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[Senate Hearing 112-677]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 112-677

   EXPANDING REFINANCING OPPORTUNITIES TO IMPROVE THE HOUSING MARKET

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   ON

   EXAMINING REFINANCING OPPORTUNITIES TO IMPROVE THE HOUSING MARKET

                               __________

                              MAY 8, 2012

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel

              Erin Barry Fuher, Professional Staff Member

                 Beth Cooper, Professional Staff Member

                 William Fields, Legislative Assistant

                 Andrew Olmem, Republican Chief Counsel

            Chad Davis, Republican Professional Staff Member

            Dana Wade, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)

                            C O N T E N T S

                              ----------                              

                          TUESDAY, MAY 8, 2012

                                                                   Page

Opening statement of Chairman Johnson............................     1
    Prepared statement...........................................    29

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2
    Senator Reed.................................................     3
    Senator Menendez.............................................     3

                                WITNESS

Shaun Donovan, Secretary, Department of Housing and Urban 
  Development....................................................     5
    Prepared statement...........................................    29

                                 (iii)

 
   EXPANDING REFINANCING OPPORTUNITIES TO IMPROVE THE HOUSING MARKET

                              ----------                              

                          TUESDAY, MAY 8, 2012

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:05 a.m. in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. This Committee will come to order.
    Our housing market faces dual problems: the continued lag 
in the housing recovery which is creating impediments to fixing 
the second problem: the need for large-scale, long-term housing 
finance reform. While the Committee continues to be concerned 
about the long-term structure of the housing finance system, 
today's hearing takes a closer look at one of the strategies to 
improve the struggling housing market.
    During our hearings on the state of the housing market, 
several witnesses, including Secretary Donovan, discussed the 
need to expand refinancing opportunities for borrowers who were 
paying their mortgage. I would like to thank the Secretary for 
coming back to discuss this topic in greater detail.
    In January, the Federal Reserve released a white paper 
entitled ``The U.S. Housing Market: Current Conditions and 
Policy Considerations.'' In this paper, the Fed stated that 
``continued weakness in the housing market poses a significant 
barrier to a more vigorous economic recovery.'' One of the 
barriers identified in the white paper includes obstacles to 
refinancing at today's low interest rates.
    The Administration's Housing Plan also identifies removing 
barriers and expanding refinancing opportunities as part of the 
solution. While FHFA made some changes to the HARP program last 
year at the urging of Members of Congress and the 
Administration, I continue to hear from constituents and the 
housing industry that more could be done to encourage 
competition in the refinancing market and give homeowners more 
options.
    During a hearing in the Housing and Transportation 
Subcommittee 2 weeks ago, Senator Menendez outlined legislation 
he and Senator Boxer are working on to expand refinancing 
opportunities for borrowers with GSE-held loans. I look forward 
to a further discussion of that legislation and any other 
proposals today.
    As I stated during our state of the housing market hearings 
on this topic, I share the concern that ongoing challenges in 
the housing market are acting as a drag on economic recovery. 
As we have heard many times in this Committee, there is not a 
silver-bullet solution that will save the housing market, but 
several options implemented together could provide stability to 
the market. I hope that this Committee can work in a bipartisan 
fashion to find practical solutions to help overcome the 
barriers that are weighing down our housing recovery.
    With that, I will turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Welcome again, 
Secretary Donovan. You have been up here a lot, and we 
appreciate it.
    Today the Committee will consider ways to aid our troubled 
housing market by expanding refinancing opportunities. And 
while this topic is timely, I think it is disappointing that 4 
years after the bursting of the housing bubble, the Committee 
has still not produced comprehensive housing legislation. And 
as a result, little has been done to address the serious 
problems in our housing market.
    FHA, for example, still needs to be reformed. Foreclosures 
remain, as the Chairman mentioned, at record levels. Millions 
of mortgages are underwater, and Fannie and Freddie continue to 
lose money at the expense of the American taxpayer. In fact, 
while the taxpayers have spent almost $190 billion bailing out 
the GSEs, the only work product we have received from the 
Administration is a brief discussion piece that lists three 
policy options but does not, Mr. Secretary, make any 
recommendations.
    Meanwhile, millions of dollars have been spent on piecemeal 
programs like HAMP and the so-called Hardest Hit Fund. But as 
SIGTARP has repeatedly noted, none of these programs have 
achieved their expected results.
    Admittedly, the problems facing our housing markets are 
very complex, as you have reminded us, and there are no easy 
solutions. Finding answers will require careful study and 
crafting legislation based on facts and rigorous analysis.
    Unfortunately, rather than doing the hard work required to 
solve problems, some have chosen to create scapegoats. Blaming 
certain regulators for not undertaking massive principal 
reductions may make for a good 1-day new story, but it is not 
an effective means for solving the problems plaguing our 
housing market. Plus paying banks billions of taxpayer dollars 
to write down mortgages is just another back-door bailout of 
Wall Street.
    Given how the Administration now praises TARP, maybe 
another Wall Street bailout is just what it wants. The American 
people, however, are tired of bailouts. It is time to take a 
more serious approach to fixing the housing market.
    As I have stated before, my Republican colleagues and I are 
willing to work with the Committee to produce and to craft 
effective bipartisan legislation. The Committee is the best 
forum, I believe, right here, to facilitate careful 
deliberations and the needed compromises. In contrast, by 
bypassing the Committee and proceeding directly to the floor 
with any legislation will almost certainly result in partisan 
gridlock. Accordingly, the majority's decision about how it 
will proceed with any housing legislation will likely reveal 
whether such legislation is a serious effort to solve problems 
or just another effort to highlight differences at the expense 
of real compromise.
    I believe the American people have already waited 4 years 
for housing reform legislation, and I welcome this hearing, Mr. 
Secretary. Only time will tell whether the American people will 
be made to wait even longer.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Shelby.
    Are there any other Members who wish to make a brief 
opening statement? Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you very much, Mr. Chairman, for 
holding the hearing, and I have to go shortly to the floor as 
part of the debate on the prevention of the increase in student 
loan interest rates. But I did want to first commend the 
Secretary for all of his efforts. You are here today 
principally on the Menendez-Boxer proposal. Let me personally 
commend Senator Menendez for his very, very thoughtful 
proposal.
    We have been trying over the last several years to do many 
things to support and revitalize the housing market. I do not 
think there is one magic solution. It is many things.
    In that context, I am very pleased that the Administration 
has finally taken interest in the REO-to-rental initiative, 
taking some of these properties on the books of banks and 
putting them back in the marketplace as rental properties.
    I also understand that you will be discussing Project 
Rebuild. I was pleased to work with you in this regard. And I 
think it is important, with the tools available and as quickly 
as possible, to deploy them to keep people in their homes, 
minimize foreclosures, and to provide a floor essentially to 
the housing market, and then hopefully begin to see it 
appreciate in a thoughtful and measured way.
    But, Mr. Secretary, thank you for all of your efforts and 
your commitment, and thank you, Mr. Chairman.
    Chairman Johnson. Anybody else? Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman, for this 
important hearing. And, Mr. Secretary, thank you for joining us 
again. I appreciated it when you came before the Subcommittee 
just recently.
    As I have said many times, we need to fix the housing 
market now to get the broader economy moving again and creating 
jobs. Fixing the housing market must involve using multiple 
strategies to attack the problem from different angles, and 
refinancing should be one of those strategies, particularly for 
borrowers who are making their payments but whose interest 
rates on their mortgages are above today's interest rates of 4 
to 5 percent.
    That is why within the next few days I will be introducing 
with Senator Boxer an important and widely supported bill 
called the Responsible Homeowner Refinancing Act of 2012. It is 
supported by borrower groups such as the Americans for 
Financial Reform, the National Consumer Law Center, the 
National Council of La Raza, NCRC, by the National Association 
of Realtors, the National Association of Home Builders, many 
lenders like Quicken Loans, and some mortgage investors like 
Amherst Securities.
    Our bill would help $17.5 million borrowers who have Fannie 
Mae and Freddie Mac loans but who are trapped paying interest 
rates above 5 percent because of barriers to refinancing. Our 
bill would make it easier for homeowners to refinance and lower 
their mortgage payments, which is a popular and commonsense way 
to help the housing market. Allowing a homeowner to refinance 
from a loan that is 6-percent interest to a loan that is 4-
percent interest, for example, would save them hundreds of 
dollars a month, putting more money in their pockets, reducing 
defaults and foreclosures. And summaries of the bill are 
available for the press in the back of the room.
    I would also like to thank Senator Franken for working with 
me on the put-back risk provision of the discussion draft which 
is similar to a provision he introduced in another bill. Our 
bill does not include, however, the Administration's proposal 
to refinance private loans through the FHA or the 
Administration's proposal to pay closing costs of borrowers who 
agree to shorter loan terms, which I understand Senators 
Feinstein and Merkley are working on, respectively.
    Finally, some but not all of the refinancing provisions 
were addressed in FHFA's Home Affordable Refinance Program 
expansion, also called HARP 2. For example, HARP 2 removed 
loan-to-value caps for underwater homeowners but does not apply 
to borrowers under 80 percent loan-to-value ratio who 
theoretically should be able to refinance but in practice 
sometimes cannot. FHFA scaled back lender liability for 
representations and warranties which lenders cite as an 
obstacle to encouraging them to extend refinance loans for 
same-servicer refinances in HARP 2. But FHFA did not scale back 
representations and warranties liability for cases when a 
different servicer was refinancing the loan, which has led to a 
lack of competition among lenders that has resulted in much 
higher interest rates for borrowers. And we need to inject 
competition and market forces into this market where servicers 
have an unfair monopoly on refinancing certain borrowers who 
effectively have no choice but to use their original lenders.
    There are some other obstacles that we had at the hearing, 
Mr. Chairman. It is more fully in my statement, and we will 
flesh it out with the Secretary.
    Finally, one of the best aspects of the Boxer-Menendez 
Responsible Homeowner Refinancing Act is that, according to 
preliminary CBO estimates, it will stop bailouts and save 
taxpayers money because fewer homeowners will default if their 
mortgage payments are lowered and, therefore, we have been told 
that we do not even need to consider some of the points that we 
were going to add. So I think this is a slam-dunk for both 
homeowners and the taxpayers, and we look forward to working 
with the Chair as we move forward.
    Chairman Johnson. Are there any other Members who wish to 
make an opening statement?
    [No response.]
    Chairman Johnson. Thank you all.
    I want to remind my colleagues that the record will be open 
for the next 7 days for opening statements and any other 
materials you would like to submit.
    Now I would like to briefly introduce our witness, who is 
no stranger to this Committee. Secretary Shaun Donovan is the 
15th Secretary of the Department of Housing and Urban 
Development. Secretary Donovan has served in this capacity 
since January 2009.
    Secretary Donovan, you may proceed with your testimony.

 STATEMENT OF SHAUN DONOVAN, SECRETARY, DEPARTMENT OF HOUSING 
                     AND URBAN DEVELOPMENT

    Mr. Donovan. Thank you, Chairman Johnson, Ranking Member 
Shelby, Members of the Committee. Thank you for this 
opportunity to testify about the Administration's initiatives 
to help American homeowners refinance their mortgages and 
rebuild equity in their homes.
    Mr. Chairman, this hearing comes at a moment in which our 
housing market appears to have turned a corner following the 
best winter of home sales since the crisis began. Indeed, with 
interest rates at historic lows, more than 14 million 
homeowners have refinanced their mortgages, putting nearly $27 
billion a year in real savings into the hands of American 
families and into our economy. Because we have provided 
responsible families opportunities to stay in their homes, more 
than 5.9 million modifications have been started in the last 3 
years, and the number of families falling into foreclosure is 
half of what it was in early 2009.
    Because we have helped communities struggling with 
concentrated foreclosures, places with targeted neighborhood 
stabilization investments have seen vacancies fall and home 
prices rise. Most important of all, our economy has added 
private sector jobs for 26 straight months, totaling 4\1/4\ 
million jobs. This represents important progress, but to create 
an economy built to last, we need to do more.
    Indeed, as I discussed before this Committee in February, a 
range of barriers keeps struggling borrowers from getting the 
relief they need and our economy needs at this pivotal moment. 
In particular, Mr. Chairman, barriers to refinancing are 
preventing millions of responsible homeowners from taking 
advantage of interest rates that are at their lowest levels 
since the 30-year mortgage was created.
    For instance, consider Judy from Tucson. Judy is in a 
mortgage with a 7-percent interest rate and cannot refinance, 
not because she has ever been late on a mortgage payment but 
because her home, like half of all homes in Arizona, is 
underwater. Not being able to refinance not only prevents 
homeowners like Judy who have done the right thing and who are 
current on their mortgages from saving thousands of dollars 
each year. It also prevents our economy from receiving the lift 
that low interest rates typically provide.
    That is why the President called for us to take more 
aggressive steps last fall. Within 6 weeks, we had identified 
barriers that were holding people with loans backed by the GSEs 
from refinancing. And by the end of the year, servicers were 
ramping up their operations for HARP 2.0.
    Just four of the largest servicers report that they are 
processing applications as we speak from 750,000 homeowners who 
stand to save an average of $2,500 per year--the equivalent of 
a good-size tax cut. Indeed, nationwide, refinancings were up 
over 100 percent in March compared to a year earlier. And in 
the hardest-hit States like Arizona and Nevada, where I 
traveled just last week, they have more than tripled, and we 
expect these numbers to continue to rise when we dramatically 
cut fees for FHA refinancing next month.
    But, Mr. Chairman, that is still not enough, and so today I 
want to discuss four legislative proposals supported by the 
Administration to ensure every responsible borrower has the 
opportunity to refinance and rebuild equity.
    The first would provide borrowers whose loans are not 
guaranteed by FHA or the GSEs access to simple, low-cost 
refinancing, so long as they are current on their mortgage, 
meet a minimum credit score, have a loan within FHA conforming 
loan limits, and are currently employed. The program includes 
features to minimize program costs, including establishing 
loan-to-value limits. Lenders interested in refinancing deeply 
underwater loans would need to write down the balance of the 
loan before they qualify, relieving the strain on the borrower 
and reducing risk to the taxpayer.
    And while this program would be run by FHA, it would be 
financed from a completely separate account from FHA's MMI 
Fund. Further, by financing this proposal through a dedicated 
funding source, we will eliminate any expected cost to the 
taxpayer. And I am pleased that Senator Feinstein has joined 
with us to draft this critical legislation.
    The second proposal, as developed by Senators Menendez and 
Boxer, would allow us to clear the remaining barriers to 
refinancing for borrowers with GSE-insured loans. While HARP 
2.0 has already given many more borrowers an opportunity to 
refinance, there remain responsible borrowers who need our 
help, including those who have equity in their homes. To ensure 
these families are not left out, we support extending 
streamlined refinancing for all GSE borrowers, irrespective of 
their loan-to-value ratio. And to ensure more homeowners can 
refinance with a better deal, the proposal creates competition 
between lenders and removes other potential hurdles like 
unnecessary appraisals, which will help responsible borrowers 
who happen to live in slower markets. Clearing these barriers 
will go a long way toward further strengthening the GSEs' 
portfolios and saving taxpayers money.
    Of course, while refinancing is critical to reducing costs 
to homeowners, we also need to ensure borrowers have an 
opportunity to rebuild equity in their homes. Savings in our 
homes is the single biggest source of how we send our kids to 
college. It is how most people get capital to start a small 
business and how people save for their retirements. That is why 
the first of our two equity-building proposals, which is being 
introduced today by Senator Merkley, would give all underwater 
homeowners who choose to participate in these programs the 
opportunity to apply the savings from refinancing to rebuild 
equity in their homes.
    As an incentive, we are proposing that homeowners' closing 
costs--about $3,000 on average--be paid by the GSEs, and to be 
eligible, borrowers must agree to refinance into a loan with a 
term of no more than 20 years, providing a path for all 
borrowers to get their heads above water faster.
    The second equity-building proposal I want to discuss is 
the Project Rebuild Act, introduced by Senator Reed, which 
would further stabilize places where prices have dropped the 
most and create 200,000 jobs. Mr. Chairman, we know that the 
second a foreclosure sign goes up on your block, your home 
value drops by as much as $10,000. Well, homeowners that are in 
the hardest-hit places often live near a dozen or more homes 
with those signs. But as the Neighborhood Stabilization Program 
has proven, we can halt the slide in home values in these hard-
hit places. Indeed, according to data hot off the presses, 
three-quarters of neighborhoods that received targeted 
investments through the first two rounds of NSP showed 
increased home prices, largely as a result of improved vacancy 
rates. That is the kind of success Project Rebuild would build 
on, and it is widely believed Project Rebuild is not only an 
investment in jobs to rebuild vacant or abandoned homes, but 
also in the neighbors who live next door.
    And that, Mr. Chairman, is ultimately who these proposals 
are about--the millions of families who are playing by the 
rules and doing their fair share--in many cases, more than 
their fair share. These families have not walked away from 
their obligations. We cannot walk away from ours. Ensuring we 
do not starts with making sure every responsible family in 
America, regardless of what kind of loan they have, has the 
opportunity to refinance and rebuild equity not only in their 
homes but in the American dream. That is what these proposals 
are about. That is what it is going to take to create an 
economy build to last. And it is why I look forward to working 
with this Committee and with Congress to enact them.
    Thank you.
    Chairman Johnson. Thank you for your testimony.
    As we begin questions, I will ask the clerk to put 5 
minutes on the clock for each Member.
    Mr. Secretary, pertaining to HARP 2.0, FHFA made some 
changes to the HARP program last fall, including expanding the 
loans that are eligible for refinancing and encouraging 
refinancing into shorter-term mortgages. Did those changes go 
far enough? If not, what barriers still remain for borrowers?
    Mr. Donovan. Mr. Chairman, we believe that those changes 
are critical and have made an important difference, as I said, 
about 750,000 applications just from four of the largest 
lenders that are being processed right now. But there are three 
key remaining barriers that we see.
    One is that we have many families who are above water on 
their first liens--in other words, the LTVs are 80 percent or 
below--but because they have second liens, because they have 
other debt, or for other reasons, they are being stopped from 
refinancing. So extending HARP 2.0 to include above-water 
borrowers, those with equity in their homes, we think is a 
critical piece.
    Second, while there were a number of important steps to 
increase competition among borrowers, right now that is one of 
the key barriers we have, is that servicers who do not 
currently have that loan or service that loan are being 
discouraged from competing to refinance those loans. There are 
a number of changes that we can make there, underwriting 
changes and others, that would help create more competition and 
lower the costs of refinancing.
    And then the third is that because there are certain 
markets where automated appraisals are hard to do, there are 
about 20 percent of borrowers, even those that would otherwise 
be eligible for HARP 2.0, that have increased costs because 
they have to do a manual appraisal. We want to extend those 
automated appraisals to the remaining roughly 20 percent of GSE 
borrowers who are locked out because they just happen to be in 
a market where there are fewer sales to be able to construct 
those AVMs.
    Again, given that the risk is already there on the GSEs' 
balance sheet, we think these are prudent steps that both help 
families, help the economy more broadly, but also help the 
taxpayer by lowering the risk of redefault for those loans.
    Chairman Johnson. What are the most important steps that 
can be taken by Federal agencies and regulators to facilitate 
refinancing under current administrative authority?
    Mr. Donovan. I think we have taken most of those steps. We 
believe that many of the steps that I have just described could 
actually be taken under existing authority, and we would urge 
that FHFA implement a number of them, even without the 
legislation being passed. But we do think there are some 
critical pieces where the legislative authority is required 
because of legal uncertainty, and so the legislation remains 
critical to pass as quickly as possible.
    Chairman Johnson. I have heard from constituents and many 
groups across the mortgage industry that the put-back risk, the 
risk that the GSEs would return the loan to a bank's balance 
sheet for cost servicer refinancing, is stifling competition 
between lenders and creating barriers for community banks. What 
impact is this having on consumers? And how can this be 
addressed to encourage competition in the mortgage market?
    Mr. Donovan. This is a very important piece. Essentially 
what is happening is that the original servicer who may have 
made that loan, if there were mistakes made in originating that 
loan, a new servicer is concerned about taking on what we call 
those reps and warranties, even though they were not 
responsible for the original loan when it was made. And so what 
we have done through HARP 2.0 is remove many of those barriers; 
however, there continue to be differences between the way 
Fannie and Freddie are implementing that and also differences 
between how above-water loans and underwater loans are treated. 
And, frankly, we think it does not make a lot of common sense 
that a homeowner who actually has more equity in their home and 
is, if anything, a lower-risk borrower would have to pay more 
or be locked out of refinancing relative to those borrowers who 
may be underwater in their loans.
    So we think this is both a matter of good--there is a good 
economic case for doing this, but also it is a question of 
fairness to be able to make sure that these refinancing 
opportunities are available across the board.
    Chairman Johnson. You previously stated that the best way 
to protect the taxpayer is to ensure that loans currently on 
FHA's books continue to perform. How would expanding 
refinancing opportunities accomplish this?
    Mr. Donovan. Well, this is a critical point, and this is 
something that economists across a broad spectrum--I know you 
had testimony from Chris Mayer, Laurie Goodman, and many others 
here recently to this Committee about the importance of 
refinancing overall. The Fed has spoken very clearly about the 
ways that reductions in payments that average $2,500 to $3,000 
a year boost consumer spending and are a net plus to the 
economy in terms of the ripple effects that that spending has.
    So I think the broad case has been made very clearly this 
is good for the economy. What I would add to that is that for 
every additional point of increase that we see in home prices, 
as the economy improves, as the number of foreclosures is 
reduced, we see a substantial benefit to FHA and to the GSEs 
because not just defaults go down but, as home values rise, the 
recoveries that we make on any foreclosures that do go forward 
are significantly lower. The estimates just to the benefits for 
the GSEs, I think Chris Mayer, when he was here, estimated a 
more than $20 billion benefit to the GSEs from lower default 
rates. Depending on the take-up, those may be at the high end 
of the range, but clearly there are very significant benefits 
that come not just to the economy more broadly but directly to 
FHA and the GSEs as the housing market is improved overall.
    Chairman Johnson. One last question. The Administration's 
Housing Plan would also expand FHA refinancing to non-GSE 
borrowers who are still paying their mortgages. During our 
previous hearing, you mentioned several ways to protect the 
taxpayers from the potential risk associated with these loans. 
As part of that protection, do you have more specific 
recommendations for standards these loans would need to meet?
    Mr. Donovan. Absolutely. And I would start, Mr. Chairman, 
by reiterating that these are homeowners that are currently 
paying. They must be current on their loan and have made every 
payment for the past 6 months, missed no more than one payment 
in the last 12 months, and so they are already relatively low-
risk loans, and by lowering their payments, they are even lower 
risk.
    In addition, we have a number of criteria in terms of 
credit scores, employment, and others that we would put on top 
of that that would help to protect taxpayers. And then I think 
two other things that are absolutely critical: one would be to 
create a completely separate fund, different from the MMI Fund, 
with a dedicated revenue source to offset any expected costs, 
and then perhaps most importantly, a requirement that the 
deeply underwater loans, which all the data show would have the 
most risk of these loans because of the greater likelihood of 
default over time, those loans would have to be written down to 
a loan-to-value of 140 percent or lower in order to be 
refinanced.
    So our numbers would show that those loans below 140 are 
likely, much more likely to be sustained over time, and that by 
writing down any loans at the higher LTV to 140 percent, we are 
mitigating a substantial portion of any redefault risk on those 
loans that are higher LTV.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Secretary Donovan, following your testimony before this 
Committee in February, I submitted a question for the record 
requesting additional data on the President's proposal to allow 
borrowers with private sector loans to refinance into FHA-
backed loans. Yesterday I received a written response to this 
request stating, and I will quote, that ``HUD does not have 
official estimates of default rates, participation rates, or 
other performance parameters.''
    Since the Administration admittedly did not have the key 
data, it seems to me, for evaluating the proposal, what is the 
basis for your support of this proposal? And without this data, 
how do you know if it presents any risk to taxpayers? That is 
our concern.
    Mr. Donovan. Absolutely, Senator. I think one of the issues 
here, as I think we have talked about before, is that these are 
voluntary programs where take-up--we have a broad range of 
estimates of potential take-up. What I will say is that--and we 
would be happy to meet with you and share more detail, or 
anybody on the Committee, on the specifics. Our estimate is 
that there would be--with some of the restrictions that we have 
proposed, the upper end of potential cost is about $5 billion, 
and we have proposed an offset that would meet that. We would 
also, though, be willing to work with the Committee on 
refining, for example, the 140 loan-to-value criteria. The 
lower that is set, the lower the take-up would likely be, and 
certainly lower the cost. So that $5 billion is an estimate 
based on that 140 LTV, but many of these criteria--we are 
working with Senator Feinstein. We would be happy to work with 
the Committee on refining in terms of the potential eligibility 
and, therefore, the take-up and the cost.
    Senator Shelby. Do you share my overall concern about the 
solvency of FHA, which is under your jurisdiction?
    Mr. Donovan. I certainly continue to focus very heavily, as 
we talked about at the last hearing, on a whole series of steps 
we can take to strengthen the fund. We recently announced 
substantial premium increases on a range of loans as well as 
published a new rule on lender indemnification that will be 
important in terms of protecting the fund. But I do think we 
are taking a broad series of steps that are necessary and 
important to protect the fund.
    Senator Shelby. The latest actuarial report states that 
FHA's capital ratio is only 0.24 percent. Mighty low. How 
quickly do you plan to increase FHA's capital? And when will it 
be above the statutorily required 2 percent? You know, I think 
we have talked about this before. Capital is probably the first 
step and the best way to ensure that FHA does not need a 
bailout from the taxpayers.
    Do you think that a 2-percent capital requirement is 
adequate--because we are a long way from 2 percent--to protect 
the taxpayers from bailing out FHA in the future?
    Mr. Donovan. The actuarial last year projected that the 
capital ratio would return to 2 percent by 2015. Since that 
time, we have both had close to $1 billion in recoveries 
through the mortgage servicing settlement and significantly 
increased premiums. So I do not have a prediction beyond what 
the actuarial said last year. We will obviously wait to see 
what the actuarial says this year in terms of the modeling. But 
we have taken a number of steps since then that would 
accelerate the return to the 2-percent ratio.
    The other thing I would just point out, CBO did score the 
projected receipts for FHA and Ginnie Mae, close to $10 billion 
for next year, $1.8 billion higher than the Administration's 
estimates. So, clearly, the new loans that we are adding to our 
book are projected to substantially increase that capital.
    Senator Shelby. Mr. Secretary, if a private mortgage 
insurer held only 2-percent capital, do you believe that would 
be adequately capitalized?
    Mr. Donovan. I think given the way that our reserves are 
projected and calculated, it is quite different from the way 
the private sector does that. And so I do not think it is an 
apples-to-apples comparison.
    My sense--and we are evaluating this, given the lessons 
that we have learned through this crisis, and I am not going to 
say today that 2 percent is absolutely adequate. I think it is 
something worth discussing with the Committee and looking at 
whether it should be revised. But I do not think we should make 
the mistake of comparing the 2 percent for us because it 
requires, for example, 30 years of potential projected losses. 
Typically the reserves that banks are holding are against a 
much shorter window of losses. Those are all differences that I 
think it is important to look at when you are thinking about 
comparing the 2 percent to the way stress tests and others are 
done----
    Senator Shelby. But we do know capital is important, isn't 
it?
    Mr. Donovan. Absolutely. Absolutely.
    Senator Shelby. One more question, if I can. Deborah Lucas 
at MIT, in conjunction with the Congressional Budget Office, 
released a paper in September of last year that models the 
effects of expanding a large-scale mortgage refinancing 
program. The paper discusses the negative economic impact that 
could result from losses taken by investors in mortgage-backed 
securities.
    Are you familiar, first, with this paper?
    Mr. Donovan. Yes.
    Senator Shelby. Do you dispute its findings?
    Mr. Donovan. We clearly have modeled into the net benefits, 
and I think the Fed and other economists that have looked at 
this do calculate in the lost interest payments to investors as 
part of this. And even though there are, as you have said, 
losses that would be taken by investors, there are significant 
still net benefits overall to the economy from those savings.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for your service.
    You mention in your testimony that lenders in the HARP 
program report that borrowers are saving as much as $2,500 per 
year, which, as you point out, is the equivalent of a big tax 
cut for those borrowers. But am I correct in saying that even 
that figure does not include the additional savings borrowers 
could get if we enacted the Menendez-Boxer draft bill and 
increased competition in the HARP refinance market by making it 
easier for lenders who are not currently servicing that loan to 
compete for the business?
    Mr. Donovan. There is no question that you would both 
increase the savings to families that are already planning to 
refinance and you would make additional homeowners eligible or 
make it economic for them, if you will, to refinance. So it has 
both those benefits--increasing the amount of savings for folks 
who are already refinancing as well as expanding the pool of 
families that we would expect to refinance.
    Senator Menendez. And do you have any sense of how many 
additional individuals--how much additional borrowers could 
save, I should say?
    Mr. Donovan. Just looking at the appraisals, we are talking 
about hundreds of dollars for those borrowers just on the 
refinancing costs. When you add to that some of the fees, for 
example, for above-water borrowers who may already be 
refinancing, you are looking at adding hundreds and in some 
cases even as much as $1,000 a year in potential savings.
    What I will tell you is with the reductions that we have 
announced that go into effect on June 11th for FHA borrowers, 
the fees alone we expect to be about $1,000 a year in lower 
costs. So that is absolutely critical.
    Senator Menendez. Really significant. So if I have been 
patching the roof that is leaking in my home, I now will have 
the wherewithal to replace it, which is, of course, of value to 
preserve the property value, but also has a tremendous economic 
ripple effect in our country as well.
    Am I correct, Mr. Secretary, that FHFA making further 
changes in HARP 2 as outlined in the Menendez-Boxer discussion 
draft would actually save the GSEs money because of reduced 
defaults once homeowners' mortgage payments are lowered?
    Mr. Donovan. All of our modeling suggests that there would 
be significant savings to the GSEs in terms of lower default 
rates. I think Chris Mayer here, a professor at Columbia, 
testified about specific numbers that he expected that exceeded 
$20 billion. Our expectations of take-up are somewhat lower 
than his, but still, you are talking about substantial sums 
that could be saved from lower defaults.
    Senator Menendez. Yes. As a matter of fact, Professor Mayer 
at our Subcommittee hearing that I chaired a few weeks ago 
estimated that it would result in GSE profits of as much as 
$23.7 billion. So whether it is your lower range or that range, 
the reality is you are talking about significant saving of 
taxpayers' money and reducing the size of any fiscal challenge 
in the future.
    The other question I have is: Do you believe that the HARP 
2 policies, some implemented by the GSEs and some by the 
servicers themselves, are reducing competition among banks and 
ultimately decreasing the effectiveness of HARP 2 and robbing 
homeowners of savings through lower interest rates? I think we 
try to address that based upon all the things we heard in the 
hearing, and I am wondering how you view those.
    Mr. Donovan. There is no question that while many of those 
barriers to greater competition were removed by HARP 2.0, your 
bill targets the critical remaining barriers. I will just give 
you one example of what is happening at this point.
    Because servicers who currently service the loan and 
already have all of the data through the GSE systems to be able 
to refinance, they only have to do, for example, a verbal 
confirmation of employment in order to proceed to refinance.
    Other services who would want to compete to refinance that 
loan still have to go through a fuller underwriting in those 
systems, including, for example, getting a full W-2 and all of 
the documentation around not only employment but income. Those 
are things that, given, again, the risk already exists on the 
GSE books, we think just do not make sense here. And because 
they have already been removed for the existing servicer, we 
ought to go the next step and make sure that there is 
competition. I think Laurie Goodman estimated that the 
potential was to save as much as $15,000 per borrower by 
increasing the competition there on the refinancing of these 
loans.
    Senator Menendez. And one final comment on your remark. In 
the panel that we had--I think we had about six witnesses 
representing a wide range of views--there was unanimity on the 
view that asking for all of that documentation when, in fact, 
already the risk is there was not necessary and actually added 
an obstacle toward refinancing. So it was interesting for me to 
hear you and some of the most conservative Members of the panel 
had that view as well. I appreciate your responses.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. And, Mr. 
Secretary, I thank you for your testimony today. It was 
indicative of the Secretary that I have grown to know and 
respect, and I appreciate the way you have come in to talk 
about these bills in the way you have. I might not agree with 
every comment, but I thank you for the testimony.
    Mr. Donovan. Thank you.
    Senator Corker. Mr. Chairman, I attended the Subcommittee 
meeting that Senator Menendez had, and it was a good hearing. I 
thought we had some good witnesses. And for what it is worth, I 
think there are some redeeming qualities to the Menendez bill. 
There are also some things that I think certainly need to be 
changed.
    Mr. Chairman, I am hearing rumors that some of these bills 
may go straight to the floor and not come through the 
Committee. I think you can see by the Committee attendance that 
people have come to think not much is going to happen here of 
consequence. We have not dealt with the technical corrections 
bill, which I think people on both sides of the aisle would 
like to see happen on Dodd-Frank. In a bipartisan way, I might 
add, we certainly have not deal with GSEs, and I am just 
pleading with you today to please not let a bill that candidly 
could, with some changes, receive some bipartisan support go to 
the floor and turn into something that is certainly not that. I 
hope that the Chairman will not let the rumors that we are 
hearing become reality by any of these bills going directly to 
the floor and not through the Committee.
    But I do want to get back to the Secretary, and I know you 
spent a lot of time on the AG settlement. I think one of the 
things that is coming out right now--and I think we sort of saw 
this on the front end, but the servicers, the big banks that so 
many folks in this country have been most upset with, 
including, it seems, this Administration, the big banks have 
the ability to get 45 cents in credit toward this $26 billion 
settlement for every dollar that they cram down of private 
investors' money, which I think most Senators understand are 
people's 401(k)s and other types of investment vehicles. And I 
think all of us want to see the private sector back in the 
business, but this AG settlement has frosted most of the people 
that we talk with on the private side because, again, they have 
no control. They have invested in these securities. The 
servicers, which, candidly, did many of the not-so-good--well, 
most of the not-so-good things in this arena actually get 
credit by using somebody else's money. And I just wonder if you 
have had much pushback--I am sure you have--from the private 
sector side. They said actually they did not even have a seat 
at the table, and especially knowing of your background, that 
surprised me a bit.
    Mr. Donovan. So, look, there are key issues here, as we 
said earlier, in terms of the complexity of how you get 
progress on these loans. And it was very important to us as we 
went through the settlement that we were clear that any of 
those writedowns that happen on private label securities loans 
needed to be net-present-value positive. What that means in 
English basically is that it is actually--they would be a 
benefit to the investors----
    Senator Corker. They tell us that the model is flawed, and 
I know they are telling you that, too.
    Mr. Donovan. And this is one of the points that we have 
been in discussions with them about. We did actually go back 
based on those concerns and get the servicers to agree to use a 
standard model, the HAMP model for what we call 2MP and the 
broader HAMP model. I think that was, in their view, 
substantially better than--in the investors' view, 
substantially better than what we had had before, but we 
continue to hear some specific concerns about that model, and 
so we are working with them to improve it.
    But, again, the fundamental idea here is I agree with you, 
the investors should not be taking the losses to the benefit of 
the servicers. But where there are net-present-value-positive 
principal reductions that can happen, those should go forward.
    The other thing that has been key, as you know, is on 
second liens, and I agree that it is a fundamental problem that 
we have that second liens have stood in the way of more 
progress on these loans. We did require significant writedowns 
on the second liens and, in fact, extinguishment of the liens 
at 180 days. We are talking to the investors about whether 
there are further steps that we could take to go beyond that 
that would be satisfactory.
    On the other hand, just as here with the refinancing issue, 
what I do not think we should do is allow second liens--when 
there were not really rules of the road, there were no rules 
written and there should have been--the investors I think will 
agree with that today--about how you handle those second liens. 
We have tried to create rules that would force the reductions 
of the second liens, and here in refinancing, we have lenders 
that hold those second liens, servicers, that are standing in 
the way of refinancings on the first liens that would be good 
for the homeowner and good for the economy.
    And so one of the key provisions in the Menendez-Boxer bill 
would be to remove some of those final steps, final barriers 
that second liens are providing. So I think this is a real 
issue.
    Senator Corker. OK.
    Mr. Donovan. The problem is, in a world where there were 
not rules, how do we create rules after the fact? They are 
never going to be perfect, and I think we can continue to 
revise those. What I do not think is acceptable is to say we 
are simply not going to try to make progress here, not help 
homeowners, and not make progress on those simply because the 
perfect is the enemy of the good, if you will.
    Senator Corker. And I understand that point of view. You 
know, on the second lien portion--and I look forward to looking 
at the details of the second lien part of the Menendez bill. 
But, look, the servicers in many cases are the second lien 
holders, right?
    Mr. Donovan. Exactly right, and they----
    Senator Corker. So, I mean, candidly, shouldn't the second 
lien automatically be extinguished first, period, gone? I mean, 
why would we give any credit at all to a second lien when you 
are writing down any portion, even a penny, of the first lien? 
Do you agree with that?
    Mr. Donovan. There are cases where what you are talking 
about is a first lien that may be delinquent and a second lien 
that is current. Right?
    Senator Corker. I understand. But you know why they are 
doing that.
    Mr. Donovan. And, ideally speaking, lien priority would say 
that the second takes all of the loss on that. The problem is 
there is no law, there is no requirement that says that, right? 
And we cannot as the Government impose that unless there were 
legislation or something else.
    Senator Corker. So I would----
    Mr. Donovan. The issue is--I agree that we are not in a 
perfect place. On the other hand, we cannot wait for a perfect 
thing to make progress.
    Senator Corker. I understand, and I appreciate your point 
of view. And I would just say to Senator Menendez through the 
witness--I do not know if I can talk directly to him--that----
    Senator Menendez. You can always talk to me, Senator.
    Senator Corker. Thank you. Thank you so much. I think this 
is something that we ought to look at. Really, what is 
happening, you know, the servicers, again, in many cases have 
the second lien, and the mortgage holder is paying a much 
higher interest rate on that second lien and staying current. 
And what we really have done as a Nation is allowed any home 
equity that used to exist--most of it is gone now. We used to 
use it as an ATM machine, and we have created a huge problem 
for people. And I hope that in the Menendez legislation, by the 
time it gets to the floor, that we will absolutely totally 
extinguish 100 percent of any second mortgage before we allow 
one penny of a first mortgage to go away. I mean, that is the 
way a second lien works, and I hope that we will clarify that 
because, again, this is to the benefit of the servicers, which, 
by the way, have helped create--I mean, having the second liens 
have the same priority as the first liens, the way these things 
have been dealt with, has created a problem.
    Let me ask one last question. I know the Chairman used 9 
minutes and I did not make an opening statement. Qualified 
mortgage, I know that has to be troubling you knowing of your 
background, the way the consumer agency is looking at the 
qualified mortgage and basically trying to determine whether 
there is going to be a safe harbor for people who are 
originating loans. If they check all the boxes, then they in 
essence have made a valid loan. They are looking at something 
called ``rebuttable presumption'' which allows them years down 
the road to come back on originators, and it seems to me that 
that is a huge problem down the road as it relates to getting 
credit to viable borrowers. Is that something that troubles 
you?
    Mr. Donovan. So I will admit, Senator, I am not an expert 
in the specifics of the rebuttable presumption versus the sort 
of hard test for complete removal of any liability on a safe 
harbor.
    My understanding--and I think this is true of a number of 
the lenders, the clearinghouse banks and others that are 
looking at this--as important as whether it is a rebuttable 
presumption or a safe harbor is how bright-line the test is 
under a rebuttable presumption.
    So I think if we could get to a standard where there is a 
very clear bright line under rebuttable presumption, that I 
think would satisfy most of the concerns that I hear about 
whether there would continue to be liquidity available. It is 
not the same as a safe harbor, but I think it is as important 
if not more important an issue to be looking at as just the 
difference between a safe harbor versus rebuttable presumption.
    Senator Corker. Thank you. Thanks for being here.
    Mr. Donovan. Thank you.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair, and thank you, Mr. 
Secretary, for your testimony and, more importantly, your work 
on these many strategies to try to help address the challenge 
of refinancing, and particularly families underwater. And I 
appreciated your comments about the rebuilding equity strategy, 
the Administration's advocacy for a way that families can 
choose between refinancing to lower their monthly costs or 
refinancing to get them out of the position of being underwater 
in an expedited manner, and the statistics and the analysis 
that shows that half the families are sticking with the same 
payment at the lower interest rate and shorter term would be 
out from underwater in 5 years is a fairly powerful observation 
to bring to this. And I am not pleased to be able to introduce 
the Rebuilding Equity Act in order to try to capture this 
concept and see if we can take this forward in the Senate.
    I wanted to turn to the non-FHA, non-GSE challenge of 
families that are underwater. Under the FHA strategy, one of 
the challenges we have run into is the 115 percent loan-to-
value restriction, and I am not sure if you are necessarily 
familiar with that or have some observations on it, the 
different ways that we can overcome that particular hurdle.
    Mr. Donovan. Could you just be more specific? The 115 
percent for----
    Senator Merkley. Yes, that FHA has----
    Mr. Donovan. ----the short refi program or----
    Senator Merkley. Well, my understanding, if I have this 
right, is that they are not allowed to extend the Government 
guarantee for loans that are more than 115 percent underwater 
and thereby we either need--and I am not sure if it is a 
regulatory or statutory fix to address that. I did not know if 
that was a piece you were working on.
    Mr. Donovan. To be clear, we have made a refinancing 
alternative available for borrowers where their combined loan-
to-value is below 115 percent. But even for those, the first 
lien that is going to be FHA insured would need to be below 
96.5 percent. So it is actually more restrictive even than you 
are describing, if I have the right issue.
    What we are proposing to do under this broad-based refi 
proposal is to allow up to 140 percent loan-to-value with the 
clear view that any loan that is deeply underwater would have 
to be written down substantially to get within those 
parameters. And so that is really the key legislative change 
that would be required under the proposal, and to create a 
separate fund from the traditional MMI Fund in order to make 
sure that we protect the MMI Fund.
    And so those are the two key pieces of the legislation that 
would be required.
    Senator Merkley. I appreciate that, that separate fund. One 
of the questions is: How do you put the money into that fund or 
that trust? And certainly one strategy is an insurance fee for 
families that are refinancing, helping them participate. 
Another possibility that has been raised is a broad-based 
financial sector fee of some sort. But I have looked at the 
issue of, instead of utilizing that approach, utilizing a risk 
transfer fee as a voluntary opt-in for companies who hold 
mortgages that are underwater, recognizing that there is 
substantial risk of holding these underwater mortgages, that 
they pay a risk transfer fee. And in laying this out over 40 
years, if you have basically a spread between--because of 
Federal Government guarantee funds between a 2-percent and, 
say, a 5-percent mortgage and you throw in the risk transfer 
fee, you end up with solvency under kind of reasonably 
conservative assumptions. But it is not zero risk because 
dramatic things can happen, and that is where the Federal 
Government guarantee through FHA becomes essential or an 
extension of a Federal Government guarantee to utilize for the 
Federal Home Loan Bank System, and this is--it has struck me 
that in the end a lot of these conversations hit the rocks on 
the notion that there is some risk. And I guess the point I 
want to make and ask you to respond to is: We took enormous 
risk as a Nation, if you will, in helping out major financial 
institutions and helping out the auto markets. It seems to me 
that it is reasonable that we take modest risk, starting with 
the spread sheets that say we will actually make money, but 
worst case, there may be some risk, but the upside of helping 
millions of families be out from underwater and have their 
financial feet is a huge upside risk. And I think we have to 
get the conversation away from saying that there is some zero 
risk way to approach this. I would just throw that out there 
for you to comment.
    Mr. Donovan. Senator, I think you have made an essential 
point. First, let me just say, to be clear, we did propose 
initially a way to pay for this broader-based refinancing, but 
we are very open to looking at other ideas like the one that 
you propose or an additional G-fee on these loans. There are a 
number of potential ways that we would like to work with the 
Committee on potential ways to pay for it and that we have been 
talking to Senator Feinstein about. But I think you have hit on 
the key point, which is there is no question that by 
refinancing these loans into FHA loans that there is some 
additional risk that we add because of that transfer.
    I think the fundamental questions are: First, how do we 
minimize that risk? And by both focusing on current loans that 
meet additional underwriting criteria and by lowering those 
costs, these are safe loans to begin with.
    Second, that by fully paying for it, we are offsetting any 
expected losses that might come.
    And then, third, and most importantly, none of that 
calculates in exactly what you are talking about, which is 
there is enormous potential upside if we can just move house 
prices a few percentage points through this broad-based 
refinancing. The benefits to the taxpayers through improvements 
in the performance of Fannie Mae and Freddie Mac, FHA, and the 
broader lift that the economy would have are all potentially 
enormous. And so the benefits of doing this we believe 
substantially outweigh any potential risks, and we have tried 
to find--we want to work with the Committee to find as many 
ways to offset those risks as possible.
    Senator Merkley. Thank you, Mr. Secretary, and I appreciate 
the Administration's attention to the non-GSE underwater 
challenge, and I look forward to continuing to work with the 
Members of the Committee and the Administration on that issue. 
Thank you.
    Mr. Donovan. Thank you.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman, and, Secretary 
Donovan, thanks for your testimony this morning.
    Mr. Donovan. Thank you.
    Senator Hagan. I mentioned this to you before, but I have 
the utmost confidence in Joe Smith, who is the former 
Commissioner of State Banks in North Carolina. I think he is 
going to do a tremendous job as the monitor of the global 
mortgage servicer settlement area. And I saw this morning that 
at least one large financial institution has begun delivering 
on its commitment under the settlement by identifying 200,000 
customers who may ultimately qualify for a principal reduction 
program.
    Can you discuss where we are on the implementation of the 
settlement and perhaps discuss some of the progress that is 
being made?
    Mr. Donovan. Absolutely, and thank you for your support of 
Joe Smith. I think he has been a terrific--in the early going 
of this, he has been a terrific addition to the team in terms 
of implementation.
    Not only have--and I think you saw the report that the Bank 
of America has begun mailing about 200,000 letters to 
borrowers. Going beyond that, there have already been principal 
reductions that have been delivered to families as a result of 
the settlement. There were many families that were being 
evaluated for other types of modifications that then were able 
to get very quickly after March 1st principal reductions. It is 
not a huge number at this point. It is in the thousands. But 
there are thousands of families that have already benefited and 
hundreds of thousands more that are now getting these letters, 
and not just from Bank of America but they are being mailed 
from all of the five banks. So that is moving forward.
    The other critical piece is implementation has begun around 
the servicing standards that were in the settlement, and 
specifically our first deadline for implementation of the most 
critical pieces of the servicing standards is coming up within 
the next month or so. And we would be happy to get you a 
detailed timeline of when those standards have to go into 
effect. But we are very encouraged by the pace with which 
implementation is moving on those servicing standards.
    Senator Hagan. Could you give me the basic parameters of 
how much a principal reduction a borrower might be eligible 
for?
    Mr. Donovan. It really varies by location. What we are 
seeing is that in the most deeply underwater States--
California, Nevada--those principal reductions are exceeding 
$100,000 per homeowner. In a State like North Carolina, we 
would expect to see it more in the range of $50,000 to $100,000 
on average. But these are substantial changes for these 
families.
    And just to be clear, the requirement in the settlement is 
that not just the principal reduction happens, but that there 
is demonstrated ability for that family to pay and to remain in 
that home for at least 90 days. And so what is critical here is 
not just the amount of the principal reduction but that it gets 
the family to a sustainable level that will keep them in their 
home long term.
    Senator Hagan. Thank you. Also, following up on a 
conversation that we started in February when you were last 
here in front of the Committee, we want to be supportive of 
what the Department and the FHA are doing to ensure the long-
term viability of the Federal insurance program. To that end, 
we have spoken about how to strengthen the enforcement 
authorities available to the FHA.
    Can you talk about some of the changes that the FHA would 
like to see in order to help it manage the risk posed by the 
noncompliance on the part of FHA-approved lenders?
    Mr. Donovan. This is critical, and there are two major 
changes that we have been seeking in legislation. We are 
working actively with your colleagues in the House to be able 
to get this legislation through. We came very close last year 
as part of our budget, but did not quite get there.
    One is to clarify our ability to hold our lenders 
accountable through indemnification. We have just issued a rule 
that expands and makes clear the standards that we have for 
indemnification. But there are certain types of loans and 
lenders that we do not have clear authority to do that on. That 
is a critical piece.
    The second is we have a somewhat perverse provision in the 
way that we can enforce that allows us to go after lenders only 
for regional or local violations based on their track records 
compared to other lenders in those areas. We cannot actually 
disqualify an entire company nationally through our current 
standards, and that is something that simply does not make any 
sense and is something that we would like to have clarified. 
There are other smaller provisions, but those are the two--the 
other thing I would just add--and I think this is particularly 
relevant for North Carolina--is that we have smaller lenders 
that today cannot originate loans under their own name unless 
they have the full ability to issue Ginnie Mae securities and 
other steps. And we have heard a lot of concerns as well in the 
Dakotas and in other areas where we have a lot of smaller 
lenders that they want that ability. That is something that we 
think makes perfect sense, and that would be included in the 
legislation as well. So I think that is an important one. It is 
not directly connected to enforcement, but it is something that 
I think you would be interested in and is an important piece.
    Senator Hagan. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. We will go to a brief second round.
    Is there a time frame within which any changes would need 
to happen? Are we losing the opportunity to improve the market 
if these changes are delayed?
    Mr. Donovan. Mr. Chairman, this is such an important piece 
of this, and this is why--I think you perhaps heard the 
President mention the importance of this issue as one of his 
top legislative priorities. He is going to be in Nevada on 
Friday and will talk specifically about the importance of 
expanding refinancing.
    There is a real urgency here because interest rates today 
are at the lowest level they have ever been for a 30-year 
mortgage. But as the economy continues to improve, I think all 
expectations are that this window of record low interest rates 
may not last a significant period of time. And, therefore, it 
is particularly urgent that we take advantage of this.
    As I said earlier, low interest rates like this are 
typically one of the most beneficial things on a macroeconomic 
level to boost the economy, and yet we are simply not seeing 
today the full benefit of these record low interest rates that 
we should be seeing. And the quickest, most effective, and I 
think the most bipartisan way that we can increase the boost to 
the economy of these record low interest rates is to quickly 
get these proposals enacted, and that is something that I think 
hopefully we can all agree on and move with real speed in 
getting these done.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Mr. Secretary, you and Senator Corker got 
into a little dialog about first liens, first mortgages, second 
mortgages, and the impact on that, dealing with FHA, dealing 
with GSEs, Fannie Mae and Freddie Mac. There have been a lot of 
proposals by the Administration to deal with that--writedowns. 
The basic property laws, you have got a first lien, which is 
the first priority; you have got a second lien, which is 
second. If the value of the first lien goes down or you pay it 
down or it is negotiated down or whatever, then it would 
logically follow that the value of the second lien would go up. 
Is that correct, generally, generally speaking?
    Mr. Donovan. Generally speaking, yes.
    Senator Shelby. Assuming the property values were there. If 
you had a $250,000 mortgage on a piece of property, first lien, 
and Fannie and Freddie or FHA, or whoever, a Government-
sponsored enterprise or Government-run, had a first mortgage 
and you had a $50,000 second mortgage, and if you by 
negotiations or something lowered the $250,000 lien to, say, 
$180,000--I will just throw that out--wouldn't it follow that 
the value, assuming the property was worth so-and-so, the value 
of the second lien would be enhanced perhaps?
    Mr. Donovan. If there is no requirement that you write it 
down or----
    Senator Shelby. What do you mean? Do you mean write down 
the second lien?
    Mr. Donovan. Yes.
    Senator Shelby. Do you know of any requirement that----
    Mr. Donovan. We have actually implemented that requirement 
in our HAMP program and in the settlement.
    Senator Shelby. Explain what you mean. You mean if you deal 
with the first mortgage, you are going to deal with the second 
at the same time?
    Mr. Donovan. Exactly.
    Senator Shelby. Otherwise, you are not going to do it, 
right?
    Mr. Donovan. Exactly. Now, here is the problem, Senator----
    Senator Shelby. So that is the----
    Mr. Donovan. This is a real issue, and, frankly, it is--I 
think we have learned our lesson that as we think about what 
the housing finance system looks like going forward, these are 
the kinds of things we have to have clear rules on, that if you 
are writing down a first, you have to write down the second 
significantly more. Those kinds of things need to be 
implemented. We have done so in the various programs that we 
have the ability to control that second lien or force that on 
the second lien. But the problem is there were no rules on this 
except when you get to foreclosure. In a foreclosure, you have 
to write off all of the second lien before you touch the first.
    Senator Shelby. Otherwise, the second goes to the first, 
right?
    Mr. Donovan. That is right. But the problem is we did not 
have rules of the road for what happens in a modification or 
particularly in a world where the second lien is current and 
you do not have the ability on the first. The good news here is 
for about half of all the underwater loans, there is no second. 
So this is only an issue for a portion of them, and where you 
only have a first lien, the issue is clear, right? But on the 
second liens----
    Senator Shelby. Well, that is the basic property law, isn't 
it?
    Mr. Donovan. It is a basic property law in foreclosure.
    Senator Shelby. Yes.
    Mr. Donovan. The problem is what we should have done is had 
rules of the road, and the investors will tell you this now. 
You know, we should not get fooled again. We should have, as 
loans are made going forward----
    Senator Shelby. At least not three times, right?
    Mr. Donovan. What is that?
    Senator Shelby. Do not get fooled three times.
    Mr. Donovan. That is right. I would prefer not to get 
fooled twice, but, yes, exactly. And I do think it is important 
that we have clearer rules of the road going forward.
    On the other hand, what I do not think we can do is throw 
up our hands and say we cannot do anything----
    Senator Shelby. I agree.
    Mr. Donovan. ----because there were not rules of the road. 
So we have tried to create them. Investors may not think they 
are perfect, and I agree, they are not perfect. And we are 
continuing to try to find ways to improve them. But we have 
made this a real priority to say--in the settlement, as an 
example, you have to write off the second lien at least as much 
as the first, and if it is seriously delinquent, you have to 
write it off 100 percent before you touch the first.
    Senator Shelby. Well, I can see the rationale of 
negotiating with a lender that has got a mortgage on a house 
that is probably precarious probably could be foreclosed, and 
renegotiating it, because they take a bath if they foreclose 
it, and they want to avoid--a lender generally--that is the law 
of banking. They are not in the housing business.
    Mr. Donovan. Right.
    Senator Shelby. They are in the money lending business, so 
I can see them doing that. A lot of our concern--and I think 
Senator Corker has enunciated this, too, up here--is we do not 
want the taxpayer to take the hit. In other words, if we could 
see that a lot of the owners of second mortgage securities 
could be--it could be a back-door bailout to them. We do not 
want to do that, and I do not think you want to do that.
    Mr. Donovan. We do not. Here is----
    Senator Shelby. You understand where I am coming from.
    Mr. Donovan. Absolutely, and I think we should work on 
provisions that we could include in the legislation that would 
focus on second liens. Here is where----
    Senator Shelby. For example, how would you do that? Tell me 
what you mean.
    Mr. Donovan. As we did in the settlement, we could require 
any servicer that was coming in to refinance a loan, they would 
have to take writedowns on the first lien to 140 LTV. We could 
also require that if they control the second, which a lot of 
them do----
    Senator Shelby. Otherwise, you do not do it.
    Mr. Donovan. They would have to write down the second as 
well. We could do something like that similar to what we did in 
the settlement. Here is the issue, though----
    Senator Shelby. But you would not want to make them do it 
if they did not want to do it, would you? Do you want to make 
it mandatory?
    Mr. Donovan. We are not proposing--this is a voluntary 
program.
    Senator Shelby. That is what I mean.
    Mr. Donovan. Absolutely. Here is the issue, though. What 
you have oftentimes is a first lien holder with a servicer and 
the second is controlled by a completely third party, and the 
question is: Even if a writedown on the first is beneficial to 
the person who holds the first, are you going to cutoff your 
nose to spite your face? Are you going to refuse to do a 
writedown because the second lien is refusing? That is the 
problem with not having these rules, that there is the ability 
of a second lien holder to basically block whether it is a 
refinancing or a principal reduction, even if that principal 
reduction is good for the first lien holder. It may be good for 
the second lien holder as well. So that is the dilemma that we 
are in in this situation by not having clear rules on what you 
do here, and so we have tried to break that by putting in place 
rules, and we could certainly do that in the case that we are 
talking about here with the universal refinancing proposal.
    Senator Shelby. I want to go back to the GSEs a minute, and 
we have talked about this, and your administration has made 
some proposals in this area. What would concern some of us up 
here on the GSE writedowns is that the GSEs would take the hit, 
ultimately the taxpayer now, since the taxpayer is holding the 
GSEs. Do you see what I am getting at there?
    Mr. Donovan. Yes. So to be clear, because any writedowns 
the GSEs would do would be done through the HAMP program, the 
requirements for the second liens to be written down would 
apply to that. In other words, any institution that was 
choosing to write down a first where they controlled the 
second, they would have to write down the second as well. So I 
think we have a way to deal with that particular issue.
    The second thing I would say, though, is there is more and 
more evidence that for deeply underwater loans, those principal 
reductions actually benefit the taxpayer, and so we think it is 
important to move forward where there is evidence that these 
are--the technical term would be ``net present value positive'' 
where they actually benefit not just the homeowner but the 
taxpayer as well because there is more likelihood to repay.
    Senator Shelby. Do you believe that this year and maybe 
next year we will have at least a million foreclosures, as some 
people predict?
    Mr. Donovan. The number of foreclosures is down 
substantially. The current expectation, last year there were 
less than a million actual foreclosures; certainly we are on 
track so far this year to be lower than that. We have seen some 
evidence of a slight increase following the servicing 
settlement in foreclosures, but not a substantial jump, and I 
think it is likely at this point that we are less than a 
million.
    Senator Shelby. Are the risk States California, Nevada, and 
Florida? I am sure you have some of it everywhere. Are those 
the----
    Mr. Donovan. We have actually seen significant improvements 
in California and Arizona, some improvement in Nevada, an 80-
percent reduction in foreclosures in Nevada, actually.
    Senator Shelby. What about Florida?
    Mr. Donovan. Florida, because it is a judicial State, we 
have not seen as much improvement because the timeline----
    Senator Shelby. Judicial meaning they go to court to do the 
foreclosure.
    Mr. Donovan. The timeline for foreclosures is much longer 
in Florida.
    Senator Shelby. OK.
    Mr. Donovan. And that has meant that it has tended to be--
the effects of these foreclosures have lasted longer. But it 
also means that more families now hopefully with the settlement 
have the ability to stay in their homes.
    Senator Shelby. I have one last question to shift over to 
the Menendez and Boxer legislation we have been talking about.
    Mr. Donovan. Yes.
    Senator Shelby. Given that a lot of the Menendez-Boxer 
proposal has been adopted or addressed through HARP 2.0, how 
many additional homeowners, if you know, Mr. Secretary, do you 
estimate would be helped by the Menendez-Boxer legislation that 
are not already being helped by HARP 2.0?
    Mr. Donovan. These kinds of predictions where you have a 
voluntary program, as we just talked about, are particularly 
hard to make, and so I am not going to give you a specific 
number. What I will tell you is a range. At the very high end, 
Christopher Mayer, who was here testifying before the 
Committee----
    Senator Shelby. I remember.
    Mr. Donovan. ----thought that it could increase refinances 
by close to 12 million. Our expectations are significantly 
lower than that. There are some who would estimate that it is 
as low as a million. We think that is probably too low. But 
somewhere in that range, I think it is fair to say millions of 
homeowners would be able to benefit through refinancing. There 
are 11 million homeowners who are what we call ``in the 
money,'' could benefit from a refinance with GSE loans that 
have not refinanced. We do not think all of them--under the 
criteria that were laid out in the bill, we do not think all of 
them will.
    Senator Shelby. How do you get them to do that? You know, 
interest rates are low, very low, historic low. You mentioned 
that earlier. The best thing anybody can do is lower a house 
payment say 5.5 to 3.7, or whatever, 3.6. Think about that. It 
would put money in their pocket every month. It would stabilize 
the housing market some. Under most loans, they can refinance 
without penalty, can't they?
    Mr. Donovan. So here are the two key things that are 
stopping them.
    Senator Shelby. OK.
    Mr. Donovan. One is they are not allowed at all to 
refinance. They may be, for example, above water on their first 
lien but have a second lien that puts them--makes it impossible 
for them to refinance.
    Senator Shelby. So it does not do any good.
    Mr. Donovan. In that case this would allow that family to 
be able to refinance.
    A second is that they may be able to refinance, but the 
costs are very high. They may need an appraisal. And what we 
are seeing in a lot of cases is that because there is 
essentially a monopoly on refinancing, whoever holds their 
current loan, whoever is the servicer, they can charge them--
and we are seeing this--very high fees. Laurie Goodman 
estimated that it was as much as $15,000 in additional costs 
that were being charged because there was not competition 
between servicers. So what we are trying to do with this 
legislation is remove those barriers to competition, and that 
will take a family who may be eligible today, but they are 
going to look at the costs and say it just does not make sense 
for me to spend as much as $15,000 extra to refinance. Or they 
may not have it, frankly.
    Senator Shelby. Give me an example. What would the $15,000 
be for?
    Mr. Donovan. So it would be not just the costs of 
refinancing--closing costs, appraisals--appraisals that, 
frankly, are not necessary given that the risk is already at 
the GSEs. And then it would be additional fees that are being 
charged by that servicer for the refinancing.
    Senator Shelby. OK.
    Mr. Donovan. And there is a range of those kinds of fees. 
We can detail them for you, but that is the issue.
    Senator Shelby. Thank you.
    Chairman Johnson. Senator Merkley, do you have any 
questions?
    Senator Merkley. Thank you, Mr. Chair. Yes, I do.
    First, I wanted to just note that your comment about the 
window of opportunity that exists right now with low interest 
rates, I just want to accentuate that. The term ``the fierce 
urgency of now'' was coming to me as you were speaking. I 
recall that many years ago, in the early 1990s, I was involved 
in a project to help--it was called Project Downpayment, and it 
was an effort to try to put together a matching downpayment 
fund to help stabilize a very low income area in Portland. And 
over the 2 years it took us to raise the funds for that 
downpayment matching grant to help renters become stabilized in 
this community, home prices went from $60,000 to over $100,000, 
and we missed the window of opportunity. And I am afraid that 
that is going to happen here, and so I really applaud your 
stressing that point.
    I want to turn back to the issue related to how to help 
homeowners who do not have GSE-guaranteed loans, and one reason 
I keep coming back to this is so many families come in to talk 
to my case work team about the challenges they are facing, and 
I feel like it is a lottery. We look up whether or not their 
loan happens to have been purchased by the GSEs, and sometimes 
it has and sometimes it has not, and the family rarely knows, 
and we would not know until we look it up in a computer data 
base. And it is like, well, hey, this is your lucky day, you 
are eligible for HARP; or, sorry, you are really stuck with no 
program. And so kind of addressing an opportunity for families 
whose loans were not purchased seems such an important part of 
this effort.
    In the proposal as outlined by the Administration--and it 
does not really have a name, but this additional FHA program. I 
do not think you have put a name on the program.
    Mr. Donovan. We have not.
    Senator Merkley. So this additional strategy for non-FHA, 
non-GSE borrowers, do you envision this in terms of refinancing 
first mortgages or first and second mortgages together in terms 
of the 140 loan-to-value and how the writedowns would occur?
    Mr. Donovan. First of all, Senator, let me just echo your 
point, which is this is not just an issue of the economic 
benefits that broader-based refinancing would have for 
families, for neighborhoods, for the economy overall, and, 
frankly, for the taxpayer through improvements to the 
performance of loans of the GSEs or FHA.
    This is about fundamental fairness, the idea that--it is 
exactly as you say. Anytime you talk to a homeowner, it is very 
rare that they would know what type of loan they have--GSE, 
FHA. And it just seems inherently unfair to the President--this 
is a point he made in the State of the Union address--that a 
family who is doing all the right things, paying their loan 
despite whatever challenges they may have, cannot benefit 
simply because they have a different kind of loan from somebody 
else. So one of the important points here to us is this issue 
of fairness that you raise.
    In terms of the question that you asked in addition to 
that--I am sorry. Can you just----
    Senator Merkley. First and second mortgage, whether it 
would cover----
    Mr. Donovan. As I was just discussing with Senator Shelby, 
that is an area where I think we would be very open to working 
with the Committee to specifically add some language to the 
legislation on that. We have done that in the other efforts 
that we have had, and I do think it is important, particularly 
where a servicer has control over a second lien and is coming 
in for a refinancing like this, that there would be a 
requirement not just that they write down the first lien to the 
140 but that there be a requirement on the second lien as well.
    Senator Merkley. Thank you, and I know that that first and 
second lien problem has bedeviled us, and certainly we are 
wrestling with it looking backwards. But we ought to fix it 
looking forward as well into the future.
    Mr. Donovan. Absolutely. I would also add, though, that it 
is not a reason to not move forward here because half of all 
the loans that are underwater do not have that second lien. And 
so there is a huge opportunity outside of the second lien 
problem to make progress here, and I think there are ways to 
deal with the second lien issue that could be productive.
    Senator Merkley. Turning to another point of this, in the 
modeling that I and my team have laid out to try to understand 
whether a fund would remain solvent or not and what the risk 
factors are, a huge issue is the percent of families that in 
the first couple years, while they are still substantially 
underwater essentially default--default strategically or 
default financially, lose their job, cannot make the payments, 
because at that point we have extended the Federal guarantee, 
and so the Federal Government is picking up those losses. It is 
offsetting them through insurance. It is offsetting them 
through a risk transfer fee or some other fund. But, still, the 
assumptions about that are critical.
    That leads to a conversation about what type of 
restrictions there are on a family in the first few years after 
the Government picks up this guarantee. Do you basically put in 
place a rule as part of the mortgage that says, first, you 
cannot basically walk away from this--and so a legal 
requirement, if you will, that is kind of almost inherent in a 
mortgage to begin with. But then normally the issue of recourse 
is determined at a State level. Some States have recourse, some 
do not, but recoursers as a fact that may reduce the number of 
folks who say, well, our circumstances have changed, we want to 
move across town to a better school district, and we are just 
going to walk away from this house and then we are going to 
rent.
    Has there been a discussion about the issue of rules 
related to recourse or whether we do anything as a Federal 
overlay on this?
    Mr. Donovan. Yes, what I would say is those are particular 
issues where we have families who may be delinquent or where 
there is significant principal reduction happening. And that 
is, I think, the right focus in those types of situations.
    To be clear, what we are talking about here is families 
who, one, are current, and they are not getting principal 
reduction through the refinancing itself. There may be a 
decision by the lender to reduce the balance to 140 loan-to-
value, but they still have a significant payment. And, again, 
these are families that are paying, that are current on their 
loans.
    So we did not see a need to go beyond that given that these 
families are responsible, have been doing the right thing and 
paying, and are not getting substantial principal reduction, at 
least below the 140 LTV, to be able to stay.
    I think it is very appropriate in those cases what you have 
proposed, which is to give them an incentive to be responsible 
on reducing their principal balance, using this interest rate--
as you know, but I think for Members of the Committee, the 
power of these low interest rates is such that anyone who is--
or just about anyone who is below 125 loan-to-value can get 
back above water within just a couple years. And so what this 
is doing, if they are choosing to use those savings, instead of 
lowering their payment, to shorten their term and be able to 
reduce principal faster, they are really giving themselves a 
light at the end of the tunnel that makes it less likely that 
they will default in future years. And so that is something I 
think you are exactly right in your legislation to encourage.
    The last thing I would just say is on the investor side, 
there is some concern that these families coming down to a low 
interest rate, are those loans going to be in place for a 
significant period of time? What investors are concerned 
about--they have been generally supportive of HARP and these 
other efforts. What they are concerned about is: Will we see a 
continuous cycle of refinancing for these? And so what we have 
been clear on--and that is the eligibility date--is that once 
you refinance to this record low level, you are not going to 
see a refinance in that loan quickly. And that is a protection 
for investors that we do think is important in HARP and that we 
certainly have been open to doing in this broader-based 
refinancing effort.
    Senator Merkley. And I absolutely take your point about 
this is for families being current. The fact is many of the 
families bought these homes in, say, 2006, 2007, before the 
bubble was at its height, or even earlier, but the crash has 
taken them below where they started. They have been making 
payments from, you know, 4 to 10 years or sometimes a little 
longer.
    Mr. Donovan. Yes.
    Senator Merkley. And yet they are still underwater, and so 
they have shouldered this through the deepest point of this 
recession, and because of that they have good credit. And so 
walking away does have a cost in terms of impairing their 
credit, and this has led to this conversation that I have had 
with a number of housing experts and financial analysts about 
the assumptions about how many folks would default per year in 
that situation, and there is widely ranging variations on that. 
And since it is a key risk in those first couple years, that is 
why I am trying to get my hands around that as we wrestle with 
the exposure of the U.S. Government. But this issue over 
recourse was one of the ideas that had been raised.
    Thank you very much again for your testimony. I join you in 
considering this as something we should be working on day and 
night until we can put it in place for the families and for our 
economy.
    Mr. Donovan. Thank you.
    Chairman Johnson. I would like to thank Secretary Donovan 
for sharing his perspective with us today. This Committee will 
continue to explore ways to improve the housing market 
immediately and then in the long term. This will require a 
multifaceted approach, and I look forward to working with my 
colleagues to continue that effort.
    With that, this hearing is adjourned.
    Mr. Donovan. Thank you.
    [Whereupon, at 11:37 a.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
    Our housing market faces dual problems--the continued lag in the 
housing recovery which is creating impediments to fixing the second 
problem--the need for large-scale, long-term housing finance reform. 
While the Committee continues to be concerned about the long-term 
structure of the housing finance system, today's hearing takes a closer 
look at one of the strategies to improve the struggling housing market.
    During our hearings on the state of the housing market, several 
witnesses, including Secretary Donovan, discussed the need to expand 
refinancing opportunities for borrowers who were paying their mortgage. 
I would like to thank the Secretary for coming back to discuss this 
topic in greater detail.
    In January, the Federal Reserve released a white paper entitled 
``The U.S. Housing Market: Current Conditions and Policy 
Considerations.'' In this paper, the Fed stated that ``continued 
weakness in the housing market poses a significant barrier to a more 
vigorous economic recovery.'' One of the barriers identified in the 
white paper includes obstacles to refinancing at today's low interest 
rates.
    The Administration's Housing Plan also identifies removing barriers 
and expanding refinancing opportunities as part of the solution. While 
FHFA made some changes to the HARP program last year at the urging of 
Members of Congress and the Administration, I continue to hear from 
constituents and the housing industry that more could be done to 
encourage competition in the refinancing market and give homeowners 
more options.
    During a hearing in the Housing and Transportation Subcommittee 2 
weeks ago, Senator Menendez outlined legislation he and Senator Boxer 
are working on to expand refinancing opportunities for borrowers with 
GSE held loans. I look forward to a further discussion of that 
legislation and any other proposals today.
    As I stated during our state of the housing market hearings on this 
topic, I share the concern that ongoing challenges in the housing 
market are acting as a drag on economic recovery. As we have heard many 
times in this Committee, there isn't a silver bullet solution that will 
save the housing market, but several options implemented together could 
provide stability to the market. I hope that this Committee can work in 
a bipartisan fashion to find practical solutions to help overcome the 
barriers that are weighing down our housing recovery.
                                 ______
                                 
                  PREPARED STATEMENT OF SHAUN DONOVAN
         Secretary, Department of Housing and Urban Development
                              May 8, 2012
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for this opportunity to testify about the 
Administration's initiatives to help American homeowners refinance 
their mortgages and rebuild equity in their homes.
    As this Committee knows, in the 3 months prior to President Obama 
taking office America's economy was shedding 761,000 jobs per month. 
Housing prices had fallen for 30 straight months. And foreclosures were 
surging to record levels month after month. This hearing comes at what 
the President has called ``a make or break moment for the middle 
class''--but also one in which our housing market appears to be turn a 
corner following the best winter of home sales since the crisis began.
    Today, because the Obama administration moved to keep interest 
rates low and took aggressive steps to stabilize the housing market, 
more than 14 million homeowners have refinanced their mortgages since 
April 2009--putting nearly $27 billion a year in real savings into the 
hands of American families and into our economy. Today, because we 
worked with lenders to develop a range of options for families 
struggling to hold onto their homes, more than 5.8 million loan 
modifications have been started in the last 3 years and foreclosure 
notices are down 50 percent since early 2009. Because we helped 
communities struggling with concentrations of foreclosures, three-
quarters of those in which we've made targeted investments have seen 
vacancy rates go down--and two-thirds have seen home prices go up. Most 
important of all, our economy has added private sector jobs for 26 
straight months, totaling 4.2 million jobs.
    Mr. Chairman, this represents important progress. But to create the 
economy built to last as the President described in his State of the 
Union address, we need to do more. Indeed, as the President laid out in 
that speech, and as I discussed with this Committee in February, one of 
the challenges that prevents our housing market--and our economy--from 
fully recovering is that a range of barriers in the market is 
preventing struggling borrowers from getting economic relief that they 
and the economy need at this pivotal moment. It is time to finally 
remove those barriers so that we can turn the corner to recovery.
    Millions of responsible homeowners, who have done the right thing 
paying their mortgages through these tough economic times, can't 
benefit from today's low interest rates because they face substantial 
obstacles to refinancing. For instance, homeowners with good credit and 
clean payment histories are rejected because home values in their 
neighborhood have plummeted and their mortgages are underwater.
    For instance, consider Judy in Tucson, Arizona. Judy and her 
husband purchased their home in 2007 through one of the largest banks 
which continues to service their loan. However, because they now face 
the burden of a 7.0 percent interest rate on a mortgage increasingly 
underwater, they can't refinance and lower their monthly payment 
through today's low rates. That is not because Judy is delinquent. In 
fact, Judy has never been late on a mortgage payment. It is simply 
because her servicer sold her loan to a securitization trust--something 
she and her husband had nothing to do with and they never thought would 
preclude them from refinancing. And even though they've been customers 
of the bank for almost 40 years, that bank is unwilling to assume the 
risk of such a high loan-to-value (HLTV) mortgage.
    If Judy had a loan insured by the FHA or guaranteed by Fannie Mae 
and Freddie Mac (GSEs), she would likely have some relief. This is 
because recent changes, announced by President Obama, to the Federal 
Housing Administration (FHA) and the GSEs have increased the 
opportunities for borrowers with underwater mortgages to refinance. 
These changes include the development of Streamline Refinance at FHA 
and HARP 2.0, which improve upon the original HARP established in 2009 
but they are only available with those who have FHA or GSE loans 
Additional refinancing help is also being provided through the historic 
Federal-State Attorney General Servicer Settlement announced earlier 
this year which will provide $3 billion in refinance assistance for 
borrowers with underwater mortgages currently held on the balance 
sheets of the largest five banks. However, that still leaves millions 
of borrowers whose mortgages are held in securitization trusts or on 
the balance sheet of banks not subject to the settlement.
    While we have made substantial progress and the Administration has 
taken action administratively to make millions of Americans eligible 
for lower interest rates, more needs to be done. But these additional 
steps require Congress to take action. With mortgage interest rates at 
their lowest in 50 years, refinancing can provide substantial benefits 
to millions of homeowners. We must do more so that every current 
borrower--no matter where their loan is located--has the opportunity to 
refinance. As economist Mark Zandi said, ``There is no better way to 
quickly buoy hard-pressed homeowners than helping them take advantage 
of the currently record low fixed mortgage rates and significantly 
reduce their monthly mortgage payments.''
    That is why the President is calling on Congress to open up 
opportunities for refinancing to responsible borrowers who are current 
on their payments. These proposals will help ``Judy'' and the millions 
of Americans like her who not only have done the right thing, but also 
refuse to consider going delinquent on their obligations in hopes of 
obtaining relief.
Providing Non-FHA and Non-GSE Borrowers Access to Simple, Low-Cost 
        Refinancing
    Under the President's broad-based refinance proposal, borrowers 
with standard non-FHA and non-GSE loans would have access to 
refinancing through a new program operated by the FHA. The refinancing 
program would be open to all borrowers who are current on their 
mortgage payments and have standard, nonjumbo loans that are not 
currently insured by FHA or the GSEs.
    The program will feature simple and straightforward eligibility 
criteria.

    They are current on their mortgage. Borrowers will need to 
        have been current on their loan for the past 6 months and have 
        missed no more than one payment in the 6 months prior.

    They meet a minimum credit score. Borrowers must have a 
        current FICO score of 580 to be eligible. Approximately 9 in 10 
        borrowers have a credit score adequate to meet that 
        requirement.

    They have a loan that is no larger than the current FHA 
        conforming loan limits in their area. Currently, FHA limits 
        vary geographically with the median area home price--set at 
        $271,050 in lowest cost areas and as high as $729,750 in the 
        highest cost areas.

    The loan they are refinancing is for a single family, 
        owner-occupied principal residence. This will ensure that the 
        program is focused on responsible homeowners trying to stay in 
        their homes.

    Borrowers will apply through a streamlined process designed to make 
it simpler and less expensive for borrowers and lenders to complete the 
refinance transaction. Borrowers will not be required to submit a new 
appraisal or tax return. To determine a borrower's eligibility, a 
lender need only confirm that the borrower is employed and meets the 
eligibility criteria outlined above. Those who are not employed may 
still be eligible if they meet the other requirements and present 
limited credit risk. However, a lender will need to perform a full 
underwriting of these borrowers to determine whether they are a good 
fit for the program.
    In addition, the proposal includes parameters to reduce program 
cost, including the following, risk mitigating measures:

    Establishing loan-to-value limits for these loans. The 
        proposal would restrict refinancing to loans up to a loan to 
        value (LTV) ratio of 140. Lenders interested in refinancing 
        deeply underwater loans would therefore need to write down the 
        balance of these loans before they would qualify. This would 
        reduce the risk associated with the program and relieve the 
        strain of negative equity on the borrower.

    Creating a separate insurance fund for new streamlined 
        refinancing program. This will help the FHA better track and 
        manage the risk involved and ensure that it has no effect on 
        existing Mutual Mortgage Insurance Fund (MMIF).

    The cost will be driven in part by additional design choices and we 
are cognizant that we must ensure that FHA has adequate capacity to 
implement this program effectively. We are interested in working with 
Congress to design appropriate limits that meet the objectives of the 
program, including walling off any risk from the MMI fund and 
containing costs to a level that will not increase the deficit or 
impose additional costs on taxpayers.
    There may be questions about this program significantly expanding 
the FHA's balance sheet, and potentially increasing the credit risk 
held by the Government, and moving in the opposite direction of the 
Administration's stated interest in stepping back from the housing 
market. To those concerns, I would like to reiterate that the program 
will be limited to those homeowners who have been making their payments 
on time for the better part of a year and in most cases considerably 
longer. These are responsible borrowers who have a demonstrated ability 
and willingness to pay and thus represent relatively low credit risk. 
Second, the program is designed to limit and contain any incremental 
credit risk to the FHA. Third, it is important that we work with 
Congress to offset the costs associated with this program, minimizing 
the incremental risk that these borrowers represent to taxpayers or the 
health of the FHA. Finally, while the Administration believes that over 
time the Government's footprint in the Nation's housing market must 
decrease, it is imperative at this time that we do what is necessary to 
ensure the continued recovery of the housing sector and broader 
economy. If we fail to take the steps necessary to speed the recovery, 
then the FHA's scaling back will take considerably longer, as private 
capital continues to wait on the sideline for a healthier market.
Steps Taken To Strengthen FHA
    I also understand that there is some concern over whether FHA has 
the capacity to implement this program given the current state of the 
Mutual Mortgage Insurance Fund (MMIF). To be clear, stresses on the 
MMIF are a result of legacy books of business originated before mid-
2009, not the books of business taken on today. In fact HUD moved 
expeditiously to limit risk going forward and strengthen the FHA's 
performance. Immediately upon taking office, this Administration acted 
quickly and aggressively to protect FHA's MMI Fund and to ensure its 
long term viability. We have taken more steps since January 2009 to 
eliminate unnecessary credit risk and assure strong premium revenue 
flows in the future than any Administration in FHA history. These 
actions coupled with the strength of FHA's recent books of business 
have significantly improved FHA's long-term outlook. FHA's improved 
trajectory is the result of a three-part strategy: systematic 
tightening of risk controls, increased premiums to stabilize near-term 
finances and expanded usage of loss mitigation workout assistance to 
avoid unnecessary claims.
    Because we are very aware that stresses on the MMI Fund remain, we 
have also followed these efforts with significant additional steps to 
strengthen the Fund. In the 2013 Budget we announced a 10 bps annual 
premium increase on all FHA insured loans in accordance with 
legislation passed by Congress late last year, as well as an additional 
25 bps annual premium increase on jumbo loans making the total increase 
for these larger loans 35 bps. And recently, we announced a series of 
premium changes that will further increase receipts to FHA by $1.48 
billion in fiscal years 2012 and 2013, beyond the receipts already 
included in the President's budget submission. We have also taken 
significant additional steps to increase accountability for FHA 
lenders. We recently published a final rule that clarifies the bases 
upon which FHA will require indemnification from lenders participating 
in our Lender Insurance program, making clear the rules of the road for 
lenders and giving FHA a solid basis upon which to require 
indemnification by lenders for violations of FHA guidelines.
    In addition, we continue to seek expanded authority from Congress 
to further enable us to protect the MMIF from unnecessary and 
inappropriate losses associated with lenders who violate our 
requirements. The House is currently considering a bill that includes 
some provisions sought by FHA, and we look forward to working with this 
Committee on legislation to help manage the risk to FHA's portfolio 
arising from noncompliance on the part of FHA-approved lenders.
    And as we have discussed, we have held lenders accountable for 
violating our rules and putting our fund at greater risk in the 
recently announcement settlement with America's largest lenders. 
Through these settlements, FHA will receive approximately $900 million 
in compensation for losses associated with loans originated outside of 
FHA requirements, or for which FHA's servicing requirements were 
violated.
Opening Up Access Through FHA While Maintaining Careful Risk Management
    FHA has made great strides in reducing barriers to low cost 
refinancing through its FHA Streamline Refinance program. The 
Streamline Refinance program allows borrowers with loans insured by the 
FHA who are current on their mortgage to refinance into a new FHA-
insured loan at today's low interest rates without requiring additional 
underwriting, allowing these borrowers to reduce their mortgage 
payments. This program benefits current FHA borrowers--particularly 
those whose loan value may exceed the current value of their home--and 
by lowering a borrower's payment, also reduces risk to FHA. As part of 
our efforts to help responsible homeowners who are current on their 
mortgages and because we see potential for more widespread use of this 
product, FHA will also make changes to the way in which streamline 
refinance loans are displayed in the Neighborhood Watch Early Warning 
System (Neighborhood Watch). By reducing lender concern about the 
potential impact associated with taking responsibility for loans they 
have not underwritten, lenders will be more willing to offer these 
loans to borrowers who are current on mortgages already insured by FHA.
    In addition to making these refinance loans more widely available, 
FHA has reduced the upfront mortgage insurance premium (MIP) to 0.01 
percent and the annual MIP to 0.55 percent for all Streamline Refinance 
transactions that are refinancing FHA loans endorsed on or before May 
31, 2009. This change will ensure that borrowers benefit from a net 
reduction in their overall mortgage payment and reduce the risk to FHA.
    FHA has a long track record of enabling millions of American 
families to purchase or refinance their homes, and coupled with its 
improved risk management system, is well positioned to provide 
refinancing to responsible non-FHA and non-GSE borrowers. We see this 
program as part of a broader effort to return the housing market to 
health, and along with the proposal described below, will speed the 
recovery of the market, benefiting homeowners and investors alike.
Fully Streamlining Refinancing for GSE-Insured Loans
Progress and Challenges of HARP
    In his address before Congress last September, President Obama 
charged HUD and Treasury to work with the Federal Housing Finance 
Agency (FHFA) to lower barriers to refinancing. Following weeks of 
intensive discussions with lenders, mortgage insurers, regulators and 
investors, FHFA announced changes to help borrowers whose loans were 
purchased or guaranteed by Fannie Mae or Freddie Mac and who are 
located in areas suffering from house price declines. These changes 
have become known as HARP 2.0.
    With HARP previously limiting refinancing to borrowers with high 
loan-to-value ratios of up to 125 percent and responsible for less than 
a million refinances, the need to pick up the pace was clear. Announced 
in October 2011, HARP 2.0 works to eliminate the LTV ceiling, reduce 
certain risk-based loan-level g-fees, also referred to as loan level 
pricing adjustments, or LLPAs, extend the program's end date by 1\1/2\ 
years to December 2013, streamline Automated Valuation Model (AVM) 
coverage and forego appraisal requirement when AVM is available, and 
provide additional representations and warranties relief.
    Eliminating the LTV cap allows borrowers who have been responsible 
in paying their underwater mortgages the opportunity to take advantage 
of unprecedented mortgage interest rates. The extension of the program 
for 2 years will allow lenders to hire staff and upgrade systems to 
assure all eligible borrowers will have the opportunity to take 
advantage of the HARP program. It will minimize the amount of funds 
borrowers would be required to obtain for a refinance because the GSEs 
reduce the fees that borrowers have to pay on 30-year fixed rate loans 
with an LTV over 80 percent from 2 percent to .75 percent of the loan 
amount. And by ensuring that the GSEs do not require the HARP 
originator to take responsibility for the quality of the loan that is 
being refinanced, it will allow lenders to only be concerned about 
making the new HARP loan terms as advantageous as possible for the 
borrower.
    We understand that most lenders have had their HARP 2.0 operations 
fully up and running since the end of March. These changes have met 
with a very positive response from homeowners, particularly in deeply 
underwater states where so many families have been locked out of the 
refinance market for years. Already, servicers report that they are 
processing applications from nearly a half-million families who stand 
to save on average $2,500 per year--the equivalent of a pretty good-
sized tax cut--speeding our efforts to help responsible families stay 
in their homes and start to rebuild the wealth they lost in the 
economic crisis.
Further Action Is Necessary To Increase Scope and Improve Efficiencies
    Significant changes have been made to HARP to improve access, but 
additional changes can be made to increase participation and improve 
its effectiveness, as detailed in the bill proposed by Senator Menendez 
and Senator Boxer. Namely, significant uptake could be achieved by 
evaluating automated valuation models as approval alternatives to 
appraisals, removing operational barriers that preclude or hinder 
cross-servicer refinances, and extending the current program to those 
borrowers with LTVs under 80 percent. More specifically, the bill 
would:

    Extending streamlined refinancing for all GSE borrowers: 
        The President's plan would extend these steps to streamline 
        refinancing for homeowners to all GSE borrowers. Those who have 
        significant equity in their home--and thus present less credit 
        risk--should benefit fully from all streamlining, including 
        lower fees and fewer barriers. This will allow more borrowers 
        to take advantage of a program that provides streamlined, low-
        cost access to today's low interest rates--and make it easier 
        and more automatic for servicers to market and promote this 
        program for all GSE borrowers. Specifically, this would 
        eliminate the restriction on borrowers who have loans with an 
        LTV of less than 80 percent LTV, applying the HARP changes to 
        GSE borrowers irrespective of their loan to value ratio.

    Increasing competition so borrowers get the best possible 
        deal: Today, lenders looking to compete with the current 
        servicer of a borrower's loan for that borrower's refinancing 
        business continue to face barriers to participating in HARP. 
        This lack of competition means higher prices and less favorable 
        terms for the borrower. The President's legislative plan would 
        direct the GSEs to require the same streamlined underwriting 
        for new servicers as they do for current servicers, leveling 
        the playing field and unlocking competition between banks for 
        borrowers' business. Specifically, this would eliminate the 
        requirement of any lender to assume representations and 
        warranties that are not required of same servicers. 
        Additionally, the GSEs could not charge any loan level pricing 
        adjustments (LLPAs), post-settlement delivery fees, adverse 
        delivery charges or other similar up-front fees.

    Eliminating appraisal costs for all borrowers: Borrowers 
        who happen to live in communities without a significant number 
        of recent home sales often have to get a manual appraisal to 
        determine whether they are eligible for refinancing into a GSE 
        guaranteed loan, even under the HARP program. Under the 
        Administration's proposal, the GSEs would be directed to use 
        mark-to-market accounting or other alternatives to manual 
        appraisals for any loans for which the loan-to-value cannot be 
        determined with the GSE's Automated Valuation Model. This will 
        eliminate a significant barrier that will reduce cost and time 
        for borrowers and lenders alike.
Allowing Borrowers To Rebuild Equity Expeditiously
    All underwater borrowers who decide to participate in either HARP 
or the refinancing program through the FHA outlined above will have a 
choice: they can take the benefit of the reduced interest rate in the 
form of lower monthly payments, or they can apply that savings to 
rebuild equity in their homes. The latter course, when combined with a 
shorter loan term of 20 years, will give the majority of underwater 
borrowers the chance to get back above water within 5 years, or less.
    To encourage borrowers to rebuild equity in their homes, we 
recommend that the legislation provide funding for the closing costs of 
borrowers who choose this option--a value averaging about $3,000--to be 
paid for on behalf of the borrower by either the FHA or GSEs. To be 
eligible, a participant in this option must agree to refinance into a 
loan with a term of no more than 20 years and with monthly payments 
roughly equal to those they make under their current loan. For those 
who agree to these terms, their lender will receive payment for all 
closing costs directly from the FHA or GSE, depending on the entity 
involved.
    For example, a borrower has a 6.5 percent $214,000 30-year mortgage 
originated in 2006. It now has an outstanding balance of $200,000, but 
the house is worth $160,000 (a loan-to-value ratio of 125). The monthly 
payment on this mortgage is $1,350. While this borrower is responsibly 
paying her monthly mortgage, she is locked out of refinancing. By 
refinancing into a 4.25 percent 30-year mortgage loan, this borrower 
will reduce her monthly payment by $370. However, after 5 years her 
mortgage balance will remain at $182,000. Under the rebuilding equity 
program, the borrower would refinance into a 20-year mortgage at 3.75 
percent and commit her monthly savings to paying down principal. After 
5 years, her mortgage balance would decline to $152,000, bringing the 
borrower above water.
    This program would provide a path out from an underwater position 
over a reasonable period of time to borrowers who qualify for either of 
the two programs set forth above rather than only those who are 
particularly distressed or for whom principal reduction is clearly NPV 
positive. We are focused on the broader group not only because of its 
importance to the continuing recovery of the housing markets, but 
because we frankly do not believe that only those who are distressed in 
their mortgages should have an opportunity to work their way above 
water.
Strengthening Communities Through NSP and Project Rebuild
    At the same time we provide relief to responsible homeowners and 
keep families in their homes, we also need to address the overhang of 
foreclosed properties that continue to drag down home prices. While the 
legislative proposals described above seek to reduce barriers to 
refinancing and afford homeowners the opportunity to save thousands of 
dollars per year, we cannot simply stabilize neighborhoods by 
refinancing one mortgage at a time. Aside from addressing challenges 
associated with concentrated foreclosures, the Neighborhood 
Stabilization Program (NSP) has played an important role in halting the 
slide in home values in neighborhoods, and as a result helped preserve 
homeowner's equity.
    NSP has helped improved sale prices and vacancy rates in areas with 
concentrated investments. Indeed, according to HUD data, three-quarters 
of neighborhoods that received targeted investments through the first 
two rounds of NSP showed increased home prices--largely as a result of 
improved vacancy rates. And, furthermore, the $7 billion that has been 
allocated under the three phases of NSP will support nearly 90,000 jobs 
by the time the funding is fully spent.
    This success is why President Obama has proposed Project Rebuild to 
further stabilize neighborhoods and communities, an initiative that 
would create 200,000 jobs in the places that need them most. I am 
pleased that Senator Reed has introduced legislation to establish this 
program, and I urge Congress to move forward on the bill.
    Nearly two-thirds of the $15 billion Project Rebuild funding will 
be provided to States and local governments by formula as specified in 
the American Jobs Act. Project Rebuild proposes important modifications 
to the NSP model to extend the benefits of the program beyond 
affordable housing, enabling greater job creation, and a broader 
positive impact on neighborhoods.
    Recognizing that it's not just abandoned homes that can drag down 
an entire neighborhood, but also vacant commercial properties, Project 
Rebuild broadens eligible uses to allow commercial projects and other 
direct job creating activities, capped at 30 percent of funds. Up to 10 
percent of formula grants may be used for establishing and operating 
jobs programs to maintain eligible neighborhood properties. Formula 
funding will go directly to States and entitlement communities across 
the country. Competitive funds will be available to States, local 
governments, for-profit entities, nonprofit entities, and consortia of 
these entities.
    Each State will receive a minimum of $20 million of the $10 billion 
in formula funds. Funds will be targeted to areas with home 
foreclosures, homes in default or delinquency, and other factors, such 
as unemployment, commercial foreclosures, and other economic 
conditions. Project Rebuild also will expand the ability of the private 
sector to participate with localities--ensuring there is the expertise 
and capacity to bring these neighborhoods back in a targeted way.
A Make or Break Moment for the Middle Class
    Mr. Chairman, we have made significant progress in recent months to 
get our housing market back on track. With the changes made to date to 
existing refinance programs, we have helped tens of thousands of 
additional families refinance. We have not only helped them save on 
their monthly payments, we've also set the foundation for the provision 
of fair and equitable treatment by servicers of many of these new and 
existing loans with the servicing settlement--establishing critical 
consumer protections that hold powerful institutions that service 
nearly 2 out of every 3 mortgages accountable for their actions. 
Through the settlement and subsequent efforts, these institutions are 
being required to take action to address problems uncovered during our 
investigations and help our housing market recover, giving every 
homeowner the dignity, respect, and fair treatment they deserve.
    In spite of all this progress, we aren't done. As President Obama 
said in his State of the Union, this is ``a make or break moment for 
the middle class and those trying to reach it'' and the defining issue 
of our time is how to build a Nation where everyone gets a fair shot, 
everyone does their fair share, and everyone plays by the same rules.
    Mr. Chairman, the millions of families who will benefit from these 
proposals are playing by the rules. They're doing more than their fair 
share. They haven't walked away from their obligations--and we can't 
walk away from ours.
    And that starts with making sure every responsible family in 
America has the opportunity to refinance in an open and competitive 
market. Achieving success on this front will be a significant step in 
the direction of a balanced national housing policy that ensures 
Americans have access to credit for those in a position for sustainable 
home ownership, assistance for those who feel the strain of high 
housing costs, rental options near good schools and good jobs, and 
above all, choices in housing that make sense for Americans and their 
families. I look forward to working with Congress to make it possible. 
Thank you.
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