[Senate Hearing 111-54]
[From the U.S. Government Publishing Office]
S. Hrg. 111-54
AN EXAMINATION OF THE HOMEOWNER AFFORDABILITY AND STABILITY PLAN
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
AN EXAMINATION OF THE ADMINISTRATION'S HOMEOWNER AFFORDABILITY AND
STABILITY PLAN AND HOW IT ADDRESSES THE ROOT CAUSE OF OUR ECONOMIC
PROBLEMS
__________
FEBRUARY 26, 2009
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee
SHERROD BROWN, Ohio JIM DeMINT, South Carolina
JON TESTER, Montana DAVID VITTER, Louisiana
HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Colin McGinnis, Acting Staff Director
William D. Duhnke, Republican Staff Director
Amy Friend, Chief Counsel
Jonathan Miller, Professional Staff Member
Lisa Frumin, Legislative Assistant
Drew Colbert, Legislative Assistant
Jim Johnson, Republican Counsel
Mark Calabria, Republican Professional Staff Member
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
?
C O N T E N T S
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THURSDAY, FEBRUARY 26, 2009
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 4
Senator Martinez............................................. 7
Senator Brown................................................ 9
Senator Reed................................................. 10
WITNESS
Shaun Donovan, Secretary, Department of Housing and Urban
Development.................................................... 11
Prepared statement........................................... 48
Response to written questions of:
Senator Kohl............................................. 57
(iii)
AN EXAMINATION OF THE HOMEOWNER AFFORDABILITY AND STABILITY PLAN
----------
THURSDAY, FEBRUARY 26, 2009
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:11 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Christopher J. Dodd (Chairman
of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order, and let me
welcome our witness and congratulate you again, Secretary
Donovan, for your confirmation and for your willingness to do
this. Senator Schumer and others have raved about you and the
tremendous work you have done in New York, and a lot of other
folks I know have talked glowingly about your ability to get
things done in that city on housing issues, and we are very
excited about your stewardship.
We are fortunate to have on our Committee, of course, Mel
Martinez who knows exactly what it is like to sit in that
chair, having run that agency himself, and he has brought a
wealth of knowledge and understanding of these issues to our
Committee over the years he has served with us. So we are
particularly delighted to have you.
What I am going to do is make some quick opening comments
myself, Senator Shelby, and then ask my colleagues for any
opening comments they would like to make as well. You are our
only witness today. We do not have a second panel. And so when
I can, I like to let members have a chance to express
themselves, and I know this is particularly appealing to
Senator Warner and Senator Bennet, I assume as well to Senator
Hutchison and others who are at sort of the end of the line. So
this way they get a chance to be heard a little bit before we
actually get down to the question-and-answer period.
Senator Shelby will certainly appreciate this, Senator
Martinez, Senator Reed, Senator Menendez. This is--and I hate
to use a Yankee expression from a Yankee, Yogi Berra, but it is
``deja-vu all over again,'' in a sense. It was about this time
2 years ago that we had the beginning of a long series of
hearings on foreclosures. Senator Shelby will tell you. I do
not know how many times we met and talked and gathered with
people to try and get people to move to workouts, to get
something done on this problem. This was early 2007. And I
think back on it now, and maybe we did not push hard enough. I
cannot imagine how much harder you could have pushed. And
nothing happened. Nothing happened. And we are in large part
where we are today because of that--not that that was the only
reason. Obviously, this problem began long before 2007. But had
we and had the administration, the previous administration--and
I say this respectfully--moved on that issue at a time, we
could have mitigated this problem substantially.
As long as I live, I will remember Bob Menendez's comments
that day, our first hearing. I think you were the first person
to call it a ``tsunami of foreclosures'' that would happen.
Today you hear that expression over and over again because we
are in the middle of it. But in 2007, in January and February,
you were considered being hyperbolic if you used language like
that. You were an alarmist. It was just politics to talk like
that. And, of course, we have now learned painfully that, in
fact, if they were guilty of anything when they used those
words, it is that they were underestimating the problem when we
gathered here to talk about it.
So I will share some opening comments and thoughts and then
turn to my colleagues, and then obviously, Secretary Donovan,
we are very anxious and, I must say, enthused a bit about what
we have heard over the last few days in a new administration
and a willingness to make some--and the President's comments on
the subject matter.
Today the Committee is going to meet to discuss, obviously,
the administration's Homeowner Affordability and Stability Plan
outlined 2 weeks ago to address the root cause of our economic
crisis: the foreclosure crisis. This plan represents in my view
a sharp change in direction from the previous administration's
approach. It draws upon funds expressly authorized by this
Committee to prevent foreclosures in the Troubled Asset Relief
Program, which was created as part of the Emergency Economic
Stabilization Act that was passed in October. And it could not
come at a more critical time. At the end of the day today,
another 10,000 families in our country will have received a
foreclosure notice.
In my State of Connecticut--and I know my colleagues, each
of them here, some more dramatically than others, can point to
their own statistics and numbers. But we can see in my State,
the small State of Connecticut, nearly 60,000 foreclosures in
the next 4 years. In all across our Nation, as many as 8
million families could lose their homes.
Over the course of some 80 hearings and meetings in the
110th Congress, this Committee has asked a very simple
question, the same question that we get asked every time we go
back to our respective States: How in the world could this have
been allowed to happen?
Certainly, as this Committee has uncovered, the problem's
origins lie in the scourge of the unchecked, abusive predatory
lending practices. A little over 2 years ago, on February 7,
2007, this Committee heard from Delores King, who sat right at
this table--that is exactly where she was sitting, right there
to your right. She had owned her home in Chicago for 36 years
and was in danger of losing it due to an exotic mortgage she
was duped into signing by a telemarketing mortgage broker.
That day we also heard from a North Carolinian, Amy Womble,
whose broker intentionally misrepresented her income in order
to secure a loan that she could not afford. A mother with two
children, she wanted to pay off the debts left by her husband
after his untimely death. She was trying to act responsibly,
and she ended up facing foreclosure.
Last year, we met Donna Pearce, a grandmother from
Bridgeport, Connecticut, where there are now 5,000 families
with subprime mortgages in danger of foreclosure. Donna was
offered assurances by her lender that she would be able to
refinance in 6 months, but he failed to mention the thousands
of dollars in penalties that refinancing would cost her in the
process.
Mr. Secretary, I defy anyone to suggest that these cases
were somehow the exception, that these were aberrational. The
vast majority of people losing their homes today are decent,
hard-working, good Americans--grandparents on fixed incomes,
working families who have lost a job or faced a health care
crisis, many of whom were taken advantage of.
To suggest, as one or several commentators have, that this
problem was created, and I quote, by ``deadbeats with an extra
bathroom'' is not only insulting and infuriating, but to the
families who are suffering right now, it is tremendously
damaging. It effectively lets unscrupulous brokers, lenders,
credit rating agencies, and investment banks off the hook. It
ignores the toll that these foreclosures are taking on home
values, an 18-percent drop nationally, and far more severe in
certain areas of the country. And it makes our task up here,
getting credit flowing again to families and businesses, that
much more difficult.
As one mortgage lender told this Committee, this crisis was
the consequence of ``mortgage malpractice''--his words when he
appeared before this Committee. We do not blame the patient
when a doctor fails to tell them they might not survive the
surgery. Why should we blame the homeowners in many ways?
So, Mr. Secretary, I appreciate the speed with which the
administration has acted to address this issue. The plan, as I
think most of us know, has three crucial elements:
First, it offers 4 to 5 million homeowners who are current
on their loans the opportunity to refinance into lower rates.
This feature will open up the mortgage market to homeowners who
have been locked out and unable to take advantage of the new
lower mortgage rates currently available because their home
values have dropped. This provision is aimed squarely at
working and middle-class families.
Second, the plan finally creates a program to modify the
loans touched by troubled borrowers. This will help 3 to 4
million families keep their homes and finally start to put a
bottom on the housing market.
And, finally, the plan calls for bankruptcy reform,
allowing bankruptcy judges to lower mortgages on first homes,
subject to carefully crafted repayment plans. Clearly, the
industry and the previous administration were late, as I have
said over and over again, in acknowledging the problem and very
timid in their responses. With this plan that I have just
mentioned, and ones we will talk about this morning, issued
only a few weeks after taking office, the contrast could not be
sharper.
Over and over, as we have begun to grapple with the
mountain of problems facing our country from skyrocketing
health care costs to energy, you have heard members on both
sides of the aisle say the same thing over and over and over
again: ``We need to fix housing first.'' And I could not agree
more. And that is not just the Chairman of the Banking
Committee talking. That is also the Republican Leader from
Kentucky, Senator Mitch McConnell; that is our colleague
Senator Kyl of Arizona; Senator Enzi of Wyoming; Senator Ensign
of Nevada; Senator Coburn of Oklahoma. All of these individuals
have said the same thing: ``Fix housing first.'' So you are not
talking about some great political divide up here when it comes
to this issue. We may debate about which nuanced approach works
better than the other, but we are all ears and want to help in
getting to the bottom of this.
And so John McCain and Barack Obama, again, during the
Presidential campaign echoed the same theme: ``Fix housing
first.'' It is a bipartisan notion, as bipartisan a notion as I
can say than anything I have heard in the Congress in the last
number of years.
So, with that, let me turn to Senator Shelby, and then my
colleagues, and then we will get to your comments and responses
to questions. We thank you again for being with us. Senator
Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Senator Dodd.
A little more than a week ago, President Obama proposed his
Homeowner Affordability and Stability Plan. The proposal aims
to stabilize our crumbling housing market and help struggling
homeowners. Unfortunately, I believe the proposal is long on
good intentions and short on providing a credible solution for
our ailing housing market.
For example, the proposed Fannie Mae and Freddie Mac
refinance program appears to focus its efforts on those
households least in need of assistance. The program would be
open to households that are neither behind on their mortgages
nor struggling to make their payments. Consequentially, the
program would waste, I believe, resources on lowering the
interest rate for borrowers who presently can and are paying
their mortgages.
Mr. Secretary, I believe our immediate attention should be
to help those most in need who can be helped and are willing to
help themselves.
One part of the President's proposal, the Homeownership
Stability Initiative, is supposed to help the most troubled
homeowners. I believe, however, that it does so at considerable
cost to the taxpayer and mainly serves as a further bailout to
the very banks that helped us get into our current condition.
The initiative, for example, will pay servicers $1,000 for each
mortgage they modify and servicers and mortgage holders $500
and $1,500, respectively, if they modify a loan before a
borrower falls behind. Mortgage holders would also get partial
insurance to cover losses on a modified mortgage if housing
prices decline further. Adding up all these payments, lenders
could receive at least $4,000 per loan modification. This would
be equal to about almost 5 months of principal and interest on
the typical mortgage.
All of this, of course, would be paid for by the taxpayer.
The proposal would potentially pay billions to lenders who have
already received tens of billions under the TARP and other
recovery programs.
For instance, with its acquisition of Countrywide Bank,
Bank of America now services almost 13 million loans. If only a
fifth of those loans, Mr. Secretary, receive assistance under
the President's proposal, Bank of America would receive an
additional $10 billion in taxpayer assistance on top of the
already over $45 billion that we know of in taxpayer funds it
has already received.
Mr. Secretary, before the American public commits another
$10 billion or more to Bank of America, for example, to perform
the same services it is already paid to do, we need to consider
whether this is really the best way to help struggling
homeowners.
We should also consider whether this proposal is fair. If
implemented, the American people may have to pay billions of
dollars to banks and servicers simply to do the job they are
supposed to do.
In addition to the lender and servicer payments, the
President's proposal also pays borrowers up to $5,000 through a
reduction in their loan balance. That sounds good. In other
words, they get paid to make their payments.
I am confident that the vast majority of American
homeowners would welcome a $5,000 subsidy simply for doing what
they are supposed to do--make their mortgage payments.
I am equally confident that the vast majority of Americans
believe that it is not their responsibility to pay for that
subsidy to someone else.
I spent last week traveling around my State of Alabama, and
the public reaction to your plan was not good. At a town hall
meeting I had in Boaz, Alabama, I spoke with a gentleman named
Darren Latta, who, with his wife, Carol, is struggling to keep
their drycleaning business going. Mr. Latta told me and
everybody else there that, despite his struggles, he would
never ask anyone to pay his mortgage. In addition, he said he
resented Congress--us--taking his hard-earned money to make
somebody else's house payment.
Mr. Secretary, I believe he was not alone among my
constituents or the American people. We all want to help
struggling homeowners. The question is how. It is crucial,
however, that we do so in a manner that is carefully targeted
and based on proven solutions, and especially if we are going
to spend billions of dollars more of taxpayers' money that has
to be borrowed.
As President Obama said Tuesday night, and I quote, ``With
a plan of this scale comes an enormous responsibility to get it
right.'' He is absolutely right there. The American people
should be able to have confidence that their tax dollars are
being used effectively, and I believe they do not think so
here. To build that confidence, the administration should be
able to provide a reasonable estimate of how many foreclosures
it believes its $75 billion will prevent, as well as its impact
on housing prices. The administration, through you, should also
be able to demonstrate that its proposal is based on verifiable
data rather than ad hoc policy choices.
Until we begin, Mr. Secretary, developing solutions based
on facts and analysis, I do not believe we can hope to rebuild
either our devastated housing market or our confidence in our
ailing economy.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very, very much, and I will now
ask my colleagues--Senator Menendez, any opening comments?
Senator Menendez. Thank you, Mr. Chairman. I want to thank
you for holding what is an incredibly important hearing. And,
Mr. Secretary, while I have several questions, I certainly want
to commend you and the administration for taking the housing
crisis seriously and developing a proposal that I think lays
the foundation for some real relief to American families.
As a member of this Committee, I feel as if we have been
listening to a fire alarm wail for years as millions of
Americans watch their dreams of homeownership go up in smoke.
We shouted the statistics as long as we could. We held meetings
to develop legislation, but for years, the previous
administration just covered its ears. And now, finally, we have
one that is willing to call in the fire department, so to
speak, and the question is how big a fire pumper do we need and
how do we turn on the water.
At a hearing in March of 2007 that the Chairman mentioned,
I said then that we were going to have a tsunami of
foreclosures, and the administration basically said I was an
alarmist. Well, at that same hearing, I started to shed some
real light on the crisis and shared a story of a woman from my
home State of New Jersey who was given an adjustable-rate
mortgage she could not afford and the promise of a new mortgage
term in 1 year. It did not take long for her to fall behind on
her payments and a foreclosure notice to arrive. That was March
of 2007.
Over 20 months later, these stories are flooding into my
office as fast as they ever have. There are 6,600 foreclosures
starting every week in this country, one every 13 seconds. In
New Jersey, since the beginning of this year, there have been
over 9,000 new foreclosures, and we expect there to be over
60,000 new foreclosures before the year ends.
Just recently, my office received a phone call--I know that
Senator Shelby talked about his constituent in that drycleaning
business, and I appreciate what he thought. But I will tell you
a different story. My office had a New Jersey resident who is a
sergeant in the United States Army Reserves. He recently
returned from a long tour of duty in Iraq. During deployment,
he fell behind on his mortgage. When he came back, he took on
not only one but two jobs. But in this tough economy, his
income has greatly decreased, and he is having trouble making
ends meet. He has three kids who are depending on him, and my
office is working with him. We are going to his servicer to try
to work out an arrangement, but nothing has worked out so far.
Families like this army sergeant are all over America
waiting for their lender or servicer to strike an agreement.
And if that does not happen, they are waiting for a padlock on
their doors. And to top it off, he thinks it is unfair--and so
do I--that lenders can take taxpayer money but do not have to
help homeowners. That was not the intention in our original
bill. In fact, it was quite the opposite. And we need to fix
that as soon as possible.
So the relief you are talking about is not a moment too
soon, and as much as I really commend you for these commitments
on paper, none of us can be satisfied until we see them put
into action. I look forward to hearing the details of the
administration's plan. I think the whole country is waiting to
find out exactly how American families are going to receive
assistance and how fast, because in the end, this is about all
of us. It is about declining values of the home next door that
may not be in foreclosure. It is about declining values in
neighborhoods. That has real consequences. As a former mayor,
it has real consequences for a community. You either have to
cut delivery of services because your rateable base is going
down, or you have got to raise taxes. Both options are pretty
horrid in this economy. And at the end of the day, it is really
about all of us as Americans because our collective economy
is--this is one of its major drivers. And when it is not
driving, it is falling. And when it is falling, we all suffer.
So at the end of the day, I look forward to see what the
administration's full plan is and how fast we will get there.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator, very much.
Former Secretary of Housing and Urban Development.
STATEMENT OF SENATOR MEL MARTINEZ
Senator Martinez. Thank you, Mr. Chairman, very much. I
want to welcome Secretary Donovan and continue to wish you the
very best in your job, and I appreciate the willingness to take
this difficult leadership position at this point in history.
Let me say, before I comment on the current plan, that it
is important that we not totally forget history. The fact of
the matter is that while to some it may have seemed like the
prior administration was completely ignoring the housing
problem, I think it would come as a surprise to those that work
for you at FHA who are working on Hope for Homeowners, which
was a well-intended program, has not had the success we hoped
it would have, but if we simply ignore the fact that sincere
efforts were made by your predecessors to deal with this
problem, we will not learn the lessons of why some of those
programs did not work as successfully as everyone had hoped at
the time that they would work.
So I think it is terribly unfair to simply say the problem
was ignored, people did not care about poor people losing their
homes. I just do not think that is accurate or the case. So I
think as you look forward to implementation of this program,
looking to Hope for Homeowners and some of the issues that
arose in that program, that created problems in participation
by private servicers, are some of the very issues that I think
we need to deal with in the plan that is being currently
suggested.
I was pleased with the President's initiative last week. I
think it is very important that we begin to deal with this
very, very serious problem that is afflicting so many
Americans. And I believe we can help deserving families stay in
their homes by curbing unnecessary foreclosures and, in doing
so, help to preserve communities and put our housing market on
a pathway to recovery.
The President has laid out the groundwork for the plan
which includes three main components: a refinancing option for
qualified homeowners whose loans are currently owned or
guaranteed by Fannie Mae and Freddie Mac; a $75 billion
interagency loan modification strategy; and an additional $200
billion in funding commitments to the housing GSEs.
I applaud the administration for taking aggressive steps to
tackle this crisis, and I also want to be sure that as we go
forward, we get some answers to some of the details. I question
whether we will be more effective than the current programs in
preserving homeownership, and that is at the very core of why I
say it is not just enough to say the prior administration tried
nothing. Some things were tried--not successfully--and we need
to learn those lessons rather than just simply ignore that the
effort was made.
One of the major stumbling blocks to the success of the
current preservation programs has been the lack of
participation by servicers of privately securitized mortgages.
These mortgages, which were originated without a guarantee from
the Government-sponsored enterprises, account for more than
one-half of the foreclosure starts, despite the fact that they
only are about 15 percent of all outstanding mortgages.
Servicers of these securitized mortgages make a critical
decision of what to do when a mortgage becomes delinquent by
choosing to pursue foreclosure or a modification of the
mortgage. Existing research suggests that these servicers opt
for foreclosure much more often than private lenders that
service their own mortgages.
While Fannie Mae and Freddie Mac and FHA and private
lenders are actively and aggressively pursuing mortgage
modifications, servicers of securities loans are still lagging.
Two primary factors are driving mortgage servicers' reluctance
to modify loans when modifications would make economic sense:
one is that servicers are not compensated for loan
modifications; and second are the legal constraints and the
potential for litigation that dissuade many servicers from
pursuing modification.
I was glad to see that President Obama's plan addresses one
part of this problem by providing monetary compensation to the
servicers, but it neglects to address the legal constraints
hindering the services' participation. Without this critical
second element, I do not believe the private marketplace will
be any more willing to pursue modification over foreclosures
than they have in the past.
The Chairman and I cosponsored an amendment to the stimulus
bill which covered both of these items, and I commend to you a
look at that amendment, which passed but ultimately was not
part of the final bill, which I think would have dealt with
both aspects of the problem, not just the compensation but also
the legal safe harbor provided to the servicers.
I have concerns about the Federal Government's becoming a
guarantor of loan modifications enacted under this program.
Although the housing market may be stabilizing in some areas,
there are still places around the country, including cities in
Florida, where home prices are expected to decline further.
According to the Obama administration's own projections, 40
percent of loan modifications through this program are expected
to redefault. We need to ensure that the Federal Government is
using taxpayer dollars wisely and that we are working to really
solve problems, not just delay them.
One major factor for accelerating defaults is that
consumers are saddled with debt beyond their homes, including
credit card debt, auto loans, medical bills. You know, the fact
that continued unemployment is a part of our daily landscape is
something that cannot be ignored as an added element of what is
happening here.
In any event, I want to thank you for the job you have
undertaken. I want to thank you for the initiative that I hope
we can see all of the details of, and I want to work with you
because this is a plan that America needs to succeed. We need
for it work.
So I hope we will continue to develop a plan in
consultation with the Congress that can not only begin to stave
off more foreclosures and declining values, but also begin to
really see a re-emergence of the housing sector, which is a
vital part of an economic recovery.
Thank you, Secretary, and I look forward to hearing your
testimony.
Chairman Dodd. I thank you very much, Senator. And I am
glad the Senator mentioned it; I regret I did not do so myself,
but I want to thank him for his amendment that we worked on
together during the stimulus vote. And I tried--I would tell my
colleague, when I got word at the last hour of that
negotiation, I guess in conference, what was going to happen, I
called, and I should say to the credit of the leadership, they
apologized. They raced back in to try and salvage the language.
There was no cost to it. In fact, quite the opposite. There was
quite a benefit to it. And they were not able to do so, and
they regret that. So it was unfortunate that it got dropped
because it really would do exactly what the Senator has just
described and played a very important role. We need to find a
way to incorporate that into something we do here pretty
quickly. So I thank the Senator for it.
Senator Brown--and there is a vote that started. I am going
to go vote and come right back, and we will just keep the
hearing going so we do not have any delay.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for your
leadership, and, Mr. Secretary, thank you for your public
service in New York and thank you for what you are doing today.
You have inherited quite a mess--a mess born of get-rich
schemes for the very wealthy and the monetary middlemen who
conceived of and carried out these schemes, mortgage schemes
that painted unaffordable homes as easily within rich,
unregulated credit markets fueled by false promises and
sustained by false hopes, and Government regulators who slept
through all of it. Not only did the perpetrators of these
schemes paralyze American families and the American economy,
they tainted the American dream.
We all hear disillusionment and despair and unbridled
outrage in the voices of Americans. I hear them in the voices
of Ohioans as they watch their homes slip away, their property
values plummet, their communities crumble. Their gut-level
feeling is that all of this is not only unjust but perhaps
criminal.
We owe it to the Americans we serve to respond quickly and
forcefully to the housing crisis. We owe it to them to stop
prioritizing the demands of corporate moguls over the well-
being of everyday Americans.
We all need, of course, to worry about the erosion of home
values. Too many working families who pay their mortgages on
time are facing lower home values when their neighbors' homes
are foreclosed. As we know, each foreclosed home reduces nearby
property values by several percent, and it does not stop at
home values. Police, fire, schools, and other programs that are
funded based on property values are also facing massive
shortfalls.
Other building blocks of the American dream are also under
siege: a car in every driveway, a stable income upon
retirement, a college education for every child. A quick
Internet search of just one Web site yields in the community of
Pickerington, a suburb outside of Columbus, a generally
affluent suburb, yields 109 foreclosures for sale in
Pickerington. Pickerington has an estimated population of
16,000 people.
Profiteers exploited the American dream, peddling subprime
loans in the quest for more bonuses, more private jets, more
European vacations. No one cared how much they spent. They
always had the golden parachute to safely land when the money
dried up. That is the problem that you are left with, that we
are left with, cleaning up after a long, loud party.
While I know the nuts and bolts of the administration's
Homeowner Affordability and Stability Plan are to be released
next week, the broad outline looks promising. I understand that
the plan the administration is proposing will help at least 9
million struggling families hold onto their homes, which is
necessary if we care whether people get back on their feet or
fall into poverty. It is also a smart move to help
neighborhoods thrive rather than fragment and help communities
on shaky ground to get on stabler ground.
I am heartened that after 8 long years we finally have an
administration that remembers that it reports to Main Street,
not to Wall Street.
Thank you for your service. Thank you, Mr. Chairman.
Senator Reed [presiding]. Thank you, Senator Brown.
STATEMENT OF SENATOR JACK REED
Senator Reed. Secretary Donovan, welcome. We are all
delighted that you are in the leadership of the Department of
Housing and Urban Development. You have extensive experience
there. In addition to that, you have been doing a remarkable
job in New York City and we thank you for that, also.
I share the sentiments of so many of my colleagues that
action delayed over the last several months has worsened this
crisis, and so the action plan that you proposed along with the
President, I think, is vitally important at this moment. I
think also the ability to react to the ups and downs of the
market is going to be critical. You are going forward with a
good plan, but I think you are also going to prepare to modify,
adapt, and respond to changes in the situation.
One of the fundamental aspects, I think, of our recovery is
stabilizing housing prices and then beginning to get people to
go back to work. And once the American families feel that their
housing prices are stable and hopefully begin to appreciate
once they are confident of their jobs, then the rest will be, I
think, much--not easy, but the path ahead will be surer and
more confident for families across the country.
One thing I want to particularly thank you for is I heard
today that within the President's proposal there will be a $1
billion fund to launch the Affordable Housing Trust Fund. That
is in the budget. I know Senator Shelby and I worked on that.
It was a key element of the legislation a year ago, last
August, and in this time when people are losing their homes,
particularly low-income Americans, expanding affordable housing
opportunities is more critical.
And in addition, too, I think it sends the signal that our
housing policy can't rest simply on home ownership, that there
are scores of American families whose best and wisest course of
action is to be in affordable rental housing because of their
family situation and because of their economic situation. I
think we were too, in a sense, beguiled by this notion that we
could put everyone in a home, and I think we found out that
some people, despite their best efforts, as it turns out today,
couldn't afford it or were given loans that were just not
commensurate with their ability to pay and to sustain the home
ownership.
So for all of these reasons, I want to commend you. I would
note, I believe, Senator Shelby, you have already had your
opening comments. We are waiting for the return of Senator
Dodd. Senator Shelby, should we go in recess for a moment? Do
you want to start?
Senator Shelby. Go ahead.
Senator Reed. See, I am relying on the wisdom and the
counsel of the former Chairman, so that shows at least----
Senator Shelby. You have got the gavel.
Senator Reed. I have got the gavel, but he has got the
wisdom and the experience.
Mr. Secretary, would you begin your statement, please?
STATEMENT OF SHAUN DONOVAN, SECRETARY, DEPARTMENT OF HOUSING
AND URBAN DEVELOPMENT
Secretary Donovan. Thank you, Mr. Chairman, Senator Shelby,
distinguished members of the committee. Thank you for the
opportunity to appear here before you today.
Homeowners in communities throughout the country have been
devastated by the economic crisis. Many responsible families
making their monthly payments have experienced falling home
values that disqualify them from opportunities to refinance
with today's low interest rates, and millions of American
workers have been laid off or forced to accept less work and
are grasping at every resource possible to make their mortgage
payments.
In the absence of action, over six million families could
face foreclosure in the next few years, with millions more
struggling to stay above water. In the absence of action, we
would have seen an intensifying spiral of more lenders
foreclosing, pushing nearby home prices even lower and putting
more families underwater. In fact, when a family loses their
home to foreclosure, nearby homes drop in value by as much as 9
percent, causing harm to every homeowner, even those who make
every payment, when foreclosures in their communities increase.
On February 18, President Obama announced the Homeowner
Affordability and Stability Plan, a plan to help make available
to as many as seven to nine million homeowners who are fighting
hard to make their payments and stay in their homes. The plan
will not provide money to speculators. It will target support
to the working homeowners who have made every possible effort
to stay current on their mortgage payments.
The Homeowner Affordability and Stability Plan is part of
the President's comprehensive strategy to get the economy
moving in the right direction. Just as the American Recovery
and Reinvestment Act works to save or create several million
new jobs and the Financial Stability Plan works to get credit
flowing, the Homeowner Affordability and Stability Plan will
support a recovery in the housing market and ensure that these
workers can continue paying off their mortgages. The plan not
only helps the responsible homeowners at risk of losing their
homes, but prevents neighborhoods and communities from decay,
as defaults and foreclosures fuel falling home values, local
business collapses, and further job loss.
There are three parts to the plan. First, encourage home
ownership by helping keep mortgage rates low. Second, support
for refinancing of up to four to five million responsible
homeowners to make their mortgages more affordable. And third,
to launch a $75 billion Homeowner Stability Initiative to reach
up to three to four million at-risk homeowners.
To help keep mortgage rates low and promote stability and
liquidity in the marketplace, the Treasury Department will
continue to purchase Fannie Mae and Freddie Mac mortgage-backed
securities. In addition, the Treasury Department will increase
its funding commitment to Fannie Mae and Freddie Mac to ensure
the strength and security of the mortgage market and to help
maintain mortgage affordability. This backing will bolster
confidence in the mortgage market, allowing interest rates to
remain at generational lows and to continue to provide mortgage
affordability for responsible homeowners.
As noted, mortgage rates are currently at historic low
levels. But under current rules, only families with conforming
loans owned or guaranteed by Fannie Mae or Freddie Mac who owe
less than 80 percent of the value of their homes are eligible
for refinancing to these low interest rates. Unfortunately,
given the recent decline in home prices, millions of
responsible homeowners who made downpayments and timely
mortgage payments are unable to access these lower rates.
The President's plan will help as many as four to five
million of these homeowners refinance to lower interest rates
through Fannie Mae and Freddie Mac by opening eligibility to
borrowers who owe on their mortgage 80 to 105 percent of their
current value of their home.
Finally, the President has announced an initiative to reach
millions of responsible homeowners who are struggling to afford
their mortgage payments. In the current economy, millions of
hard-working families have seen their mortgage payments rise to
40 or even 50 percent of their monthly income, particularly if
they received subprime or exotic loans with exploding terms and
hidden fees. The Homeowner Stability Initiative operates
through a partnership of lenders, servicers, borrowers, and the
government to help responsible borrowers stay in their homes,
providing families with security and neighborhoods with
stability.
Based on estimates of the effects of foreclosures on the
value of nearby homes, the Homeowner Stability Initiative could
protect the owner of an average-valued home in the U.S. from as
much as a $6,000 decline in home prices. Homeowners with high
mortgage debt compared to income may be eligible for a loan
modification as long as their home mortgage does not exceed the
GSE conforming loan limits. Further, the increase in GSE
conforming loan limits, up to $729,750 in some high-cost areas,
as enacted in the American Recovery and Reinvestment Act, will
allow more borrowers to qualify.
Significantly, this program will not require homeowners to
be delinquent in their payments to qualify for eligibility.
Loan modifications are more likely to succeed if they are made
before a homeowner becomes delinquent. Thus, the plan will
include households at risk of imminent default despite having
not yet missed a mortgage payment.
Borrowers with large non-housing debts can qualify, but
only if they agree to enter HUD-certified counseling.
Specifically, homeowners with total back-end debt, which
includes not only housing debt, but other debt including car
loans and credit card debt, equal to 55 percent or more of
their income will be required to agree to enter a counseling
program as a condition for a modification.
The Homeowner Stability Initiative could reach up to three
to four million at-risk borrowers in all segments of the
mortgage market, reducing foreclosures and helping to avoid
further downward pressure on overall home prices. The program
has several key components.
First, the government will partner with lenders to reduce
the homeowner's monthly payment to an affordable level. The
lender is solely responsible for interest rate reductions and
other changes necessary to lower the borrower's monthly payment
to 38 percent of his or her income. From that point, the
government will match, dollar for dollar, any additional
reductions the lender makes to lower that ratio to 31 percent.
These adjustments could mean a monthly mortgage payment lowered
by more than $400 for a borrower with a $220,000 mortgage. The
lower interest rate arrived at must be kept in place for 5
years, at which point it can gradually be increased to the
conforming loan rate at the time of the modification. Lenders
will also have an option of decreasing monthly payments by
reducing the principal owed on the mortgage with the government
sharing those costs.
Second, servicers will receive $1,000 for each eligible
modification meeting initiative guidelines. They will also
receive fees to reward them for continued success, awarded
monthly as long as the borrower stays current on the loan, up
to $1,000 each year for 3 years.
Third, to encourage borrowers to stay current, the
initiative will provide a monthly principal balance reduction
payment. As long as a borrower stays current on his or her
loan, he or she can get up to $1,000 each year for 5 years.
Fourth, because loan modifications are more likely to be
successful if they are made before a borrower misses a payment,
to keep lenders focused on reaching borrowers who are trying to
stay current on their mortgages, an incentive payment of $500
will be paid to servicers and an incentive payment of $1,500
will be paid to mortgage holders if they modify at-risk loans
before the borrower misses a payment.
Finally, to encourage lenders to modify more mortgages and
enable more families to keep their homes, the administration,
together with the FDIC, has developed an innovative home price
decline reserve payment. The fund, which may be as large as $10
billion, will provide holders of mortgages modified under the
program with an additional payment in the event that the home
price declines and therefore the risk of losses of cases of
default is higher than expected.
As mentioned earlier, the Homeowner Affordability and
Stability Plan is not a self-contained initiative but is
intended to work in conjunction with other efforts, such as the
American Recovery and Reinvestment Act and the Financial
Stability Plan to provide a comprehensive and multifaceted
response to the current economic troubles.
As part of the American Recovery and Reinvestment Act
signed by the President, the Department of Housing and Urban
Development will award $2 billion in competitive Neighborhood
Stabilization Program Grants for innovative programs that
mitigate the impact of foreclosures by supporting strategies to
address the problem of vacant foreclosed properties.
Additionally, the Act includes $1.5 billion to provide
assistance to renters facing displacement, reducing
homelessness and avoiding entry into shelters. HUD allocated
that $1.5 billion of homelessness prevention funding to
recipients yesterday, just 1 week after the bill was signed, as
part of our successful allocation of three-quarters of Recovery
Act funds for HUD programs yesterday.
In addition to the already mentioned efforts, the
President's overall Economic Recovery Plan will seek careful
changes to personal bankruptcy provisions. The administration
will work with Congress to ensure that legislation works well
in conjunction with our voluntary modification approach.
Finally, the Hope for Homeowners Program offers one avenue
for struggling borrowers to refinance their mortgages. In order
to ensure that more homeowners participate, we support changes
to the program that will reduce fees paid by borrowers,
increased flexibility for lenders to modify troubled loans,
permit borrowers with higher debt loads to qualify, and allow
payments to servicers of the existing loans.
Thank you, and I look forward to your questions.
Senator Reed. Well, thank you very much, Mr. Secretary.
I note we have been joined by Senator Johanns. We have been
asking if you have opening statements--very good. In that case,
I will begin a quick round of questioning. Let me just do this,
because we have to vote. I will recognize Senator Johanns for
questions and by the time you finish, Senator Dodd will be here
and all will be well. Thank you, Senator Johanns.
Senator Johanns. Mr. Secretary, welcome.
Secretary Donovan. Thank you.
Senator Johanns. It is unusual that we get this kind of
opportunity, but I appreciate the opportunity.
Let me, if I might, offer a thought, and then I would like
your reaction to a couple of questions. The thought is that one
of the challenges we are finding in the marketplace in terms of
lending at the moment is the market is looking for stability,
predictability. They are looking for confidence in the ability
of that borrower to repay, et cetera. So I want to turn to just
the last comment you made about the bankruptcy provisions. I
think what you are referring to is cramdown, although you did
not use that word.
Talk to me about how that fits into what you are doing
here. How would a cramdown approach fit with what you are
proposing here today?
Secretary Donovan. That is a very important question,
Senator, and let me first start by saying, as the President
made clear in his announcement of the plan last week, that this
is an issue of fairness to him and to the administration,
whether it is a second home or any other kind of debt, that
currently can be modified in a bankruptcy. We have been able to
find ways to ensure that markets are stable for those types of
loans, as well. But we also agree that particularly in this
time of difficulty in the market, we don't want to disturb the
markets any further. And so there are a couple provisions that
we think are important in terms of carefully tailoring this
legislation.
One of those is to make it available only for loans that
are already in existence. In other words, new mortgage loans
would not have this provision apply to them, and----
Senator Johanns. If I might just interrupt, you lost me
there. Make what available?
Secretary Donovan. The option to modify a loan in a
bankruptcy proceeding----
Senator Johanns. The cramdown----
Secretary Donovan. ----would apply only to loans that have
already been originated.
Senator Johanns. OK.
Secretary Donovan. In other words, the idea is not to have
an impact on lenders that are out making mortgage loans today
and to potentially impact interest rates as a result of that.
Senator Johanns. OK. So let me stop you there, just so we
are on the same wavelength.
Secretary Donovan. Yes.
Senator Johanns. You have got, I don't know how many
dollars' worth of loans out there today, billions and billions
and billions. They would all be subjected to this new
bankruptcy authority is what you are saying. Now, if you end up
with a loan the day after, you don't benefit from that new
bankruptcy authority. Are we together so far?
Secretary Donovan. Right. The idea is that prospectively,
for new loans that will be originated, this provision would not
apply, and therefore there is no risk of it affecting
originations going forward.
Senator Johanns. OK. Now let me take another step with you,
because I think I know where you are going. Let us say that we
are going to continue to ask the taxpayer to bail these things
out, because I think that is kind of what is going on here, and
they are going to in some form or fashion, whatever the idea
is, they are going to in some form or fashion be the owner of
these bad loans or a certain portion of them. How can we assure
the taxpayer that with this new bankruptcy authority, as you
referred to it--I call it cramdown, because it is--I am a
lawyer and that is what we call it--how can we assure them that
there will be stability, because all of a sudden we have forced
into that basket of debt that the taxpayer is going to own a
big uncertainty?
We have got one judge somewhere who has been empowered to
say, that loan isn't worth what you think it is because I am
going to force something different. Isn't that the very
uncertainty that we are trying to avoid in the marketplace?
Secretary Donovan. Again, I think with careful tailoring of
this legislation, there are a number of ways to ensure that it
doesn't introduce that kind of instability. One of them is this
is prospective. Another is to make sure that every effort is
being made to modify loans, keep people in their homes, before
they ever get to bankruptcy. So we would support a provision
that would--if a lender has made a good faith effort to use
this modification plan, that that would exempt them from the
bankruptcy.
So in other words, we want to be very clear. This is not a
solution to the issues that homeowners have struggling with
their payments as a primary response. It is only a last case
resort. We want to make sure that we are getting to this
problem of modifications, and that is why we have our proposal,
as early on as possible to take away exactly the instability
that you are talking about, to ensure that mortgages are
affordable and that people can make their payments, and that
will help markets to stabilize, because it is the foreclosures
today that are happening and that instability that is driving
so much of the problems in our mortgage market.
Forty-five percent of all home sales in December were
distressed sales, and so helping to make mortgages more
affordable before you ever get to bankruptcy is incredibly
important. So there are a number of ways to do that built into
the bankruptcy provisions, we think.
Senator Johanns. I am out of time and the Chairman has
arrived, so let me just wrap up with this. I hear what you are
trying to say, and I think you are trying to assure me that,
Mike, it isn't going to be that bad. But if the only option is
for these people who are in default or have missed payments, if
the only option is bankruptcy, they will probably take that
option. I think you will see bankruptcies skyrocketing.
And then, like I said, because of the uncertainty that you
have now introduced into the valuation of that mortgage debt,
what is it worth, if a judge holds that power, I think as this
trails out, the people who are going to pick up the tab for
that is the taxpayer out there, because I think in the end,
they are going to own--it looks to me like they are going to
own a lot of those bad debts.
Secretary Donovan. If I could, Senator, there is one other
provision that I haven't mentioned that I think is important,
as well. There has been discussion about a limitation of any
reduction of the debt in bankruptcy to--the maximum it could be
reduced is to the market value of that home. And I think also
that is quite important in terms of taking away some of the
uncertainty that you are talking about.
So again, I think there are a number of ways to minimize
that uncertainty, and we clearly agree that bankruptcy is not
the way to work out these mortgages and we have taken action.
That is exactly what the modification plan that we have
introduced is, is to make sure that we avoid the problem of
foreclosure and bankruptcy in the first place and help as many
families as possible, responsible homeowners, stay in their
homes with the modification.
Senator Johanns. Mr. Chairman, thank you.
Chairman Dodd [presiding]. Thank you, Senator, very much.
Senator Merkley, I know you didn't get a chance to make an
opening comment at all, so why don't you take the floor.
Senator Merkley. Well, thank you very much, Mr. Chair, and
thank you for your testimony and I will keep it very simple.
This is an incredibly important plan for millions of American
homeowners, certainly important to the financial foundations
for our families, but also for the health of our economy, and I
look forward to hearing the exchanges of questions and thoughts
and working with the administration to try to make sure that
this program works, both for our families and for our economy.
Thank you.
Chairman Dodd. I want to say, Mr. Secretary, that Senator
Merkley, as we talked a little bit yesterday, as well,
privately, has, as all of us do, a very deep and abiding
interest in this subject matter and spent a lot of time on his
own, in fact, meeting with people outside of Washington to talk
about this issue, as well. He has some very strong ideas I am
sure you will listen to.
Let me just open with a couple of things. One is, I don't
need to tell you, Mr. Secretary, the level of frustration of
the country is beyond probably anything any of us have
witnessed in a long, long time. The word frustration and anger
and disappointment, the adjectives don't even begin to
adequately describe what so many millions of our constituents
are feeling, whether they are directly affected by a job loss
or foreclosure, retirements being dissipated almost before
their very eyes, if they know people, or they know what their
children are going through.
I don't know anybody not adversely affected by this at this
moment, and obviously they are looking for answers and how this
is all going to work. I presume the other offices are not
unlike mine. We are getting a lot of calls coming in saying
they are optimistic about this now and how does it work and how
do I qualify and what do I do. Can you share with us any plans
that the administration has as to how we can begin to
communicate directly with the American people about this so
they can understand this and determine whether or not--because
obviously timing is important in all of this, where you are in
that economic cycle----
Secretary Donovan. Yes.
Chairman Dodd. ----can determine whether or not you are
going to benefit from this or not. If you act too early, you
may not. If you are too late, you may not. So the windows are
not terribly wide for people to step through, and I think it is
critically important that the very people we are trying to help
here understand what this is and how it works and what they
need to do and can do.
Secretary Donovan. Mr. Chairman, an incredibly important
question. We have been spending a lot of time with my staff,
staff on the National Economic Council, at Treasury, reaching
out to organizations that are talking to homeowners, to
servicers, to make sure that we get as much information out as
possible. You may have seen that Secretary Geithner and I
hosted a meeting yesterday with the largest national groups
that are involved in counseling and servicing to make sure that
we do that.
First of all, we have a lot of information available today.
I think as you know, next week, on March 4, we are going to
publish the detailed guidelines, and there will be more
detailed information available then. But we already know a lot
about who is eligible for the program and we have already begun
communicating with the servicers and the counselors about how
to talk to borrowers to help them understand if they are
eligible.
And what I would suggest most specifically is that, whether
it is your office or anyone interested in getting more
information, you can go to HUD's website at www.hud.gov and get
all of our question and answers, all of the detailed
information we have today, or pick up the phone and call the
Hope Hotline, which is 888-995-HOPE, and we have been working
very closely with them to make sure they have the very latest
detailed information on who is eligible and how to get
assistance.
As you know, the servicers have all agreed to stop
foreclosures until the detailed guidance is out next week, and
we would expect them to begin modifying loans immediately after
the guidelines are out based on that information. So we believe
that this can happen very quickly and that there is the
information available today to start to help homeowners make
those decisions.
Chairman Dodd. Well, I would hope in that regard--
obviously, all of our officers are prepared to try and answer
what we can, and certainly yours will, as well, but we are also
very conscious this is a new administration. You are not
exactly fully staffed, I presume, yet, as well, in addition to
everything else you are doing, to handle the volume.
I raise this with you merely as an idea and a thought, and
others may have some similar suggestions. I wonder if you might
even be convening the major heads of some of our largest
television, radio outlets for them to, as a public service to
the country, provide some basic information. Lending
institutions themselves, particularly those receiving TARP
funds here, ought to be required in some way to do something in
a proactive way so the people are going right to the source
where they can.
All of us are getting a lot of calls coming in. Certainly,
we welcome those calls, but we are going to be wanting to defer
them, and if we do it just to you, you end up with a set of
problems. But if we could actually hook them up----
Secretary Donovan. Yes.
Chairman Dodd. ----with the people who then can actually
deliver or answer their questions very directly. I think it is
one of those moments where the kind of cooperation of some of
our major media outlets could really be of help at a time like
this, to give those numbers out, to give numbers of where
people can call, or do something that would allow people who
are more likely to get good information through that than
watching a hearing, with all due respect to C-SPAN, who I love
dearly. The idea that they all watch this is unlikely.
So I raise that with you, and there may be other thoughts
and ideas and we ought to talk about it.
Secretary Donovan. It is a terrific idea.
Chairman Dodd. Let me quickly jump to one other question I
have for you, as well, and that is a lot of us have heard the
debates about whether or not we ought to have an affordable
payment plan or have a principal reduction model, and
obviously, the number of e-mails and others from people who are
very knowledgeable in the area of finance and have argued for
the principal reduction model rather than the affordable
payment plan.
Could you share with us briefly why you decided to opt for
the affordable payment plan rather than the principal reduction
plan and what the pitfalls would be, as I presume you have
drawn the conclusion, in the principal reduction proposal?
Secretary Donovan. Mr. Chairman, it is an outstanding
question. In some ways, this gets to the very heart of the key
to how we think this plan will be successful, and we spent a
lot of time, you can believe, with Larry Summers, with the
President, with Secretary Geithner thinking through these
issues.
What we found, looking at the evidence, is that we believe
very strongly that by getting payments to an affordable level,
that is the single most important thing we can do to keep
people in their home. The evidence from a series of studies,
most recently a Boston Fed study, shows that a very small
percentage of people who are underwater but can afford their
mortgages actually walk away or default.
Now, I will recognize with all humility that we are in an
unusual time, that we may not be able to compare our current
environment to what has happened historically, but there is
very clear evidence--this recent Boston Fed study said that for
people who are underwater but can afford their payments, only
in the range of one to 2 percent of those homeowners actually
walk away and go through foreclosure.
So we believe, based on the best evidence that we could
gather, that the key to keeping people in their homes is
getting them to an affordable payment rather than focusing on
principal reduction, and frankly, it is also, we believe, a
more cost effective way to reach more people. There are
estimates, a range of estimates, but it would have been
hundreds of billions if not trillions of dollars to try to get
to principal reduction across the whole portfolio of people who
are at risk. So those are really the two primary
considerations.
Chairman Dodd. It would appear there would be obvious
benefits to the principal reduction in that it would allow
people to start to accumulate equity back in their homes, the
wealth creation idea. That is obviously appealing from that
perspective.
Secretary Donovan. Yes.
Chairman Dodd. There were also complaints--or not
complaints, but questions raised--I guess complaints as well--
about what would happen in the bond market and so forth in this
area because of this choice of affordability over principal
reduction. Can you respond to that?
Secretary Donovan. Yes, and I do think it is very important
to make clear principal reduction is a good thing, and we have
done everything we can in the plan to ensure that the owners of
these loans can go ahead and reduce principal. And, in fact, we
will share--if they choose to get the payments more affordable
through principal reduction rather than interest rate
reductions or principal deferral, we will match that dollar for
dollar in the same way that we would an interest reduction. We
also have this feature that for successful modifications, over
5 years borrowers can get up to a $5,000 payment to reduce the
principal. So we have ways that we can help to start build
equity again.
Finally, I would say that we have other tools that get to
principal reduction. Hope for Homeowners is a good example. We
have been talking with a number of the investors that you
mentioned and want to make sure that our plan treats across the
board principal reduction with the same sort of incentives that
we have provided for affordability. We have not gone to the
point of actually paying for that principal reduction in a
scale that we think could, you know, have a cost of hundreds of
billions, if not trillions of dollars.
So we do allow it, we do encourage it, but we do think that
the most important focus is on affordability.
Chairman Dodd. Great. And I am going to come back. I will
ask you in the next round I have about Hope for Homeowners and
what steps you think--Senator Shelby and I worked very hard on
that last year to try and put a plan with Mel Martinez, and it
was difficult because there were a lot of--we were not quite in
the intense moment we are today in all of this, so there were a
lot of issues being raised, and I think we sort of, with all
the good intentions, created a process that was so intimidating
and so filled with hurdles that it discouraged both lenders and
borrowers from being involved. And I would love to know if you
have given that some thought, how we might modify that so that
that program could also work, certainly far better than it has.
But let me turn to Senator Shelby.
Senator Shelby. Thank you, Senator Dodd.
Mr. Secretary, Section 1517 of the Housing and Economic
Recovery Act of 2008 requires HUD to undertake a study of the
root causes of high foreclosure rates among residential
mortgages. An interim report was due January the 31st of this
year, and I know you have not been there long, Mr. Secretary. I
believe such a report could, however, provide a valuable
foundation upon which to structure foreclosure assistance.
Until we have a firm understanding, Mr. Secretary, of what is
driving foreclosures, I believe assistance plans will continue
to be ad hoc and uninformed, for the most part.
When can the Committee--the Banking, Housing, and Urban
Affairs Committee here--expect to see HUD's foreclosure report
that is required by law?
Secretary Donovan. First of all, let me say, Senator,
that--and you made this comment in your opening statement. I
could not agree with you more that we need to take actions
based on history, based on data, based on real information, and
I am happy to talk about a lot of the detail and assumptions
underneath what we have done. I think we have tried to do that
and to meet your standard, which is absolutely the right
standard.
On the report, when we took office, roughly a month ago--it
seems like a little longer some days--we had a rough draft of
that report presented to us. We have been reviewing that, not
only within HUD but also at OMB and at the White House, to make
sure we understand, to ask for any more detailed information
where we think there should be, and I can promise you we will
have that report to you within the coming weeks based on the
review that we are undertaking right now.
Senator Shelby. Do you believe that report is important?
Secretary Donovan. I do believe it is.
Senator Shelby. The targeting of assistance, historically
the No. 1 event resulting in mortgage delinquency has been job
loss. When a family has lost the wage of its primary earner, it
is unlikely that any reduction in their mortgage rate will keep
them in their home, generally.
Mr. Secretary, what does the President's foreclosure plan
do to help families that are struggling to pay their mortgages
due to job loss? What is there? I do not see it there.
Secretary Donovan. First of all----
Senator Shelby. You know what I am asking, don't you?
Secretary Donovan. Yes. First of all, I think the President
made clear in his speech this week to Congress that we cannot
think about the mortgage and the housing problem in isolation
from the other parts of the recovery. We have to take action,
and we have, to create or preserve 3.5 million jobs through the
Recovery Act. We must get credit flowing again, and the
Financial Stability Plan will do that.
And so I cannot tell you that the housing plan alone solves
all the problems of job loss, but----
Senator Shelby. We know that.
Secretary Donovan. And you will see this in the detailed
guidelines that we release next Wednesday, that we are looking
at job loss in particular as a factor that we use in
determining eligibility for the plan.
For example, if a borrower is still current on their
mortgage but has recently lost a job, that would be one
indicator we would use to be able to say there is a reasonably
foreseeable event of default--is the sort of term of art in
many of these pooling and servicing agreements--that that could
be one factor, for example, that would allow a servicer to say,
well, they are current, but it is important that we go ahead
and modify based on their new job information.
You are absolutely right, if someone has no income, it is
going to be very difficult to get a modification to work for
them. But in many cases, what you have is people working two
jobs, other wage earners in the family. And so with that
attention to recent job loss, I think we will be able to make
sure that the plan reaches as many of those unfortunate
families who are suffering from job loss or reduction in wages.
Senator Shelby. Mr. Secretary, I brought this up in my
opening statement, and I will just pose it as a question in a
minute. A number of banks that have received assistance,
including the TARP funds, have agreed to implement foreclosure
mitigation plans as a condition of that assistance. Citibank,
for one, has agreed to implement a foreclosure plan based upon
FDIC's IndyMac model that you are familiar with.
Mr. Secretary, will those financial institutions that have
already agreed to implement foreclosure mitigation plans be
eligible for subsidies under your new plan, the President's
plan?
Secretary Donovan. This is a very important question and I
am glad you asked this, and this goes to Senator Martinez's
point as well. We cannot forget history here. We cannot forget
that there are things already happening in terms of
modification plans. We do not think they have been as
successful as they could be, for a number of reasons. But we
have had a lot of discussions with FDIC, with servicers, and
what we are generally seeing in the current modification plans
is that they get down in the best cases to a 38-percent debt-
to-income ratio. And so one of the reasons why we structured
our plan the way that we did is we want to build on the current
efforts that are there, like the Citibank one, where we are
requiring lenders 100 percent at their own cost to bring the
payments down to a 38-percent debt-to-income ratio, and then we
will share costs.
So this actually builds on those current efforts. It does
not mean that they are going to get paid for something they
were already doing. What it means is we are going to bring what
was a plan to bring somebody down to a 38-percent DTI through a
shared payment with them further to a 31-percent DTI, which we
think is the right affordability standard and will make sure
that modifications are successful.
Senator Shelby. Mr. Chairman, if I could ask one more
question on lender payments. Subprime mortgage servicers, it is
my understanding, are paid about 20 basis points annually, or
about $400 a year, to service the typical subprime loan. The
President's proposal would more than double the current per
loan servicing payment for modified loans. This appears to be a
significant subsidy to pay servicers to perform the job they
are already paid to do.
Mr. Secretary, could you explain to the Committee how the
$1,000 up front and the $1,000 annual lender subsidies in the
President's plan were derived? In other words, what was that
based on?
Secretary Donovan. Yes. It is a very important question,
Senator. I think hindsight is 20/20, they say, and if you look
at these securitizations, the way that the pooling and
servicing agreements were done, I think we all recognize today
that there were a range of mistakes in the way the incentives
were set up that, frankly, made sure that the people
originating these mortgages did not act like they should have
acted, did not have the right interests at heart, and I think
we can fix that prospectively.
On this issue of payments, one of the problems with these
agreements that were put in place is that the way that
servicers are paid gives them a bigger incentive to foreclose
than to modify because they can access additional payments.
So what we are trying to do with these payments is to
basically level the playing field for modifications, to make
sure that a servicer who today does not get any compensation
for a modification, but does get compensation for a
foreclosure, that we can tip the scales to try to help make
modifications move more quickly.
On the reason for the $1,000 payment, you know, no number
is perfect, but we did a fair amount of research, talked to
servicers, talked to a range of others in the mortgage industry
to try to get to what we think the rough costs of the
modification is, and that is how we arrived at the $1,000
payment.
Senator Shelby. Thank you, Senator Dodd.
Chairman Dodd. Thank you very much, Senator.
Who came in first? Senator Menendez I guess was here before
Senator Brown.
Senator Menendez. Thank you, Mr. Chairman.
Mr. Secretary, let me ask you--I appreciate--and I read
through your testimony. We hear this plan will only help
``responsible homeowners.'' Can you define that term for us?
What universe does that include?
Secretary Donovan. First of all, let me just say how
excited I am to work with you as the new Chairman of the
Subcommittee. I will miss Senator Schumer as Chairman, of
course, as my home State Senator. But your intelligence around
these issues, your commitment to housing, it is very exciting.
Senator Menendez. I look forward to working with you as
well.
Secretary Donovan. I think there are a couple of components
of this issue of how do we target responsible homeowners.
First of all, the plan, we have talked a lot about the
modification proposal, but to make clear, the refinancing
initiative as well as the increase in the backstop to Fannie
Mae and Freddie Mac are both targeted at making sure this plan
benefits every American homeowners. By keeping interest rates
low, obviously borrowers with good credit are the ones--and who
have made their payments are the ones who are going to be able
to access the mortgage market today most easily for those low
rates. The refinancing initiative to help 4 to 5 million
existing owners with loans through Fannie Mae and Freddie Mac
that are underwater is available only if you have made your
payments on those.
And then, finally, for the modification plan, a couple
things. We have targeted this to owner occupants, not to
investor owners who may have bought a home as a speculation or
in order to flip it quickly because of what was happening in
the market. We have targeted this to reasonably priced homes by
using the loan limits that I talked about in my testimony, up
to $730,000 as of yesterday when we implemented those increased
limits from the Recovery Act.
And then, finally, I think we have to make sure that we do
not fall into the traps that got us here in the first place. We
will make sure that we verify income so that if a family lies
about their income to try and get a modification, we will
ensure not only that the servicers are checking that, but that
we are auditing--we are drafting the contracts right now to
implement this program--through auditing and a range of other
features to make sure that we know people's incomes, we can
verify them, and we do not have the kind of fraud either on
lenders' parts or families' parts that got us into this.
Senator Menendez. On the income side, we are using the same
ratios as we have in the past?
Secretary Donovan. We are using the 31-percent debt-to-
income ratio, if that is what your question is. As I mentioned
earlier, one of the concerns we have had about existing
modification programs is that they have gotten to, say, 38-
percent debt-to-income ratio. And, in fact, in many cases--and
this is why the redefault rates have been so high--we see lots
of modifications where payments actually increase rather than
decrease. So we think the 31-percent debt-to-income standard is
the right standard, widely accepted affordability standard in
rental programs as well as homeownership. So we think it is the
right standard to make sure that we have successful
modifications.
Senator Menendez. So as briefly as you can, what is your
timeline on the proposal? What will happen first? What will
take the longest? When are we going to see the first
modifications as a result of this?
Secretary Donovan. Next Wednesday, March 4, we will release
the detailed guidance to servicers and others about how exactly
the program is going to work, and the implementation, and we
would expect servicers to be able to begin modifying loans
based on that almost immediately. As you know, a large number,
the vast majority of servicing at this point, the servicers
have held up on foreclosures subject to getting that guidance
next Wednesday. So we expect them--they are very eager to see
that guidance and are ready--I have talked to Jamie Dimon and
others myself directly. They are prepared to implement that
guidance as quickly as possible after it is released next
Wednesday.
Senator Menendez. Let me ask you one other thing. One of
the biggest lessons I have learned over this period of time is
that some of these institutions simply will not police
themselves and lenders will not modify their own, in many
cases. Voluntary efforts just do not work.
Are you confident that there are sufficient carrots and
sticks that you have provided here that will work, specifically
on the servicers? Are there too many carrots here and not
enough consequences?
Secretary Donovan. Well, I think there are a couple of
pieces to that, because this is a very important question.
First of all, a requirement that any new funding from TARP
to any financial institution requires that they participate in
this plan, and we will be looking to see that they are auditing
very carefully, that they are applying this correctly, that
they are using the guidance on every loan in their portfolio to
figure out which can qualify and not.
I think it is also important to remember that we have the
servicers themselves as well as the investors, and one of the
reasons why the servicers had not acted--and this goes to
Senator Martinez's point earlier--is concern that the investors
will not allow them to act or will bring suits against them.
The guidance that we are releasing next week is critical in
being able to set a standard, a standard for what is a
reasonably foreseeable default which allows them to move ahead
and modify those loans, and what is a reasonable modification.
Those standards, issued by Treasury, applying to every
financial institution, we believe will go a very, very long way
to allowing the servicers to move beyond this concern around
the investors, because we have got an industry standard that
has the force of guidance from Treasury to allow them to move
forward.
So we think we have the sticks. We also think we have the
protection that is needed to allow these modifications to go
forward.
Senator Menendez. Thank you, Mr. Chairman.
Senator Shelby. Senator Dodd asked me to recognize you. I
have no power.
Senator Martinez. Well, I appreciate your recognizing me,
with or without power. I appreciate that very much.
Mr. Secretary, let me follow up on that very issue of--I
have called it a ``safe harbor.'' I think others have as well.
And I know you met with the servicers yesterday and the
industry folks, and my understanding is that there continues to
be concern about the lack of a legal safe harbor. What is your
thought on that? What are your plans? Do you think you need
such authority to have a legal safe harbor? Or will the
servicers be satisfied not to have the legal protections that I
am led to believe they insist upon?
Secretary Donovan. Well, let me say up front, Senator,
there is more legal wisdom on that side of the room than here.
I am not a lawyer. I am not a----
Senator Martinez. Never admit it.
[Laughter.]
Secretary Donovan. I am not a tax lawyer. I am not an
expert on some of the tax issues that surround these contracts.
But it is a difficult issue because certainly some of the
proposals for safe harbor go far enough that they effectively
would be modifying existing contracts, which to my
understanding there can be constitutional issues with. There
are also provisions around changing tax laws that would be
retroactive that there are significant certainly policy
concerns if not legal concerns around.
So I know that we are engaged in discussions about this
right now with a number of folks on the Hill to try to figure
out what the best way to do this is. But let me be clear. We
have looked at this. Our sense is that for 80 to 90 percent of
the pooling and servicing agreements, with the guidance that we
are going to issue next week, we feel very comfortable that
that provides servicers with the comfort that they need to go
ahead and start modifying the loans without significant fear
about lawsuits. But there remain roughly 10 to 20 percent of
these pooling and servicing agreements that have more
restrictive language which potentially will still be
problematic, and that is where I think we need to try to focus
our effort and to see if there are other--whether it is
legislative solutions--we think we are going as far as we can
go under our existing power with these guidelines, which do
have the force of guidelines from Treasury that apply to every
financial institution, that we can solve a large piece of this
problem through that.
Senator Martinez. Well, I hope so. My sense is that--well,
maybe the problem is not with all private servicers. I believe
that anyone who is concerned about a private investor's
reaction to a modification might have a problem, but, anyway, I
would like to know your thoughts on bankruptcy cramdown,
essentially, as it is called, and you mentioned the
constitutional issues with renegotiating contracts. Obviously,
in the legal context of a bankruptcy, perhaps those problems
will be avoided. But I know we are going to be confronting that
issue. Do you think that that is a necessary element to have in
the arsenal available to be able to stave off continued
foreclosures and, you know, the detrimental effect that has on
the housing market?
Secretary Donovan. The President believes and I believe
that carefully tailored bankruptcy reform is a piece of the
solution. Clearly, making sure--and this is absolutely why we
took action in the way that we did. We have to make sure that
well before we ever get to a bankruptcy court or to
foreclosure--and, in fact, even before borrowers get to 90 days
delinquent--it is critical that we start to modify these loans
in significant numbers. That avoids bankruptcy court. It avoids
foreclosure. It avoids the terrible effects on the families
themselves, but also their neighbors and the communities.
So we do not see bankruptcy court as the place to work out
mortgages. We think that would be a terrible result, frankly,
of what could be happening. But we do see that carefully
tailored reform that includes the kind of things that I
mentioned earlier--for example, having it be retrospective
rather than prospective, applying only to existing loans rather
than new loans; a limit on the size of loans, we have discussed
as well, to, for example, the conforming loan limit so that we
do not have millionaire homes that end up in bankruptcy court;
provisions that would ensure that if a servicer has made good-
faith efforts to modify the loan along the lines of our
program, that they are protected, as well as making sure that
there are provisions in the code that would allow us to protect
against an example where it was coming through foreclosure and
would be modified down to a level that was well below the
market value of the home. We do not want, you know,
arbitrariness or the unpredictability of a bankruptcy judge
modifying, you know, to a level that is well below the value of
the home, because we do not think that that is fair as well.
So those types of careful tailoring of it we think can make
sure that it is done in the right way and not introducing
stability into the process.
Senator Martinez. My time is up. Thank you very much,
Secretary.
Chairman Dodd. Thank you very much.
Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair and Mr.
Secretary. I want to follow up just a little bit of new
information there that I had not heard before regarding your
points about the tailored nature of bankruptcy. Can you expand
just a little bit on the good-faith provisions, if I caught you
correctly, that if a servicer proceeds to work with the
administration's program and does so in good faith, then in
that case modification and bankruptcy would not be on the
table? Is that correct?
Secretary Donovan. Well, let's be clear. Bankruptcy reform
is something obviously that Congress is going to make a
decision about. There are discussions ongoing about ideas like
this. So there is nothing in our modification plan that sets
the detailed limits or lays out these ideas about bankruptcy
reform. That is really going to be part of a discussion with
all of you, and those discussions are ongoing.
So what I am laying out are potential ideas for ways to
target bankruptcy reform in a way that we think would be most
effective.
Senator Merkley. Thank you. I will say that as I went
through the details of the loan modification program, I think
that your team and the Treasury team and Larry Summers' team
are to be saluted for really wrestling with a lot of nitty-
gritty details and trying to lay out a road map of how to make
modifications work. So I do compliment you all on that.
I remain a bit of a skeptic about how easy this is going to
be because of the enormous thicket of challenges: the issue of
second mortgages, the issue of legal liability, the fact that
the servicers have conflicting language over the range of their
authority. Certainly we have seen in the past that there has
been great reluctance to wade into those issues. I think you
have done everything possible in laying out this plan to
overcome that.
But is there a Plan B? If, in fact, all of these incentives
and, in addition, the carrots and the sticks, the bankruptcy,
if these things do not result in a significant number of loan
modifications due to the problems we all have worked to
overcome, is there a Plan B on how to take on using, if you
will, the refinance strategy in addition to the loan
modification strategy?
Secretary Donovan. Well, first of all, let me say you are
absolutely right that this is a complicated problem, that we
find ourselves in a very difficult situation. The complexity of
these loans and the securities behind them, it is not simple,
and we have done an enormous amount of work with our team to
try to get through a lot of those issues, and I appreciate your
recognizing that.
What I would say is that we have through this plan tried to
provide a range of options: the refinancing proposal that will
move forward with the GSEs for underwater borrowers; fixes to
Hope for Homeowners to make sure there is an option that
includes principal reduction; and getting folks into long-term,
fixed-rate FHA loans. So we do have a couple of pieces to this
that I think complement well the modification effort.
Obviously, to go to Senator Reed's comment, we will be
watching this very closely, watching the results. If there are
tweaks that we need to make to the program, we will do that.
But I want to make very clear that we expect servicers to move
quickly and not--one of the problems that we have had, I think,
over the past year or so is a shifting target and a shifting
set of programs. We want to send a very clear message that this
is a comprehensive, full solution that we want to focus on
today and make it work. We are working with the servicers, with
the guidelines out next week. We expect to see a large number
of modifications happen very quickly. And I do not want to
engage in too much discussion about Plan C or Plan D because,
frankly, we think this is the right program, and we think that
it can be effective and that it will be effective with the set
of options that we have provided.
Senator Merkley. Thank you for laying that out.
I held a conference in my State last week over the
foreclosure mitigation issues, a wide range of participants.
What came out of that meeting was--the single core message was
how difficult, how extraordinarily difficult it is for
homeowners to reach anyone with whom they can actually
negotiate. You can imagine the situation of going through the
phone tree and finally getting somebody on the line after you
have been waiting an hour or so, and the person says, ``Well, I
cannot address loan modifications. I can tell you what your
balance is on your loan,'' or when your last payment was or
whatever. And so they try to get through to somebody with
authority, and after they have spent multiple hours, several
days, they give up.
So anything that can be done--and I know my time is up, so
I will just--but anything that can be done, whether it is a
national hotline, whether it is the support you are considering
providing to servicers to enable them to expand their training
and their staff, their negotiation team. If there is not a
channel of communication that ordinary people can get through
to someone, it will greatly hinder the success of this. And I
just encourage you, I bring you a message from frustrated
homeowners in Oregon that they need help getting through to
people that they can actually talk to. Certainly it is much
less of an issue when loans are held in a portfolio, but when
they have a servicer who loans--a servicer connected to a
trust, and the trust has split up the cash-flows and sold them
as derivatives, it just seems like the message is that when
there is not a personal relationship with a local institution,
it is very, very difficult. I think you know that.
Secretary Donovan. I could not agree more, Senator. I think
it is a very, very important point, both to make sure that we
have outreach from the servicers, and the compensation you
talked about is an important part of them being able to staff
up and really provide the service that we need.
We also need counselors out there, and as part of the
Housing and Economic Recovery Act, a significant amount of
funding that you provided through NeighborWorks. We have been
meeting with NeighborWorks and making sure that all of this
information is available, that they are reaching out and that
that money is available as quickly as possible to help
counselors.
And also Chairman Dodd had a terrific idea earlier about
advertising, using campaigns. That is something that I think we
will try to see if there are ways that we can get out there and
inform people. And as I said earlier, 888-995-HOPE is the
national hotline that has been set up that is available for
borrowers who have questions about the plan, want to see if
they are eligible, or go to our website at www.hud.gov.
Senator Merkley. Thank you very much.
Chairman Dodd. Thank you very much, Senator.
I apologize to Senator Bayh, but we try to do this in the
order that people arrive, so Senator Reed.
Senator Reed. Thank you. Evan, do you need to----
Senator Bayh. No.
Senator Reed. OK. Secretary Donovan, I have been arriving
and leaving constantly, so thank you for keeping track. But
Secretary Donovan, again, congratulations and we are extremely
delighted and very confident of your role going forward.
The plan rests upon the effective actions of the GSCs, FHA,
Veterans Administration, Fannie, Freddie, and there is an issue
of capacity. Do they have the resources, the computer
resources, the personnel? This is a program that has to work
not only to help families, but also to be financially sound and
well managed, and I wonder if you have any specifics relating
to program improvements or additional resources you need. And I
say that in the context that last year, Senator Shelby and
Senator Dodd were very kind, because we included in FHA
modernization language in the legislation. They have that, but
we have to go beyond the language and make sure they have the
resources. So any comments, I would appreciate.
Secretary Donovan. Well, it is very important both that the
GSEs and FHA have adequate resources. The President is
releasing our initial budget today and I think you will see
that does focus extensively on building FHA capacity. You all
have been very, I think, forward-looking in terms of
recognizing the need to enhance staffing systems at FHA to
handle the increasing volume, and that includes the
modification efforts that we will undertake at FHA.
There is legislation that we hope would be part of the
package that both has some improvements to Hope for Homeowners
but also allows partial claims to happen at FHA so that FHA can
participate in this modification program in a very consistent
way with the plan that we have laid out.
And then on the GSE side, at the broadest level, the
announcement as part of this plan that we would, as authorized
by Congress, increase the Keep Well by $200 billion ensures
that Fannie and Freddie will have the resources to be able to
implement this plan and continue to guarantee mortgages.
But we are, rest assured--I was talking to somebody this
morning who was in meetings until 12:30 in the morning with the
team that is implementing this. We are making very, very sure
that there is adequate reporting, oversight, that the systems
are there to be able to implement this plan. We are doing it
very quickly and I can't promise that we won't make some
mistakes, that we won't have to learn as we are going, but we
are very focused on the implementation and making sure the GSEs
have the resources and they are doing what they need to do.
Senator Reed. Thank you very much, Mr. Secretary.
There is another issue, and this is part of the, not
directly related to housing but part of the current crisis.
There are many not-for-profit organizations, hospitals are just
one example, who have been sort of squeezed out of the credit
markets. Some hospitals participated in these option rate bond
mechanisms. That option rate bond mechanism has essentially
closed down and they are looking at serious financial issues.
Since 1978, in my understanding, HUD has the ability to
allow hospitals without existing capital projects to refinance
their debt into lower interest rate loans. I would ask you to
look at this issue, and not just yourself but share it with
your colleagues on the economic team, because I have a feeling
that one of the repercussions of this crisis is that there are
going to be some not-for-profit hospitals across the country
who are going to be in difficult shape when their existing
financing, which sometimes was as low as 3.5 percent, is now
kicked up to 12 and 13 percent, just unaffordable. So you have,
I think, some authority and I wish you would look into that, if
you would, please.
Secretary Donovan. Absolutely. I think we both need to do
things to strengthen the bond markets in general, and that was
part of what the President announced last week, was
strengthening for HFAs, State HFAs who can be a real part of
this solution with refinancing using the $11 billion in tax-
exempt bonds that was part of your Housing and Economic
Recovery Act, but also the hospital program is key. Despite
being from New York, it used to be that the portfolio in the
hospital program was about 80 percent New York City hospitals
and New York State hospitals. One of the great things about the
program, it has now expanded significantly where it is
providing financing for hospitals across the country and it is
very, very important.
Senator Reed. Thank you. One final point, because I have a
few minutes. The Chairman has pointed out and my colleagues
have echoed the need to communicate with the public these
details, but I think there is another message that has to be
continually communicated, not just by yourself but by the
President, is that for those people who are paying their
mortgages and feel the sense of, well, that they are torn
because they want to help their neighbor but they are making
their responsibilities, the fact that if we don't move
aggressively with respect to these foreclosures, the market
will deteriorate so that people a year ago or today who are
making it won't be making it. They will be in the next wave of
these foreclosures. I think that message has to be
communicated, as well as the details of how one qualifies for
this plan.
Secretary Donovan. A very important point. Our models based
on the plan show that simply by modifying mortgages in the way
that we are proposing, the $75 billion dedicated to that, we
will help to avert a loss of $6,000 in value for the average
homeowner, not the average homeowner in foreclosure, for the
average homeowner that is making their payments across this
country. So it does have a very tangible, concrete benefit to
everyone.
Senator Reed. I think that point has to made over and over
again, because frankly, people, they are struggling and they
are doing their best and they have got to know that they are
getting a benefit, too. Thank you.
Chairman Dodd. Thank you, Senator.
Senator Bayh.
Senator Bayh. Thank you, Mr. Chairman.
Secretary, thank you for your service.
Secretary Donovan. Thank you.
Senator Bayh. I think your energy and your confidence will
bring a breath of fresh air to the Department at a time when
the country needs it, so thank you for that.
Two very brief questions about things of particular just to
my State that are tangentially related to the topic at hand
today. Last June 30, President Bush signed into law an Act that
Representative Donnelly from my State worked with me on. It was
called the FHA Manufactured Housing Loan Modification Act. If
you have staff here, I hope they will make a note of that. It
is particularly important to North Central Indiana,
particularly Elkhart County, where the President made his first
trip outside of Washington as President of the United States.
The unemployment rate there is 15.1 percent.
The changes called for in the Act, although signed into the
law more than half a year ago now, have not been made. Can I
get a report from your staff about when the Department intends
to make those changes?
Secretary Donovan. Yes. Can I give you a report myself
right here?
Senator Bayh. I am highly impressed. This is a well-briefed
Secretary, Mr. Chairman.
Secretary Donovan. When we came into office about a month
ago, there was a lot of concern on your part, Senator Corker,
Representative Donnelly, and others, Chairman Frank reached out
to me about this, that there had been potentially a
determination within the Department that implementing this law
needed full rulemaking, which would have delayed the
implementation of it another--months, frankly, and that there
were critical changes that needed to move quickly.
We have gone back with our legal team. We have made sure
that we can go ahead and get this law into effect just with a
mortgage e-letter, rather than going through the entire
rulemaking process. That letter is being drafted as we speak. I
can't tell you exactly what day it is going to be done, but I
think within 30 to 60 days, we will have that out and the law
will be implemented.
Senator Bayh. Thank you. I am very impressed. If you would
let us know as soon as the letter is complete, I am sure the
people of Elkhart would be very gratified to know the
administration has moved this quickly in the face of previous
inaction, so thank you for that.
The second thing will come as no surprise to you, either.
We had mentioned sometime before your confirmation the
situation in Gary, Indiana.
Secretary Donovan. Absolutely.
Senator Bayh. You know, they are very desirous, as are
people outside of Gary in that part of our State. They have
hundreds of derelict homes. It is keeping project capital from
coming in. They become sites for the illegal activities and
that sort of thing. They would like to have an aggressive
program of tearing down those homes, rehabilitating the land,
preparing it for private home construction, that sort of thing.
I was pleased to see that the administration is putting
together something called the Affordable Housing Trust Fund,
which might be eligible for this, or you already have in place
in the Neighborhood Stabilization Fund. If I could just get a
report at some point, Mr. Secretary, about what could be done
through those avenues or others to help facilitate this process
in Gary, because until we take care of those derelict homes,
frankly, it is going to be very hard to generate much positive
activity on the upside.
Secretary Donovan. Absolutely. When we talked about this,
one of the points you made, which I think is right, I have been
hearing this from smaller counties in California and Florida,
as well, where the original formula for the $4 billion in
Neighborhood Stabilization funding, a large share of it went to
States. It didn't necessarily reach, at least directly, lots of
the locations, particularly smaller areas, smaller towns that
weren't eligible directly, to be able to deal with the problems
of foreclosed homes, vacant homes.
I am very happy that as part of the recovery bill, there is
an additional $2 billion in Neighborhood Stabilization funding.
Yesterday, the Vice President announced we were releasing
allocations for 75 percent of all the HUD funding that was in
the bill, over $10 billion. We are now going to move to
implementing the competitive aspects of it and we should have
those competitions written within the next 30 days or so, and
that includes this Neighborhood Stabilization funding. It is
competitive and we want to really target the areas that have
comprehensive strategies, that are working already well with
Neighborhood Stabilization or didn't get access to it.
But I think in particular in Gary, where, for instance, in
the Chicago metropolitan area there has been a very good,
strong, coordinated effort around this issue, that we ought to
be looking at innovative things like that----
Senator Bayh. They have such a concentrated problem that it
really would pay huge dividends, so I thank you for your
cooperation on that.
I have got 22 seconds left. Let me ask you this, my final
question. Do you know what percentage of mortgages in the
country are current, being paid on time? It has got to be 90
percent, something like that.
Secretary Donovan. Roughly 90 percent are----
Senator Bayh. Well, here is my question. I hear from people
all the time who say, look, I did the right thing. I have lived
my life prudently. I saved my money. I didn't buy a house that
was too big for me. I didn't take on a loan that I couldn't
afford. And now I see my tax dollars are being used to help
those who made different decisions. How is that just? How is
that fair to people who have lived within their means?
So my question to you would be, on behalf of the 90 percent
of people who are current with their payments, how are we not,
in essence, enabling unfortunate behavior through our
activities? Now, I am playing a little bit of a devil's
advocate here, as you can imagine, but that question is out
there. People are angry. I think it needs to be addressed head
on. What would you say, Mr. Secretary?
Secretary Donovan. It is a very important question. There
is a lot of anger. There are a lot of things that are happening
in this country that are unfortunate that are happening to
families. I think it is very important, first of all, that we
recognize the most significant part of our plan in many ways is
to take the actions we need to take to keep interest rates at
what are really generational lows. That benefits every single
American family that owns a home or wants to buy a home.
Twelve-hundred to $1,600 a year, on average, we think just the
actions we took to keep Fannie Mae and Freddie Mac interest
rates low will have that benefit. So that reaches every
homeowner in the country.
Refinancing, where a family has made every payment, they
are current on their mortgage, and simply because housing
values have dropped around them in their community, they may
have a seven or an 8-percent mortgage rate, they can't take
advantage of the refinancing to today's low rates. We are going
to change that through our initiative in the plan. Four to five
million homeowners who can benefit, an average of about $2,600
a year for those families to benefit.
All of those, good credit, paid their bills, done
everything right, haven't made mistakes, they are all
benefiting.
But I think the final thing that is perhaps most important
for those concerned about are we providing money to people who
overstretched, who shouldn't have gotten into homes that were
too expensive to begin with, we are doing everything we can in
that plan to target it to people who are paying their bills,
that are working hard, but we have to recognize, first of all,
there is a lot of job loss in this country. The number of
people, because they have a medical emergency and they can't
pay a bill.
We have to, I think, as Americans, rise to the occasion and
say, yes, we are going to do everything we can in this program.
We are not going to allow speculators to participate. We are
going to check incomes carefully. We are going to make sure we
don't have fraud. But we have got to help folks.
And, by the way, it is helping ourselves because 45 percent
of all home sales in December were distressed sales. That
drives everybody's home price down. Just through the
modifications that we are doing, we think we can save the
average homeowner in America, the ones who have played by the
rules, making their bills, $6,000 on their home value. So we
have got to make sure that, I think, Americans understand that
this crisis we are facing, the foreclosure crisis, is hurting
everyone and we have got to stop it so that everybody benefits,
as well.
Senator Bayh. Thank you, Mr. Chairman.
Chairman Dodd. Those are excellent, excellent points. I
would just point out on the same point that in my home State, I
don't know if this is true of all States, but my community
bankers--and I think one of the things we have got to be
careful of is the language we use describing bankers because a
lot of our bankers at the local level have been prudent lenders
over the years. In Connecticut, they tell me, my community
bankers, that the best month they have had on mortgage
origination was the month of December, and the next best month
for them was August of last year. I don't know what the January
numbers look like.
But at a certain level, and obviously it is not everywhere,
but there is good lending going on out there and there is
activity. In fact, in credit markets, I think, what is it, a 5-
percent, 30-year fixed-rate mortgage is available today, which
is a pretty good indication that at least in that credit
market, there is some level of activity that ought to be
encouraging to people.
Secretary Donovan. And we need to get back to basics in
lending the way a lot of community bankers did the right thing
and those mortgages are performing well.
Chairman Dodd. But your $6,000 figure is a very important
piece of information that I think needs to be transmitted, as
Senator Reed said, over and over and over again to people that
they understand that even though they are not in that category,
they are a beneficiary by getting this back on its feet.
Senator Schumer, before, when you were in and out, I was
saying that a lot of us got to know about Shaun Donovan because
of you, and your best cheerleader up here in terms of your
tremendous work in the city of New York was certainly trumpeted
by Senator Schumer over and over again. So you have got a great
ally and friend here in the Senator from New York.
Senator Schumer. Thank you, Mr. Chairman.
Secretary Donovan. Hear, hear.
Senator Schumer. Thank you, and I think, as you know
because you are so on top of all these issues, as America gets
to know Shaun Donovan the way New York has gotten to know him,
they are going to realize we are going to have one of the best
Housing Secretaries that we have ever had----
Secretary Donovan. Thank you.
Senator Schumer. ----and so welcome, Shaun. We are glad to
see you here.
First, just a point of reiteration. Senator Reed, Jack
Reed, mentioned putting hospitals, seeing if they can be
eligible for FHA.
Secretary Donovan. Yes.
Senator Schumer. You know, the problem of people getting
financing is just everywhere, and sometimes I worry that we are
not even as knowledgeable of it as we had--well, hospitals. I
have heard many hospitals have the money, have the resources,
have the ability to build and can't get any financing. So
looking at FHA that way in terms of job creation without
costing us much, please look at it.
But here is my main point. You know, I think the housing
plan that you and Tim Geithner and, of course, the President
put together is really a home run. The Bush administration sort
of when it came to foreclosures watched all the fast balls go
by--they are fast balls, they are hard to hit--and refused to
even swing. You have stepped up to the plate, you are swinging,
and I think you have knocked it out of the park.
And I don't think there is enough understanding of this,
and so I would like to just reiterate--Senator Menendez touched
on it. I would like to just elaborate on what he talked about.
Sorry I couldn't be here while you were being asked all these
other questions.
The real block, in my opinion, has been the servicers and
the bond holders. It hasn't been the homeowner, even the
homeowner who could afford to pay back. It has been the
servicers and the bond holders. Now, the bond holders have
their own economic interest sprayed all over the lot because
very few home mortgages are held and the riskiest tranche
holder has a different interest than the safest. The riskiest
says, I am not doing this because I lose all my money if the
house is 98 percent of its value. Well, you got the higher
interest rate for that.
But the servicers are the ones who could do something. And
unfortunately, the previous administration didn't really focus
on the servicers. They said, go do it and we will protect you,
but it was sort of vague. What you have done in your plan is
laid out specific guidance that every regulator agrees to and
that most legal experts say will protect the servicer as the
servicer endeavors to refinance the mortgage so that it can be
at a lower rate.
The plan also very intelligently, I mean, I know Evan asked
the question, well, what about people who really got
underwater, way over their heads? They are not going to be
helped by this. But people who may have lost a job who had
always paid, and maybe they are paying 50 percent of their
income as mortgage, not 80, but 50, not 200, will really be
helped by this and they are the right group to help.
But I think the most important thing is something you told
me, and I would like to get that out here, and that is that
many, many servicers have agreed to start refinancing the
mortgages and they feel they are protected by the guidance that
you have issued. That is a key, because if a large percent of
their servicers say they are going to step up to the plate, you
are going to see a lot of refinancing and a lot of homes that
might have gone into foreclosure taken off that list in the
next three or 4 months.
So could you elaborate a little on that? I think that is
really important for the public to know.
Secretary Donovan. Thank you. As I said earlier while you
were out of the room, I am very excited that Senator Menendez
will be Chair of the Housing Subcommittee, but I will miss you
as Chair there----
Senator Schumer. I am very excited that is the Chair of the
DSCC.
[Laughter.]
Secretary Donovan. So that is very important. We have tried
to work very closely with servicers. We believe, as you said,
that we have tried to make sure we are covering all the issues
around their compensation, their incentives, around these legal
issues with the investors. But the proof of the pudding is that
they are, first of all, they suspended foreclosures pending the
plan, which clearly signals they think there is something in
the plan that really helps them move forward on the
modifications.
And I have already had commitments, Jamie Dimon himself
said a million loans, they think they can do through this, just
at JP Morgan Chase. We had a meeting yesterday with the
servicers with President Wells and he said this will allow them
to move forward and to do a very large number of loans.
Senator Schumer. I think the public has this view that the
servicers are little entrepreneurs all over the lot. What
percentage of the servicers come from the large banks who, say,
have accepted significant money from the TARP?
Secretary Donovan. The largest banks cover about two-thirds
of the servicing.
Senator Schumer. And you have a little leverage over them,
I would say?
Secretary Donovan. And, in fact, we have made it explicit
that any funding from TARP requires participation--any new
funding from TARP requires participation.
Senator Schumer. So this means that right now, two-thirds
of the servicers are likely to go along with this plan for
those mortgages that meet the guidelines and the guidance that
you have put out, is that right?
Secretary Donovan. We hope it goes well beyond those
biggest----
Senator Schumer. But if it goes to two-thirds, shouldn't
that be a real change in the housing markets and rates of
foreclosure, and even shouldn't it help us find a floor?
Couldn't the markets, the housing markets then say, hey, so
many of these are being refinanced. We know now that there is
going to be some floor to housing.
Secretary Donovan. Yes.
Chairman Dodd. Let me ask, how about the previous
recipients of TARP, as well, doing exactly what we described?
How many more would you include if we added previous recipients
of taxpayer money?
Secretary Donovan. To be honest, I don't know--I don't have
the details. I don't know the numbers of going forward versus
previous.
Chairman Dodd. But it would be higher----
Senator Schumer. But I think, yes, and Mr. Chairman, I
think most of the big banks that have already received TARP
money who are servicers have agreed to be part of this, isn't
that right?
Secretary Donovan. Absolutely.
Senator Schumer. So you have got them, I mean, the
Citigroups and the JP Morgans and the Wells and all of them.
And they are the servicers. That is the amazing thing. I didn't
really know that until you told me.
Secretary Donovan. Yes.
Senator Schumer. So I really would say that your program is
going to have a significant and deep effect on housing markets,
improving them, and that can reverberate throughout the whole
economy. You know, I am sort of surprised it hasn't gotten more
focus and more attention. I don't know why, but----
Secretary Donovan. I think when we can show results, and we
will very clearly be focused on auditing and making sure that
we are getting the results that we----
Senator Schumer. One final question. When should we start
seeing the results that this guidance, the effect it will have
on the servicers?
Secretary Donovan. Well, next Wednesday, March 4, we are
going to release the guidance. We, based on our discussions
with servicers, believe that servicers will be able to almost
immediately begin modifying loans under the guidance. It may
take some of them a little bit of time to, you know, get the
systems and all that going, but we are working on it with them
already.
So I would hope that in March, but certainly in April, we
start to see a significant decline in foreclosures. Again, 45
percent of all home sales in December were distressed sales, so
there is no question that if we can lower the number of
distressed sales of foreclosures that we can begin to stabilize
the market and help it return to balance.
Senator Schumer. And that is going to mean some real stuff
to the stability of the banks and of the whole financial
markets, because they are still holding this paper. They don't
know what the bottom is. So this is dramatic and significant
and I would just commend to my colleagues, the public,
everybody, pay a little attention to this because it is one of
the first early bits of good news, I think, that I have heard
about this, and I congratulate you, Secretary Geithner, and the
President for coming up with it.
Secretary Donovan. Thank you.
Chairman Dodd. Senator Warner.
Senator Warner. Thank you, Mr. Chairman. Let me thank you
and colleagues who have been here long before me for continuing
to raise this issue, particularly in terms of the importance of
finding relief for the housing sector and the fact that you
have been a constant advocate on both sides. If we are going to
spend TARP money, make sure some of it is directed here in the
housing area.
Mr. Secretary, good to see you again. I have a couple of
lines of questions and I will try to be brief. One, I know some
of my colleagues when I was not here pressed somewhat on how we
make sure that folks around the country understand these new
programs and how they get access to it. One point that I am not
sure that you fully addressed, though, is that I am getting
folks calling our office, and Lord knows it is going to
exponentially increase on the fourth, and they are saying they
are calling their servicers and some of their servicers are
actually not telling them who owns their loan at this point.
There seems to be some ambiguity in the law whether a
servicer is actually required to disclose who the owner of the
loan is, and we have had this on a number of occasions and it
sure seems to me that we need to make sure that there is
clarity on that, whether there needs to be regulatory change or
at least guidance. I could see these servicers getting flooded
with calls on March 4, and if there is still this ambiguity,
some folks coming back even more confused if they can't even
find out who actually owns the loan at this point. Have you
heard----
Secretary Donovan. I appreciate your mentioning that. We
are working in depth on the guidance now and we will ensure
that that is an issue we look at.
Senator Warner. Please look into that.
I am a little bit of a broken record, Senator Bennet and I
are on this issue, and Senator Menendez and Senator Schumer
have raised it in terms of hospitals, but I do think anything
we can continue to do for this whole municipal bond market, and
a piece of that, obviously, are our housing agencies that I
think can play an important role, and have you given any more
thought to how our State and local housing agencies will play a
role in this real estate recovery?
Secretary Donovan. I am very glad you asked that. Virginia
in particular has one of the strongest housing finance agencies
in the country, and it has done great work.
The President actually mentioned in his speech last week
that as part of this plan, we are going to provide some
assistance to housing finance agencies who can really be part
of the solution here. There was $11 billion in new tax-exempt
bond authority that was part of the Housing and Economic
Recovery Act last summer. But because of the issues in the bond
market that you rightly point to, they have not been able to
fully utilize that funding to be able to take advantage of the
refinancing they could provide and other benefits they could
provide.
So we really have two lines that we have been working on
with Treasury on this front. One is there are existing bonds
that because of the lack of liquidity out in the marketplace--
and many of these are, you know, weekly resets or bonds in
particular that have struggled, auction rate securities. My
experience in New York, the market just dropped out on those.
So making sure that there is adequate liquidity available for
existing bonds that are out there so that we do not have, you
know, real problems for the housing finance agencies on the
loans that they are already holding. And then in addition, for
new bonds that they are going to issue, looking at whether we
can--what we can do to ensure that there is an adequate market
out there.
Obviously this goes well beyond just HFA bonds, municipal
bonds. There are lots of different issues in the market, and
Treasury is looking at that issue more broadly. But we want to
make sure on the housing front that there is an adequate market
for these bonds going forward.
Senator Warner. Well, Chairman Dodd has been very
supportive and helpful to those of us who have raised this
issue, and all I can make a request is when we have had
Secretary Geithner and when we have had Chairman Bernanke in,
we have not heard a lot of specificity. In fact, I believe
Secretary Geithner said he had not seen any good ideas around
how we could restart the muni markets. And I would hope that
you would be the inside-the-administration advocate that this
is directly helpful to not only the housing market, these are
oftentimes shovel-ready projects. I know Senator Bennet has got
a great interest in a number of school bonds. There are highway
bonds. There is a whole host of municipal bonds out there that
if we can jump-start that, these are truly projects that are
ready to move forward and that would be very valuable.
Secretary Donovan. On the good news front as well, just to
make sure you know, yesterday we released $10 billion, about 75
percent of all HUD's funding from the Recovery Act. That
included $2 billion, over $2 billion for housing finance
agencies to help jump-start tax credit deals that are stalled.
So very hopeful that by getting it out so quickly, we can make
sure those projects move forward.
Senator Warner. Mr. Chairman, could I ask one more
question? I know my time has expired.
Chairman Dodd. Because you missed your opening statement,
take a little more time.
Senator Warner. A Schumer 2 minutes or----
Chairman Dodd. Don't press your luck.
[Laughter.]
Senator Warner. I think you have laid out the framework of
a good program. I am anxious to see more of the details. But a
piece that I know the Chairman has been supportive of as well--
and I have had my thinking change on it. If we are going to
look at bankruptcy reform that would allow principal
readjustment or so-called cramdown, my hope is that it does
become the hammer of last resort. And it seems what has been
missing--and I can understand perhaps timing-wise now why you
did not include it in this initiative. But for those homeowners
that are truly underwater, if we provide that bankruptcy
reform, I would hope the administration would give some thought
to, you know, what initiative or what program could be out
there as the step before you have to take that. We should
reserve that bankruptcy process as the ultimate last-resort
hammer, and I hope there will be some interim prerequisite of
good faith acted by the homeowner to make sure that they have
really tried and that the servicer and the lender have really
made a real effort, and that we only push folks into using this
tool in bankruptcy as the ultimate last resort. That has been
kind of missing from the debate. I know you have received some
comments that the program does not address those folks that are
more than 105 percent below their loan-to-current-value ratio,
those folks who are really deeply underwater. At some point,
they are going to have to be part of the equation as well, or
they are all just going to move into the bankruptcy provision
if the reform is made.
Secretary Donovan. A couple of comments on that because it
is very important. We completely agree that bankruptcy court
should not be the place where, you know, millions of loans are
worked out; that if that happens, that is a problem for
everyone, and that we want to do everything we can to avoid
that. And I do think there are other options in this program.
The President did say as part of his speech, obviously it
depended on legislation in Congress, that we do support
tailored, targeted bankruptcy reform. But we do have options as
well. Making sure Hope for Homeowners is a viable alternative
which allows a mortgage to be re-underwritten at a reasonable
level with principal writedown, make sure that program is
effective.
As Chairman Dodd said earlier, none of us knew maybe where
we would end up and that what was designed in Hope for
Homeowners was based on what was happening at the time, and we
are at a different place now so we need to adjust the program
to make sure that that works. I think that is an important
component.
The other thing I would say--and there has not been much
attention on this, but it is important as well--we have added
incentives for things like short sales or deed in lieu of
foreclosure. You have lost your job, but you find a job in a
new town, you have got to sell your home but it is underwater--
you have got a problem, right? Because your only alternative
really is bankruptcy or to go through a foreclosure, wreck your
credit. And, frankly, the bank is not going to recover--if you
are really underwater, they are not going to recover any more
either. So the best solution there is often a short sale, which
is where a bank takes less than the face value of the mortgage
to satisfy the debt, and you can then move and leave your home.
It does not restore all your equity, but it at least allows you
to get on with your life. We have incentives for those kinds of
alternatives so that you do not end up in bankruptcy. So there
are a number of provisions we have tried----
Senator Warner. Making clear what that bevy of options
would be before bankruptcy. The last point I will make just is
a comment, that I sure as heck agree with the Chairman and
Senator Martinez that one piece on the servicers was to make
sure we give them the right incentives to act. But the other
piece I continue to believe--and Senator Schumer made a comment
about this. Since we have sliced and diced these loans into so
many tranches and because there will be an unwillingness of
those folks who are at that top 2, 5, 10 percent, the
discussion we had earlier, that are most exposed, and then we
have got all of the side bets and credit default swaps that
were made on that last tranche, you know, the more we can clear
out some of the legal hurdles and the more we can do some hold
harmless or what the Chairman put forward in his amendment, it
has got to be a piece of this mix or, you know, all these good
intentions could still end us up in court.
Secretary Donovan. Yes.
Senator Warner. Thank you.
Thank you, Mr. Chairman.
Chairman Dodd. Before I turn to Senator Bennet and Senator
Akaka, could I raise--just on that last point, take advantage
of Senator Warner's question. This is about the safe harbor
bankruptcy, the lenders that offer borrowers a loan consistent
with your program. The second lien holders. There is an issue
here that we are going to confront, and I do not know whether
we address it or not, and there are some concerns that under
the administration's proposal and the safe harbor--and this is
a very important question. Are we adequately covering the
second--are we going to be able to deal with the second lien
holders? So many of these were piggyback loans, and whether or
not they are going to be accommodated for that in this idea. Or
are we giving the lender, in effect, veto power over all of
that?
Secretary Donovan. I think it is important to make clear
that there are two very different situations for second lien
holders: a modification versus a refinancing. In a
modification, you are keeping the existing first loan in place
and changing the terms of it. A second lien holder has no
ability to stop the modification or to--so for the modification
program, the second liens really--and we have heard this
consistently from servicers. They are not a significant
problem. We are still looking at whether there are some
enhancements to the program as part of the final guidance that
we might, you know, deal with second liens even in that case to
make sure that they stay silent and they are not an issue.
But I think the real issue is around where you have
refinancings, where you are extinguishing the first lien, and
then would you have to get explicit permission or resubordinate
the second, what you do with those. And that is where we are
looking at in more detail exactly what should be done and as
part of the guidance. I think you will see next week that we
have some ideas around that.
But, really, I want to make clear: On the modifications,
everything we are hearing is that they are not a significant
issue because the first----
Chairman Dodd. I appreciate that, and obviously a lot of
members on this side of the dais are very interested in how
this moves forward. So we would love to stay in very close
contact with you.
Secretary Donovan. Mr. Chairman, if I can just take one
moment, I realize----
Chairman Dodd. That is fine.
Secretary Donovan. Senator Warner made a point that I want
to make sure is absolutely clear, because there has been some
real confusion about this. The 105-percent loan-to-value
restriction is only on the Fannie Mae and Freddie Mac
refinancing initiative. For modifications, borrowers that are
much more significantly underwater, up to typically about 150-
percent loan-to-value, can participate in the modification.
Senator Warner. But that is in the first--the Homeowner
Stability Program I thought was the one that had the cap at
105.
Secretary Donovan. There is a portion of this which is a
refinancing 4 to 5 million homeowners, existing Fannie Mae or
Freddie Mac loans that are current on their mortgages, that are
paying, and cannot refinance to today's low rates because they
are at 80-percent to 105-percent loan-to-value. Those are the
folks we are going to allow to refinance but they are current.
Where somebody is more significantly underwater, having trouble
paying their mortgage, you can be more deeply underwater to be
able to participate in the modification.
There has been a lot of confusion about this in the press
and otherwise, and I am happy you raised it because I want to
make sure that that is clear.
Senator Warner. So those folks can be at 150----
Secretary Donovan. More deeply underwater. We think
generally 150-percent loan-to-value is as far as we can go,
because for modifications to be successful you cannot be so
deeply underwater that----
Senator Warner. And that is the program where we are going
to try to modify and buy down to 31 percent of income.
Secretary Donovan. Exactly.
Senator Warner. Making that clear would, I think--I think
there has been--the press has really----
Secretary Donovan. Yes, has been confused.
Senator Warner. ----not understood that.
Chairman Dodd. Senator Shelby has something on the same
question. I apologize to my colleagues.
Senator Shelby. Along these lines, it is my understanding
of the legal--you have got a first mortgage, then you have got
a second mortgage. Of course, we know the first mortgage has
priority over everything. But if you supersede that first
mortgage with another mortgage, in other words, pay it off and
modify it, lower the terms, couldn't you get into a dicey
situation because the second mortgage--you know, you are the
Secretary, and I am sure you have got lawyers everywhere. But
the second mortgage then becomes the first mortgage in an
ordinary situation. I guess that is what some of us--Senator
Warner was kind of alluding to this. That is kind of dicey. I
hope you are doing it right. I guess you could--I do not know
this. It depends on--you can modify something, modify the note,
but you start fooling with the mortgage, you know, especially
if you pay off the mortgage and supersede it, that mortgage is
gone. You know, and then you are in line behind the second
mortgage, which comes to the front.
Secretary Donovan. That is exactly why----
Senator Shelby. Does that make sense?
Secretary Donovan. You are exactly right, and that is
exactly why in a refinancing where the first mortgage is
actually extinguished.
Senator Shelby. Absolutely.
Secretary Donovan. That is where the second lien becomes an
issue, and that is what we are focused on dealing with.
Senator Shelby. It would come to the front, wouldn't it?
Secretary Donovan. Right.
Senator Shelby. In the priority.
Secretary Donovan. Whereas a modification, the first stays
in place, and it does not--the second has no right to supersede
the first.
Senator Shelby. It has to be done right, though. You will
have some lawsuits. I think Senator Warner was alluding to
that.
Senator Warner. Right. And if we are going to do this, we
have got to not just create this whole new legal pile of
trouble.
Senator Shelby. Oh, no.
Senator Warner. And I also think you have got the issue
even on the first mortgage, if it has been securitized and
chopped up so much, the challenge of those most at risk, the
first 2, or 5, or 20-percent holders--a different issue, but it
has got huge issues, too, since you have got all the--that is
where a lot of the side bets were placed.
Chairman Dodd. And that is where the safe harbor, I think,
is critical. Whereas, in this one, the modification versus the
refinancing, I think it is pretty clear. If you are modifying,
the safe harbor is really, I do not think, as necessary as the
first situation we talked about. If you are refinancing, as
Senator Shelby points out, then you have crossed over a line,
and then clearly you have got a problem with the----
Secretary Donovan. But even with the modifications, there
have been concerns on the part of the investors. That is why
this guidance that we are going to do next week, which from
Treasury applies to all financial institutions, is critical.
The pooling and servicing agreements say the servicer has a
responsibility to act on behalf of the whole trust, but we
think this guidance will provide them very clear, specific
support for their being able to modify, except in the most
extreme cases where pooling and servicing agreements had
unusual language, only about 10 percent or so.
Chairman Dodd. Let me thank Senator Warner and Senator
Shelby for raising this point. We have taken a little time on
it, but it is very worthwhile to have this exchange.
Secretary Donovan. Very helpful, yes.
Chairman Dodd. Senator Bennet, welcome.
Senator Bennet. Thank you, Mr. Chairman. I appreciate it,
and I apologize for coming in on the tail end, so I will be----
Chairman Dodd. Well, Senator Akaka is here, too.
Senator Bennet. I will be very brief. I first wanted to
come because I always like to see a local government guy make
good. So congratulations, Mr. Secretary, on your confirmation,
and I look forward to working with you.
I know there has been some discussion this morning about
proactively communicating with our citizens on this, and I just
want to underscore from my point of view how important that is.
We in Colorado are fifth, we think, in foreclosures in the
country by some measures, which is nothing to write home about,
but we used to be first. And we have started to see these
foreclosures decrease. The State a couple of years ago, with
the cooperation of State, private enterprise, and nonprofits,
put together a hotline I think along the lines of the one you
are talking about, and what we have discovered is that four out
of five of those calls resulted in something other than a
foreclosure for the people that were calling them. We think we
roughly saved 4,200 homes by doing that. So I encourage you--
and I know based on my travels during the recess that there is
a profound lack of clarity out there about what it is we are
trying to do. I want to congratulate the administration on your
efforts here.
There was a reminder in the President's speech this week
about how comprehensive these issues are, that it is not just
one thing, there is not one silver bullet to deal with it.
I also know you testified that as this proceeds, you will
continue to re-evaluate whether the program is being effective
or not. And I would love it if you could tell us a little more
about what kinds of triggers you are going to look at to assess
progress with this plan and what sorts of metrics we should be
thinking about as we evaluate your success.
Secretary Donovan. Well, obviously, the long-term metric on
this is what happens in the housing market and can we help it
to turn around. So clearly what this is aimed at is improving
the housing market for everybody, not just those homeowners
that are most at risk, but recognizing the terrible impact that
foreclosure is having on everybody's home value in the country.
So that is the long-term metric.
I think in the shorter term, we are going to be looking
very carefully with the data we get back from the servicers and
the auditing and other things that we are going to be doing,
first of all, what do we see in terms of modifications
increasing, and we certainly expect that that would lead to
fewer foreclosures, so looking at the rate of foreclosures and
what is going to happen there.
It is also going to be the quality of the modifications and
how long they last, making sure that people have verified
income, that we are getting to the 31-percent debt-to-income
ratio. We have seen lots of modifications, frankly, where
payments are required to go up rather than down, and so it is
not just a modification. It is the right kind of modification,
and the program sets very strong standards on that. We will be
measuring to make sure that servicers are meeting that, that
they are checking income adequately.
And then also to see how long those modifications last,
that they are successful. One of the things that we think we
have certainly tried to do and we hope we have got right is to
pay for success rather than failure. So instead of guaranteeing
any loss, which only happens with a redefault, we structured
our payments so that if it only lasts 6 months, the
modification, well, you only get the payment for those 6
months. If it last 5 years, you get a much more significant
contribution. So we think we have structured it to pay for
success, and we want to make sure that we see the redefault
rates come down and that we have as many homeowners who can
succeed with these modifications as possible.
So I think those are the key metrics we will be looking at.
Senator Bennet. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Akaka.
Senator Akaka. Thank you very much, Mr. Chairman.
Let me add my welcome to Secretary Donovan to this
Committee again. I remember your lovely family when you were
here earlier. But I want to let you know that I really
appreciate your efforts in helping assist struggling families
in trying to remain in their homes. I am impressed with your
responses and look forward to continuing to work with you.
Secretary Donovan. Thank you.
Senator Akaka. Let me be more focused on my concern in my
questions, and that is, implementing housing policy in Native
American communities and on trust land which often requires
unique and innovative approaches.
Secretary Donovan, my question to you is: What will be done
to assist homeowners in Native American, Native Hawaiian,
Alaska Native communities?
Secretary Donovan. Well, first of all--and I think we
started talking about this a little bit before--outreach and
education on this issue is absolutely key. A national number, I
will say it again at the risk of repeating myself, 888-995-
HOPE, anyone anywhere in the country can call and get
information, go on HUD's Web site, www.hud.gov, and get
information about what is available, the options that are
available.
We had a very good discussion yesterday with lots of
counseling agencies and others who made it very clear ensuring
broad geographic outreach, different languages, a whole range
of things that we need to do to make sure that we are getting
the word out as comprehensively as possible.
And then beyond that, what I would say in particular, there
are a range of things we need to do for Native Americans, for
Native Hawaiians. One of the things about the recovery bill
that I think was so important is it recognized that. And, in
fact, just yesterday we announced allocations of $255 million
for Native American block grant funding, and I believe it is
$10 million for Native Hawaiian funding. So we got that out
within a week after the President signed the bill, and so those
communities will know what they have available. They can come
on in and start to sign the contracts to actually obligate that
money in the next 30 days.
So those are some things I would say about dealing
specifically with the issues in those communities.
Senator Akaka. Well, thank you for that, Secretary. I
appreciated your comments on that.
Let me then point to some loans on VA. In addition to
serving on this Committee, I am Chairman of the Veterans
Affairs Committee. The Department of Veterans' Affairs
administers a successful home loan guarantee program. Lenders
have expressed concern, however, about the possibility that the
cramdown proposal may negatively impact VA's home loan
guarantee program.
My question to you is: What will be done to mitigate any
potential negative consequences that the proposal may have on
the VA loan guarantee program?
Secretary Donovan. Excellent question, Senator. I am very
glad you brought that up because it is something I had not
mentioned before, but it is a critical issue.
Because of the way FHA insurance and VA insurance have been
structured, whether it is in bankruptcy or even in a loan
modification, there is not current authority to be able to pay
partial claims in those situations. And so in addition to the
changes for Hope for Homeowners, we have been working on
language with the Committees here that would allow FHA and VA
to pay partial claims in modifications as well as in bankruptcy
that would ensure that lenders, when they made a loan relied on
the full faith and credit of the U.S. Government can actually--
can rely on that in those situations. So that is an important
part of the legislative language that we have been working on
with the Committees.
Senator Akaka. Well, I appreciated your thoughtful
comments, again, about this. And during your nomination
hearing, the need to incorporate education in the home loan
process, we talked about this. And I know that the Homeowner
Affordability and Stability Plan focused on keeping mortgage
rates low, supporting refinancing efforts, and assisting at-
risk homeowners as we work to develop longer-term policies to
better educate and empower prospective homeowners.
My question to you is: How should education be incorporated
into the home-buying process? You mentioned outreach. You even
gave the 888-995-HOPE. Are there other matters that we can
think of in helping in the home-buying process?
Secretary Donovan. Very important question, and we do have
to remind ourselves, I think, in the midst of this crisis that
we need to look forward and, as I said earlier, get back to the
basics in terms of lending. In New York, we had a program to
create and preserve homeownership where we helped over 17,000
families, and we only had five foreclosures in that program.
And the reason for that is because we did the education. We
made sure it was affordable. We made sure the loan terms were
acceptable. You know, really the basics. And education is an
important part of that.
I think you will see--the President is releasing the first
information about our budget proposal for 2010 today, and I
think you will see that counseling is an important part of
efforts going forward. HUD-approved counselors around the
country are a critical resource, not just for helping work out
foreclosures, but also for first-time homebuyers or homebuyers
getting into a home to make sure that they are getting the
right mortgage products, that they are prepared for
homeownership. And I think that is a key thing we have got to
focus on going forward as well.
Senator Akaka. Thank you. Thank you very much for your
excellent responses.
Mr. Chairman, thank you.
Chairman Dodd. Senator Akaka, thank you very much, and as
you will discover, if you have not already, Mr. Secretary,
Senator Akaka has had--for as long as he has been on this
Committee, and I suspect even pre-dating it--a deep interest in
financial literacy issues, and we have talked about it
extensively here. It is something we really need to focus on. I
often wish that even at public elementary schools they would
begin just teaching at the earliest grades math and so forth by
utilizing examples of just balancing checkbooks and things like
that. It could be helpful. I have often said as well, too--and
I say this respectfully to all of us here--that a little
financial literacy might even begin here. I say that
respectfully to my colleagues, but I think we all appreciate
that we do the best we can, but these are subject matters that
all of us as lay people--most of us lay people--try to get our
arms around to understand as well as we should. And so I thank
Senator Akaka for his deep interest in that subject matter.
Senator Merkley had some additional questions.
Senator Merkley. Thank you very much, Mr. Chair.
Secretary Donovan, thank you so much for your testimony.
Your thorough knowledge of the topic and the details is
refreshing and gives us a lot of confidence in the work that
you are going to be doing.
Secretary Donovan. Thank you.
Senator Merkley. I wanted to put in one request with you as
you go forward, and that is, in regard to the hotline that is
being set up or has been set up, if it is possible to expand it
beyond simply a description of existing programs, if you will,
when folks calls, if they are able to be able to talk to a real
person, if they are able to say, ``I have a loan that is
serviced by so-and-so. How can I get through to somebody ready
to talk about renegotiation?'' so that they can get through to
a real person on the servicer end and bypass what will be
numerous days, numerous hours of frustration, is there any way
to utilize that hotline in a way to really help connect people
to the servicers and to action. It would be a huge, just a
monumental service to the homeowners of America.
Secretary Donovan. I could not agree more, and in the
discussions that we have been having, we are trying to make
sure that that centralized hotline can connect folks up to the
servicers as well as counseling agencies in their neighborhoods
that can help them stay in their homes and get the assistance
they need. You are absolutely right.
Senator Merkley. Thank you so much.
Chairman Dodd. Senator Shelby, any closing thoughts?
Senator Shelby. I just want to tell the Secretary again we
welcome him here. We look forward to working with you. We know
you have great challenges, but we think you have the energy and
you have got a great background, and I think you will be before
this Committee a lot, and we will always welcome you back.
Secretary Donovan. I look forward to it. Thank you.
Chairman Dodd. Let me echo those words as well, Secretary
Donovan. You have been very impressive this morning. And on the
Hope for Homeowners, I know you are doing this, but I will just
publicly--we need to get as much information because, to the
extent we can go back and make some fixes to that so it can
work as well as we would all like it to, it would be very, very
helpful. Senator Shelby and I would like to get that as early
as we can, to the extent we can bring our members together, get
around some of these ideas, and then go to our respective
leaders, assuming we can reach that kind of understanding,
which I believe we can, so that we can go forward and bring
some of these matters up for the consideration of our
colleagues on the floor of the Senate, it would be very
helpful. There is a sense of urgency, obviously, in getting
this stuff in place, so we would ask you to do that.
And, second, we have got other issues we need to talk about
with you as well as obviously foreclosure issues, a lot of
issues dealing with housing, and related matters of transit.
This Committee has jurisdiction over urban mass transit issues.
The surface transportation bill is going to come up this year,
and so that is going to be a matter which I am going to want to
engage you in, along with the Secretary of Energy, the
Secretary of Transportation, the Secretary of even Health to
some degree, talk about how we might do a better job of
coordinating these questions when it comes to surface
transportation issues, where housing and energy, obviously
transport, and environmental question--I said ``health.'' I
meant environmental issues--can really come together and we get
a working group on this so we think about it more holistically
than just transit questions but, rather, how they interrelate
with each other. And I know you have done a lot of work on
that. I was very impressed in our conversation about your full
understanding of that holistic approach to this question. So I
am going to really draw upon those years of experience you have
brought to the subject matter already.
Senator Shelby had a comment.
Senator Shelby. Just along the same lines, the Secretary I
am sure knows very well we have about--on transit-related
stuff, about 20 percent of the highway budget, I believe, of
the whole thing. So we will need to engage you because this
Committee is going to be very active there.
Chairman Dodd. And a lot of interest in the subject matter
today. This is no longer just an East Coast-West Coast thing,
but now places like Utah and Nevada and Idaho and----
Senator Shelby. And Alabama.
Chairman Dodd. Alabama, that is right, with the
concentrations in urban areas. A great trivia question is which
is the most urbanized State in America, and people are inclined
to maybe say New York or Connecticut or Illinois or something.
But the most urbanized State in the country is Nevada with the
largest concentration of population in one county, and so we
have a tendency to think of the West is not in need of transit
issues in the past, but clearly the whole country needs to
focus on this.
So I did not mean to digress from the subject matter this
morning, but I wanted to tell you how much I appreciate your
service and look forward to working with you.
Secretary Donovan. Thank you. And we have been doing some
thinking around the budget, you know, based on our conversation
and others, about how we can begin to do that. I would also
just say we have been working with your staff on--we have
announced the intent to nominate Ron Sims as Deputy for HUD,
and I think you will find--I hope you will find in the hearing
that he is very knowledgeable on these issues. He has been a
real leader around bringing transit together in King County in
Washington State with housing and a whole range of issues and I
think could be a terrific resource on doing this. I hope you
will find the same when he comes before the Committee.
Chairman Dodd. We will try to move on that.
Thank you very much for being with us.
Secretary Donovan. Thank you.
Chairman Dodd. The Committee will stand adjourned.
[Whereupon, at 12:38 p.m., the hearing was adjourned.]
[Prepared statements and response to written questions
supplied for the record follow:]
PREPARED STATEMENT OF SHAUN DONOVAN
Secretary,
Department of Housing and Urban Development
February 26, 2009
Mr. Chairman, Senator Shelby, and distinguished Members of the
Committee, thank you for the opportunity to appear before you today.
Homeowners and communities throughout the country have been
devastated by the economic crisis. Many responsible families, making
their monthly payments, have experienced falling home values that
disqualify them from opportunities to refinance with today's low
interest rates. Millions of American workers have been laid off, or
forced to accept less work, and are grasping at every resource possible
to make their mortgage payments.
In the absence of action, over 6 million families could face
foreclosure in the next few years, with millions more struggling to
stay above water. In the absence of action, we would have seen an
intensifying spiral of more lenders foreclosing, pushing nearby home
prices even lower, and putting more families underwater. In fact, when
a family loses their home to foreclosure, nearby homes drop in value as
much as 9 percent, causing harm to every homeowner--even those who make
every payment--when foreclosures in their community increase.
On February 18, President Obama announced the Homeowner
Affordability and Stability Plan, a plan to make help available to as
many as 7 to 9 million homeowners who are fighting hard to make their
payments and stay in their homes. The Plan will not provide money to
speculators. It will target support to the working homeowners who have
made every possible effort to stay current on their mortgage payments.
The Homeowner Affordability and Stability Plan is part of the
President's comprehensive strategy to get the economy moving in the
right direction. Just as the American Recovery and Reinvestment Act
works to save or create several million new jobs and the Financial
Stability Plan works to get credit flowing, the Homeowner Affordability
and Stability Plan will support a recovery in the housing market and
ensure that these workers can continue paying off their mortgages.
The plan not only helps responsible homeowners at risk of losing
their homes, but prevents neighborhoods and communities from decay, as
defaults and foreclosures fuel falling home values, local business
collapses, and further job loss.
First, encourage homeownership by helping keep mortgage
rates low.
Second, support for refinancing to up to 4 to 5 million
responsible homeowners to make their mortgages more affordable.
Third, launch a $75 billion homeowner stability initiative
to reach up 3 to 4 million at-risk homeowners.
To help keep mortgage rates low and promote stability and liquidity
in the marketplace, the Treasury Department will continue to purchase
Fannie Mae and Freddie Mac mortgage-backed securities. In addition, the
Treasury Department will increase its funding commitment to Fannie Mae
and Freddie Mac to ensure the strength and security of the mortgage
market and to help maintain mortgage affordability. This backing will
bolster confidence in the mortgage market, allowing Fannie Mae and
Freddie Mac to continue to provide mortgage affordability for
responsible homeowners.
As noted, mortgage rates are currently at historically low levels.
But under current rules, only families with conforming loans owned or
guaranteed by Fannie Mae or Freddie Mac who owe less than 80 percent of
the value of their homes are eligible for refinancing to these low
interest rates. Unfortunately, given the recent decline in home prices,
millions of responsible homeowners who made down payments and timely
mortgage payments are unable to access these lower rates. The
President's plan will help as many as 4 to 5 million of these
homeowners refinance to lower interest rates through Fannie Mae and
Freddie Mac, by opening eligibility to borrowers who owe, on their
mortgage, 80 to 105 percent of the current value of their home.
Finally, the President has announced an initiative to reach
millions of responsible homeowners who are struggling to afford their
mortgage payments. In the current economy, millions of hard-working
families have seen their mortgage payments rise to 40 or even 50
percent of their monthly income--particularly if they received subprime
and exotic loans with exploding terms and hidden fees. The Homeowner
Stability Initiative operates through a partnership of lenders,
servicers, borrowers, and the government to help responsible borrowers
stay in their homes, providing families with security and neighborhoods
with stability. Based on estimates of the effects of foreclosures on
the value of nearby homes, the Homeowner Stability Initiative could
protect the owner of an average-valued home in the United States from
as much as a $6,000 decline in home values.
Homeowners with high mortgage debt compared to income may be
eligible for a loan modification as long as their home mortgage does
not exceed GSE conforming loan limits. Further, the increase in GSE
conforming loan limits (up to $729,750 in some high-cost areas) as
enacted in the ARRA will allow more borrowers to qualify.
Significantly, this program will not require homeowners to be
delinquent in their payments to qualify for eligibility. Loan
modifications are more likely to succeed if they are made before a
homeowner becomes delinquent; thus, the plan will include households at
risk of imminent default despite having not yet missed a mortgage
payment.
Borrowers with large non-housing debts can qualify, but only if
they agree to enter HUD-certified counseling. Specifically, homeowners
with total ``back end'' debt (which includes not only housing debt, but
other debt including car loans and credit card debt) equal to 55
percent or more of their income will be required to agree to enter a
counseling program as a condition for a modification.
The Homeowner Stability Initiative should reach up to 3 to 4
million at-risk borrowers in all segments of the mortgage market,
reducing foreclosures, and helping to avoid further downward pressures
on overall home prices. The program has several key components:
First, the government will partner with lenders to reduce
the homeowner's monthly payment to an affordable level. The
lender is solely responsible for interest rate reductions and
other changes necessary to lower the borrower's monthly
mortgage payment to 38 percent of his or her income. From that
point, the government will match, dollar for dollar, any
additional reductions the lender makes to lower that ratio to
31 percent. These adjustments could mean a monthly mortgage
payment lowered by more than $400 for a borrower with a
$220,000 mortgage. The lower interest rate arrived at must be
kept in place for 5 years, at which point it can be gradually
increased to the conforming loan rate at the time of the
modification. Lenders will also have an option of decreasing
monthly payments by reducing the principal owed on the
mortgage, with the government sharing those costs.
Second, servicers will receive $1,000 for each eligible
modification meeting initiative guidelines. They will also
receive fees to reward them for continued success-awarded
monthly as long as the borrower stays current on the loan-of up
to $1,000 each year for 3 years.
Third, to encourage borrowers to stay current, the
initiative will provide a monthly principal balance reduction
payment. As long as a borrower stays current on his or her
loan, he or she can get up to $1,000 each year for 5 years.
Fourth, because loan modifications are more likely to be
successful if they are made before a borrower misses a payment,
to keep lenders focused on reaching borrowers who are trying to
stay current on their mortgages, an incentive payment of $500
will be paid to servicers, and an incentive payment of $1,500
will be paid to mortgage holders, if they modify at-risk loans
before the borrower misses a payment.
Finally, to encourage lenders to modify more mortgages and
enable more families to keep their homes, the Administration-
together with the FDIC-has developed an innovative home price
decline reserve payment. The fund--which may be as large as $10
billion--will provide holders of mortgages modified under the
program with an additional payment in the event that home price
declines--and therefore the risk of losses in cases of default
is higher than expected.
As mentioned earlier, the Homeowner Affordability and Stability
Plan is not a self-contained initiative but is intended to work in
conjunction with other efforts such as the American Recovery and
Reinvestment Act and the Financial Stability Plan to provide a
comprehensive and multifaceted response to the current economic
troubles.
As part of the American Recovery and Reinvestment Act signed by the
President, the Department of Housing and Urban Development will award
$2 billion in competitive Neighborhood Stabilization Program grants for
innovative programs that mitigate the impact of foreclosures by
supporting innovative strategies to address the problem of vacant,
foreclosed properties. Additionally, the Act includes an additional
$1.5 billion to provide assistance to renters facing displacement,
reducing homelessness and avoiding entry into shelters. HUD allocated
that $1.5 billion of homelessness prevention funding to recipients
yesterday, as part of our successful allocation of three quarters of
Recovery Act funds for HUD programs only a week after President Obama
signed the Act into law.
In addition to the already mentioned efforts, the President's
overall economic recovery plan will seek careful changes to personal
bankruptcy provisions. The Administration will work with Congress to
ensure that legislation works well in conjunction with our voluntary
modification approach.
Finally, the Hope for Homeowners program offers one avenue for
struggling borrowers to refinance their mortgages. In order to ensure
that more homeowners participate, we support changes to the program
that will reduce fees paid by borrowers, increase flexibility for
lenders to modify troubled loans, permit borrowers with higher debt
loads to qualify, and allow payments to servicers of the existing
loans.
Thank you, and I look forward to your questions.
Homeowner Affordability and Stability Plan
The deep contraction in the economy and in the housing market has
created devastating consequences for homeowners and communities
throughout the country. Millions of responsible families who make their
monthly payments and fulfill their obligations have seen their property
values fall, and are now unable to refinance to lower mortgage rates.
Meanwhile, millions of workers have lost their jobs or had their hours
cut, and are now struggling to stay current on their mortgage payments.
As a result, as many as 6 million families are expected to face
foreclosure in the next several years, with millions more struggling to
stay current on their payments.
The present crisis is real, but temporary. As home prices fall,
demand for housing will increase, and conditions will ultimately find a
new balance. Yet in the absence of decisive action, we risk an
intensifying spiral in which lenders foreclose, pushing home prices
still lower, reducing the value of household savings, and making it
harder for all families to refinance. In some studies, foreclosure on a
home has been found to reduce the prices of nearby homes by as much as
9 percent--creating the potential that even borrowers who make every
payment suffer from an increase in foreclosures in their community.
The Obama Administration's Homeowner Affordability and Stability
Plan will offer assistance to as many as 7 to 9 million homeowners
making a good-faith effort to stay current on their mortgage payments,
while attempting to prevent the destructive impact of foreclosures on
families and communities. It will not provide money to speculators, and
it will target support to the working homeowners who have made every
possible effort to stay current on their mortgage payments. Just as the
American Recovery and Reinvestment Act works to save or create several
million new jobs and the Financial Stability Plan works to get credit
flowing, the Homeowner Affordability and Stability Plan will support a
recovery in the housing market and ensure that these workers can
continue paying off their mortgages.
By supporting low mortgage rates by strengthening confidence in
Fannie Mae and Freddie Mac, providing up to 4 to 5 million homeowners
with new access to refinancing and enacting a comprehensive stability
initiative to offer reduced monthly payments for up to 3 to 4 million
at-risk homeowners, this plan--which draws off the best ideas developed
within the Administration, as well as from Congressional housing
leaders and Federal Deposit Insurance Corporation Chair Sheila Bair--
brings together the government, lenders and borrowers to share
responsibility towards ensuring working Americans can afford to stay in
their homes.
Provide Access to Low-Cost Refinancing for Responsible Homeowners
Suffering From Falling Home Prices
Provide the Opportunity for Up to 4 to 5 Million
Responsible Homeowners Expected to Refinance: Mortgage rates
are currently at historically low levels, providing homeowners
with the opportunity to reduce their monthly payments by
refinancing. But under current rules, most families who owe
more than 80 percent of the value of their homes have a
difficult time securing refinancing. (For example, if a
borrower's home was worth $200,000, he or she would have
limited refinancing options if he or she owed more than
$160,000.) Yet millions of responsible homeowners who put money
down and made their mortgage payments on time have--through no
fault of their own--seen the value of their homes drop low
enough to make them unable to access these lower rates. As a
result, the Obama Administration is announcing a new program
that will provide the opportunity for 4 to 5 million
responsible homeowners who took out conforming loans owned or
guaranteed by Freddie Mac and Fannie Mae to refinance through
the two institutions over time.
Reducing Monthly Payments: For many families, a low-cost
refinancing could reduce mortgage payments by thousands of
dollars per year. For example, consider a family that took a
30-year fixed rate mortgage of $207,000 with an interest rate
of 6.50 percent on a house worth $260,000 at the time. Today,
that family has $200,000 remaining on their mortgage, but the
value of that home has fallen 15 percent to $221,000--making
them ineligible for today's low interest rates that generally
require the borrower to have 20 percent home equity. Under this
refinancing plan, that family could refinance to a rate near
5.16 percent--reducing their annual payments by over $2,300.
A $75 Billion Homeowner Stability Initiative To Prevent Foreclosures
and Help Responsible Families Stay in Their Homes
The Treasury Department, working with the GSEs, FHA, the FDIC and
other federal agencies, will undertake a comprehensive multi-part
strategy to prevent millions of foreclosures and help families stay in
their homes. This strategy includes the following six features:
A Homeowner Stability Initiative To Reach Up to 3 to 4
Million At-Risk Homeowners
Clear and Consistent Guidelines for Loan Modifications
Requiring That Financial Stability Plan Recipients Use
Guidance for Loan Modifications
Allowing Judicial Modifications of Home Mortgages During
Bankruptcy When A Borrower Has No Other Options
Require Strong Oversight, Reporting and Quarterly Meetings
With Treasury, the FDIC, the Federal Reserve and HUD To Monitor
Performance
Strengthening FHA Programs and Providing Support for Local
Communities
A Homeowner Stability Initiative To Reach Up to 3 to 4 Million At-Risk
Homeowners
This initiative is intended to reach millions of responsible
homeowners who are struggling to afford their mortgage payments because
of the current recession, yet cannot sell their homes because prices
have fallen so significantly. In the current economy, in which 3.6
million jobs have been lost over the past 14 months, millions of hard-
working families have seen their mortgage payments rise to 40 or even
50 percent of their monthly income--particularly if they received
subprime and exotic loans with exploding terms and hidden fees. The
Homeowner Stability Initiative operates through a shared partnership to
temporarily help those who commit to make reasonable monthly mortgage
payments to stay in their homes, providing families with security and
neighborhoods with stability. This plan will also help to stabilize
home prices for homeowners in neighborhoods hardest hit by
foreclosures. Based on estimates concerning the relationship between
foreclosures and home prices, with the average house in the U.S. valued
around $200,000, the average homeowner could see his or her home value
stabilized against declines in price by as much as $6,000 relative to
what it would otherwise be absent the Homeowner Stability Initiative.
Who the Program Reaches:
Focusing on Homeowners At Risk: Anyone with high combined
mortgage debt compared to income or who is ``underwater'' (with
a combined mortgage balance higher than the current market
value of his house) may be eligible for a loan modification.
This initiative will also include borrowers who show other
indications of being at risk of default. Eligibility for the
program will sunset at the end of 3 years.
Reaching Homeowners Who Have Not Missed Payments:
Delinquency will not be a requirement for eligibility. Rather,
because loan modifications are more likely to succeed if they
are made before a borrower misses a payment, the plan will
include households at risk of imminent default despite being
current on their mortgage payments.
Common Sense Restrictions: Only owner-occupied homes
qualify; no home mortgages larger than the Freddie/Fannie
conforming limits will be eligible. This initiative will go
solely to supporting responsible homeowners willing to make
payments to stay in their home--it will not aid speculators or
house flippers.
Special Provisions for Families With High Total Debt
Levels: Borrowers with high total debt qualify, but only if
they agree to enter HUD-certified consumer debt counseling.
Specifically, homeowners with total ``back end'' debt (which
includes not only housing debt, but other debt including car
loans and credit card debt) equal to 55 percent or more of
their income will be required to agree to enter a counseling
program as a condition for a modification.
How the Program Works:
The Homeowner Stability Initiative has a simple goal:
reduce the amount homeowners owe per month to sustainable
levels. This program will bring together lenders, servicers,
borrowers, and the government, so that all stakeholders share
in the cost of ensuring that responsible homeowners can afford
their monthly mortgage payments--helping to reach up to 3 to 4
million at-risk borrowers in all segments of the mortgage
market, reducing foreclosures, and helping to avoid further
downward pressures on overall home prices. The program has
several key components:
Shared Effort To Reduce Monthly Payments: Treasury
will partner with financial institutions to reduce homeowners'
monthly mortgage payments.
The lender will have to first reduce interest rates
on mortgages to a specified affordability level (specifically,
bring down rates so that the borrower's monthly mortgage
payment is no greater than 38 percent of his or her income).
Next, the initiative will match further reductions
in interest payments dollar-for-dollar with the lender, down to
a 31-percent debt-to-income ratio for the borrower.
To ensure long-term affordability, lenders will
keep the modified payments in place for 5 years. After that
point, the interest rate can be gradually stepped-up to the
conforming loan rate in place at the time of the modification.
Note: Lenders can also bring down monthly payments to these
affordability targets through reducing the amount of mortgage
principal. The initiative will provide a partial share of the
costs of this principal reduction, up to the amount the lender
would have received for an interest rate reduction.
``Pay for Success'' Incentives to Servicers:
Servicers will receive an up-front fee of $1,000 for each
eligible modification meeting guidelines established under this
initiative. Servicers will also receive ``pay for success''
fees--awarded monthly as long as the borrower stays current on
the loan--of up to $1,000 each year for 3 years.
Responsible Modification Incentives: Because loan
modifications are more likely to succeed if they are made
before a borrower misses a payment, the plan will include an
incentive payment of $1,500 to mortgage holders and $500 for
servicers for modifications made while a borrower at risk of
imminent default is still current.
Incentives to Help Borrowers Stay Current: To
provide an extra incentive for borrowers to keep paying on time
under the modified loan, the initiative will provide a monthly
balance reduction payment that goes straight towards reducing
the principal balance on the mortgage loan. As long as the
borrower stays current on his or her payments, he or she can
get up to $1,000 each year for 5 years.
Home Price Decline Reserve Payments: To encourage
lenders to modify more mortgages and enable more families to
keep their homes, the Administration--together with the FDIC--
has developed an innovative partial guarantee initiative. The
insurance fund--to be created by the Treasury Department at a
size of up to $10 billion--will be designed to discourage
lenders from opting to foreclose on mortgages that could be
viable now out of fear that home prices will fall even further
later on. This initiative provides lenders with the security to
undertake more mortgage modifications by assuring that if home
price declines are worse than expected, they have reserves to
fall back on. Holders of mortgages modified under the program
would be provided with an additional insurance payment on each
modified loan, linked to declines in the home price index.
These payments could be set aside as reserves, providing a
partial guarantee in the event that home price declines--and
therefore losses in cases of default--are higher than expected.
How It Will Be Effective:
Protecting Taxpayers: To protect taxpayers, the Homeowner
Stability Initiative will focus on sound modifications. If the
total expected cost of a modification for a lender taking into
account the government payments is expected to be higher than
the direct costs of putting the homeowner through foreclosure,
that borrower will not be eligible. For those borrowers unable
to maintain homeownership, even under the affordable terms
offered, the plan will provide incentives to encourage families
and lenders to avoid the costly foreclosure process and
minimize the damage that foreclosure imposes on lenders,
borrowers and communities alike. Moreover, Treasury will not
provide subsidies to reduce interest rates on modified loans to
levels below 2 percent.
Counseling and Outreach To Maximize Participation: Under
the plan, the Department of Housing and Urban Development will
also make available funding for non-profit counseling agencies
to improve outreach and communications, especially to
disadvantaged communities and those hardest-hit by foreclosures
and vacancies.
Creating Proper Oversight and Tracking Data To Ensure
Program Success: Fannie Mae and Freddie Mac will be
responsible--subject to Treasury's oversight and the Federal
Housing Finance Agency's conservatorship--for monitoring
compliance by servicers with the program. Every servicer
participating in the program will be required to report
standardized loan-level data on modifications, borrower and
property characteristics, and outcomes. The data will be pooled
so the government and private sector can measure success and
make changes where needed. Treasury will meet quarterly with
the FDIC, the Federal Reserve, the Department of Housing and
Urban Development and the Federal Housing Finance Agency to
ensure that the program is on track to meeting its goals.
Limiting the Impact of Foreclosure When Modification
Doesn't Work: Lenders will receive incentives to take
alternatives to foreclosures, like short sales or taking of
deeds in lieu of foreclosure. Treasury will also work with the
GSEs to provide data on foreclosed properties to streamline the
process of selling or redeveloping them, thereby ensuring that
they do not remain vacant and unsold.
Clear and Consistent Guidelines for Loan Modifications
A lack of common standards has limited loan modifications, even
when they are likely to both reduce the chance of foreclosure and raise
the value of the securities owned by investors. Mortgage servicers--who
should have an interest in instituting common-sense loan
modifications--often refrain from doing so because they fear lawsuits.
Clear and consistent guidelines for modifications are a key component
of foreclosure prevention.
Developing Clear and Consistent Guidelines for Loan
Modifications: Working with the FDIC, other federal banking and
credit union regulators, the FHA and the Federal Housing
Finance Agency, the Administration is in process of developing
guidelines for sustainable mortgage modifications for all
federal agencies and the private sector--bringing order and
consistency to foreclosure mitigation. The guidelines will
include detailed protocols for loss mitigation as well for
identifying borrowers at risk of default; the Administration
expects to announce these guidelines by Wednesday, March 4.
Applying Guidelines Across Government and the Private
Sector: Treasury will develop uniform guidance for loan
modifications across the mortgage industry by working closely
with the FDIC and other bank agencies and building on the
FDIC's pioneering role in developing a systematic loan
modification process last year. The Guidelines--to be posted
online--will be used for the Administration's new foreclosure
prevention plan. Moreover, all financial institutions receiving
Financial Stability Plan financial assistance going forward
will be required to implement loan modification plans
consistent with Treasury guidance. Fannie Mae and Freddie Mac
will use these guidelines for loans that they own or guarantee,
and the Administration will work with regulators and other
federal and state agencies to implement these guidelines across
the entire mortgage market. The agencies will seek to apply
these guidelines when permissible and appropriate to all loans
owned or guaranteed by the federal government, including those
owned or guaranteed by Ginnie Mae, the Federal Housing
Administration, Treasury, the Federal Reserve, the FDIC,
Veterans' Affairs and the Department of Agriculture. In
addition, these guidelines will apply to loans owned or
serviced by insured financial institutions supervised by the
Office of the Comptroller of the Currency, the Office of Thrift
Supervision, the Federal Reserve, the Federal Deposit Insurance
Corporation and the National Credit Union Administration.
Requiring All Financial Stability Plan Recipients To Use Guidance for
Loan Modifications
As announced last week, the Treasury Department will require all
Financial Stability Plan recipients going forward to participate in
foreclosure mitigation plans consistent with Treasury's loan
modification guidelines.
Allowing Judicial Modifications of Home Mortgages During Bankruptcy for
Borrowers Who Have Run Out of Options
The Obama administration will seek careful changes to personal
bankruptcy provisions so that bankruptcy judges can modify mortgages
written in the past few years when families run out of other options.
How Judicial Modification Works: When an individual enters
personal bankruptcy proceedings, his mortgage loans in excess
of the current value of his property will now be treated as
unsecured. This will allow a bankruptcy judge to develop an
affordable plan for the homeowner to continue making payments.
To receive judicial modifications in bankruptcy, homeowners
must first ask their servicers/lenders for a modification and
certify that they have complied with reasonable requests from
the servicer to provide essential information. This provision
will apply only to existing mortgages under Fannie Mae and
Freddie Mac conforming loan limits, so that millionaire homes
don't clog the bankruptcy courts.
Bolster FHA and VA Authority to Protect Investors and
Ensure Loan Modifications Occur: Legislation will provide the
FHA and VA with the authority they need to provide partial
claims in the event of bankruptcy or voluntary modification so
that holders of loans guaranteed by the FHA and VA are not
disadvantaged.
Strengthening FHA Programs and Providing Support for Local Communities
Ease Restrictions in Federal Housing Administration
Programs, Including Hope for Homeowners: The Hope for
Homeowners program offers one avenue for struggling borrowers
to refinance their mortgages. In order to ensure that more
homeowners participate, the FHA will reduce fees paid by
borrowers, increase flexibility for lenders to modify troubled
loans, permit borrowers with higher debt loads to qualify, and
allow payments to servicers of the existing loans.
Strengthening Communities Hardest Hit by the Financial and
Housing Crises: As part of the recovery plan signed by the
President, the Department of Housing and Urban Development will
award $2 billion in competitive Neighborhood Stabilization
Program grants for innovative programs that reduce foreclosure.
Additionally, the recovery plan includes an additional $1.5
billion to provide renter assistance, reducing homelessness and
avoiding entry into shelters.
Support Low Mortgage Rates By Strengthening Confidence in Fannie Mae
and Freddie Mac
Ensuring Strength and Security of the Mortgage Market:
Today, using funds already authorized in 2008 by Congress for
this purpose, the Treasury Department is increasing its funding
commitment to Fannie Mae and Freddie Mac to ensure the strength
and security of the mortgage market and to help maintain
mortgage affordability.
Provide Forward-Looking Confidence: The increased
funding will enable Fannie Mae and Freddie Mac to carry out
ambitious efforts to ensure mortgage affordability for
responsible homeowners, and provide forward-looking confidence
in the mortgage market.
Treasury is increasing its Preferred Stock Purchase
Agreements to $200 billion each from their original level of
$100 billion each.
Promoting Stability and Liquidity: In addition, the
Treasury Department will continue to purchase Fannie Mae and
Freddie Mac mortgage-backed securities to promote stability and
liquidity in the marketplace.
Increasing the Size of Mortgage Portfolios: To ensure that
Fannie Mae and Freddie Mac can continue to provide assistance
in addressing problems in the housing market, Treasury will
also be increasing the size of the GSEs' retained mortgage
portfolios allowed under the agreements--by $50 billion to $900
billion--along with corresponding increases in the allowable
debt outstanding.
Support State Housing Finance Agencies: The Administration
will work with Fannie Mae and Freddie Mac to support state
housing finance agencies in serving homebuyers.
No EESA or Financial Stability Plan Money: The $200 billion
in funding commitments are being made under the Housing and
Economic Recovery Act and do not use any money from the
Financial Stability Plan or Emergency Economic Stabilization
Act/TARP.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL
FROM SHAUN DONOVAN
Q.1. One of the major problems homeowners have been facing is
getting in touch with their lender. In the new plan, homeowners
are urged to contact their lender to determine eligibility. Are
lenders going to be engaging in outreach to homeowners who are
eligible for modifications or refinancing?
A.1. There are a number of different outreach activities that
servicers are engaged in to contact distressed borrowers and
provide information about the Making Homes Affordable Program.
Many servicers participate in homeowner outreach activities in
collaboration with the Hope Now Alliance, State and local
governments and HUD-approved counseling agencies. For example,
the Hope Now Alliance hosts foreclosure prevention events
across the country and servicers actively participate with
representatives that meet one-on-one with homeowners to help
determine what are the best options to meet their needs. Also,
servicers are actively engaged in letter writing campaigns to
homeowners at risk of losing their homes which include
information on the Making Home Affordable Program.
HUD is also working in partnership with Treasury and Fannie
Mae and Freddie Mac to coordinate outreach to homeowners on the
Making Home Affordable Program. For example nationwide outreach
events are being organized with special emphasis on events in
high default/foreclosure areas. FHA is assembling a team of
senior staff members around the country who are trained on the
details of the Making Home Affordable Program and will make
presentations at borrower outreach events. A National Education
Campaign is also being launched which will include public
service announcements for TV and radio and in both English and
Spanish. The purpose af the campaign will be to: educate
borrowers on the new refinance and loan modification options;
inform borrowers that counselors at HUD-approved agencies are
available as rusted advisors and urge them to work with
counselors; and how to avoid foreclosure rescue scams.
Q.2. The Administration has said that any financial institution
which receives money from the Financial Stability Plan will
have to participate in foreclosure mitigation plans. Does this
requirement apply retroactively to institutions which have
taken bailout money already? If not, are the Treasury and the
Federal Reserve going to work with those institutions to remove
troubled assets from their books so they can be modified?
A.2. The participation requirement is not retroactive. However,
Treasury will work with all recipients to encourage
participation. A separate plan to purchase assets from
securitizations is being developed. It is premature to state
what loans may be eligible for purchase.
Q.3. There are also very significant problems facing those who
rent their homes. About one in eight households pays more than
50 percent of their income for housing. Hundreds of thousands
of lower income Americans are on waiting lists for affordable
rental housing, with little hope of their names being reached
in the foreseeable future.
In light of these issues, and in light of the 10 percent
and successful track record of the Low Income Housing Tax
Credit in producing and preserving affordable rental housing,
shouldn't the administration's plan also address incentives to
re-invigorate investment in the housing credit program, which
has seen a substantial reduction in investor activity over the
past year?
A.3. The Department recognizes the need to better coordinate
our multifamily rental housing programs with Low Income Housing
Tax Credits to facilitate the production of more affordable
rental housing. Specifically, in regards to FHA programs, prior
to the passage of the Housing and Economic Recovery Act of 2008
(HERA), the Department took the following steps to address this
need:
Streamlining subsidy layering review requirements
to expedite the approval of mortgage insurance
applications by eliminating submission burden and
duplicative reviews.
Issuance of waiver authority to Multifamily Hubs
permitting use of the Departments 223(f) program to
facilitate developers' ability to obtain permanent
financing for projects where construction has completed
and the developer is unable to obtain conventional
take-out financing. A number of these projects may have
received equity from Low-Income Housing Tax Credits.
Issuance of a Mortgagee Letter streamlining
processing of FHA mortgage insurance applications when
combined with Tax Credits. This Letter reduced upfront
equity requirements and synchronized the FHA review
process with the Tax Credit application and review
process.
Issuance of a Master Lease Policy in March 2008.
Master Leases are a form of ownership structure used to
fully leverage the benefits of LIHTCs, Historic Tax
Credits and New Market Tax Credits. This guidance
permits this form of ownership structure to be used in
projects financed with the Department's mortgage
insurance programs.
In addition to these steps, we are currently undertaking
the following activities to improve coordination between
multifamily rental housing programs and Low-Income Housing Tax
Credits:
Implementation of the 2008 Housing and Economic
Recovery Act (HERA), which contained provisions to
further streamline processing by eliminating Subsidy
Layering Reviews and Cost Certification requirements
for applications involving tax credits and by
eliminating the requirement for Letters of Credit or
any other form of security for the equity derived from
LIHTCs for mortgage insurance applications.
Establishment of a pilot program to demonstrate the
effectiveness of streamlining FHA mortgage insurance
applications with equity provided though Low-Income
Housing Tax Credits.
The Department continues to explore ways to streamline and
improve our Multifamily housing programs to make them work more
effectively and efficiently with Low-Income Housing Tax Credits
in order to encourage and maximize investor participation in
the tax credit program.