[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

                               __________

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


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html


                  U.S. GOVERNMENT PRINTING OFFICE
50-858                    WASHINGTON : 2009
-----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001


            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

                              ----------                              

                      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.
