortgage law, rather than steps that are demanded by investors. We will also be identifying ways to jumpstart competition for various closing costs, which can help spur refinancing activity. Lower closing costs lowers the barrier to entry for refinancing and makes refinancing more appealing to a broader swath of homeowners, especially for low- and moderate-income homeowners.

While rate reductions will help homeowners with high-rate mortgages, there is a looming crisis facing many of them throughout the country: cancellation and steep premium increases on homeowners insurance.

Homeowners insurance protects against losses from a wide range of potential calamities, like fires, though it typically does not cover earthquakes and floods. Most importantly, mortgage lenders typically require that a borrower has a valid homeowners insurance policy. Climate change, natural disasters, and severe weather have led many property insurers to significantly increase the premiums they charge or to decline offers to renew policies altogether.

This trend started in California, Florida, and Louisiana, but is now spreading across the country. Several smaller insurers in Florida have even gone out of business. This pull back by insurers is driven, in part, by rising reinsurance costs - that is, the cost insurers pay to other financial companies to reduce some of their own risk.

These often global financial conglomerates that sit behind insurance companies are called reinsurance companies. As reinsurance companies' losses are increasing and becoming increasingly correlated across the world, they are raising costs and pulling back.

The CFPB is seeing rate increases of 30 to 60 percent in many parts of the country. The CFPB regulates the process by which mortgage servicers are allowed to forcibly enroll a homeowner into expensive insurance with limited coverage when their policy is canceled or not renewed. While this does provide some protection, it does not address the spiraling costs of homeowners insurance and its long-term effects on housing and our economy.

In a recent trip to Pensacola, Biloxi, New Orleans, and Houston, I heard directly from residents about all the negative effects this is already having. First, many homeowners are seeing their mortgage payments surge since insurance payments are often made through mortgage servicers. This is putting more homeowners at risk of falling behind and falling into foreclosure. In addition, middle-class neighborhoods are seeing owner-occupied homes snatched up by investors. Because of the challenges with homeowners insurance, many people simply cannot afford a mortgage to purchase homes in many parts of the country. This means that homeowners are selling to all-cash buyers, including big investors.

While there have been efforts to improve the resilience of homes to defend against damage from climate events, we urgently need to identify solutions to the looming homeowners insurance crisis. As more homeowners are thrown off private plans and move to the limited public insurance plans offered in many states, state budget capacities could be pushed to the limit by future losses. I believe this problem will require greater involvement from financial regulators, housing policymakers, and fiscal authorities at the state and federal level.

A comprehensive approach could include actions to lengthen the term of homeowners insurance policies to avoid the damaging bank-run dynamics of the annual renewal process, ensure that insurance companies are stable and resilient, and provide a framework to meet the needs of homeowners in uninhabitable areas, as well as a federal insurance or reinsurance program that addresses the clear market failures at play. The National Flood Insurance Program, Terrorism Risk Insurance Program, and Crop Insurance Program, among other federal insurance and reinsurance programs, may provide both positive and cautionary lessons in thinking through a state-federal solution to this impending catastrophe.

In the meantime, the CFPB has proposed rules to streamline the process for homeowners to modify their mortgages when they face distress. Under our proposed rules, servicers would have to focus on helping borrowers - instead of foreclosing - when homeowners can't make their monthly payments. This means servicers would have to stop dual track actions - taking steps both toward foreclosure and to help them - and would limit the fees they could charge borrowers, while they review possible options to help struggling borrowers. The proposal would also remove paperwork and "complete application" requirements, so servicers have more flexibility to get borrowers help quickly. Finally, the rules would also improve borrower-servicer communication, including requirements that borrowers get information in a language they understand and information more tailored to a borrower's specific situation.

In closing, we are seeing a whole-of-government effort to confront issues facing renters, homeowners, and families looking for housing. The CFPB knows that the cost of housing is taking a significant financial toll on families all over the country. Homeowners with mortgages are having to make difficult decisions every month between what bills to pay or groceries to buy to make sure they can make their mortgage payment.

While lower interest rates may help bring down some housing costs, the effects of yesterday's rate cut may take weeks or months to be felt by families in crisis now. Our actions in mortgage servicing, as well as in rental housing, will help consumers now, and we will ensure that as mortgage rates continue to drop every borrower has the opportunity to take advantage of refinancing.

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