[Senate Hearing 111-473]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-473


                THE STATE OF THE NATION'S HOUSING MARKET

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

                                HEARING

                               before the

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

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE STATE OF THE NATION'S HOUSING MARKET AND ITS EFFECT ON 
                 THE U.S. ECONOMY AND AMERICAN CITIZENS

                               __________

                            OCTOBER 20, 2009

                               __________

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


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                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia             JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                     Marc Jarsulic, Chief Economist

               Jonathan Miller, Professional Staff Member

                 Beth Cooper, Professional Staff Member

                 Will White, Professional Staff Member

                Misha Mintz-Roth, Legislative Assistant

                Mark Oesterle, Republican Chief Counsel

            Chad Davis, 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

                              ----------                              

                       TUESDAY, OCTOBER 20, 2009

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     3
    Senator Reed
        Prepared statement.......................................    55

                               WITNESSES

Johnny Isakson, a U.S. Senator from the State of Georgia.........     5
    Prepared statement...........................................    55
Shaun Donovan, Secretary, Department of Housing and Urban 
  Development....................................................    15
    Prepared statement...........................................    61
    Responses to written questions of:
        Senator Reed.............................................    96
        Senator Schumer..........................................    97
        Senator Tester...........................................   101
        Senator Warner...........................................   102
        Senator Bennett..........................................   103
        Senator Vitter...........................................   106
Diane Randall, Executive Director, Partnership for Strong 
  Communities....................................................    36
    Prepared statement...........................................    66
Ronald Phipps, First Vice President, National Association of 
  Realtors.......................................................    39
    Prepared statement...........................................    69
Emile J. Brinkmann, Chief Economist and Senior Vice President for 
  Research and Economics, Mortgage Bankers Association...........    41
    Prepared statement...........................................    75
    Responses to written questions of:
        Senator Schumer..........................................   109
David Crowe, Chief Economist, National Association of Home 
  Builders.......................................................    43
    Prepared statement...........................................    91

              Additional Material Supplied for the Record

Statement submitted by the Independent Community Bankers of 
  America........................................................   112
Statement submitted by Larry H. Keener, Chairman, Chief Executive 
  Officer and President, Palm Harbor Homes, Inc..................   113

                                 (iii)

 
                THE STATE OF THE NATION'S HOUSING MARKET

                              ----------                              


                       TUESDAY, OCTOBER 20, 2009

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:33 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 again this 
morning, and let me welcome everyone to the Committee hearing 
this morning, my colleagues and guests who are in the audience, 
as well as our witnesses who will be here this morning. I want 
to particularly welcome our colleague from Georgia, Senator 
Johnny Isakson, whom we will get to momentarily.
    I want to make some brief opening comments, turn to Senator 
Shelby for any opening comments he has, and then we will turn 
to our witness, Senator Isakson. Of course, we are honored as 
well to have Shaun Donovan, the Secretary of Housing, here with 
us this morning as well, and the very distinguished members of 
the third panel as well, whom I will introduce momentarily.
    The title of our hearing today is ``The State of the 
Nation's Housing Market,'' obviously a broad, big hearing with 
a lot of items to discuss when we have a hearing of that 
magnitude, but I thought it would be important for us, in light 
of all the things that are going on and the efforts of this 
Committee over a number of months on trying to address the 
housing issue, that we ought to have just a hearing on this 
subject matter generally. And that is why we asked for you all 
to be here this morning.
    We examine, obviously, the catastrophic problem that has 
undercut the financial security of millions of American 
families and nearly destroyed our economy, and that is the U.S. 
housing market. Housing prices, as everyone in this room knows, 
fell by nearly a third from mid-2006 when the bubble was at its 
peak to this summer. That decline has hurt middle-class 
Americans acutely.
    Most Americans, of course, do not own huge stock 
portfolios, as we all know. Their wealth, for most Americans, 
nearly all of their savings, is in their homes. Too many have 
seen, of course, that wealth wiped out in the last couple of 
years. In fact, one study suggests that as many as 15.2 million 
families in the United States now find themselves with 
mortgages that are higher than the values of the homes in which 
they live. That is an astonishing and deeply, deeply disturbing 
figure.
    Meanwhile, housing inventory remains high. Home sales 
bottomed out earlier this year, and foreclosures continue to 
ravage communities across our Nation. As part of the economic 
recovery package, we created an $8,000 first-time homebuyer tax 
credit, replacing an unsuccessful and overly complex loan 
program with one that is already having an impact, and I want 
to congratulate my colleague again from Georgia. He was the one 
who pushed that idea. I was glad to join him in that effort 
back a number of months ago. But for Johnny Isakson, I am not 
sure that idea would have been incorporated as part of that 
recovery plan, so many Americans owe you a debt of gratitude, 
Johnny, for that.
    The homebuyer tax credit has already been used by nearly 2 
million first-time homebuyers. In addition to helping middle-
class families achieve the dream of home ownership, the tax 
credit has helped to stabilize housing prices and the market at 
large. The credit is set to expire in 5 weeks, as we all know. 
But the work of stabilizing the housing market will not be 
done, as we also know. We still need to use every tool at our 
disposal to try and fix this problem.
    So our first witness, Senator Johnny Isakson, and I have 
proposed extending the tax credit through the end of next June 
as well as expanding it so that more middle-class families can 
take advantage of what I believe has been an effective program. 
But the utility of the homebuyer tax credit will be maximized 
only if it operates in tandem with an effective program to 
protect struggling homeowners from foreclosure as well. And our 
second witness, Secretary of Housing and Urban Development, 
Shaun Donovan, will discuss with us some of the steps the 
Administration is taking to prevent foreclosures as well as 
other steps we can take to stabilize the market and to 
strengthen communities for all families.
    The success of the housing market is not only important to 
homeowners, of course. On our third panel, we will be joined by 
four stakeholders in the area of housing policy: David Crowe 
from the National Association of Home Builders, Jay Brinkmann 
from the Mortgage Bankers Association, and Ronald Phipps from 
the National Association of Realtors, and from my home State of 
Connecticut, Diane Randall, who is the Executive Director of 
the Partnership for Strong Communities. Those witnesses will 
offer us a variety of perspectives on how the housing market 
affects those who build, sell, and finance homes as well as 
those who rent their homes and rely on our low-income housing 
stock.
    Throughout, we should keep in mind just who the most 
important stakeholder is, and that is, of course, the hard-
working families in our country who want and deserve their 
piece of the American dream. Whether they are renting, hoping 
to own a home, or looking to use their equity to build a more 
secure financial future for themselves and their families, the 
American people need a stable housing market, and it is up to 
us here, obviously, to make sure we can rely on one.
    Let me say something about Diane as well, Diane Randall 
from my home State of Connecticut. She is doing tremendous work 
in our State fighting for affordable housing, but these days 
her job could not be tougher. I was reading her testimony last 
evening, and she will testify that nearly half of the renters 
in Connecticut are spending over 30 percent of their income on 
housing alone. She says, ``For many of these folks, managing 
the family budget is a high wire act, deciding among the 
priorities of food, health care, transportation, and 
clothing.'' Those statements could be made, I suspect, by her 
counterparts in almost every State across the country where the 
stock of rental housing has not kept pace and, therefore, you 
are seeing a tremendously high percentage of family budgets 
where people cannot afford to get into a home pay for rental 
housing.
    Anyway, I think she and others like her have hit the nail 
on the head, and that is the kind of devastating problem that 
we face, that we are faced with today, and that is why this 
hearing is so important. I thank many of my colleagues who are 
here already to participate in it.
    With that, let me turn to Senator Shelby for his opening 
comments, and then, Johnny, we will get to you and your opening 
comments.
    By the way, a rare thing occurred here. My colleagues 
should know this. We ask witnesses always to submit their 
testimony 24 hours in advance. I do not ever recall a Member of 
Congress actually submitting their testimony 24 hours in 
advance, and Johnny Isakson submitted his testimony, as our 
colleague, 24 hours in advance--a rarity around here. So, 
Senator, we really appreciate your complying with Senate rule.
    Senator Isakson. Good staff work.
    Chairman Dodd. Staff work. Good staff work.
    Go ahead, Richard.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman, and thank you for 
calling this hearing.
    Given the undeniable role that the housing market played in 
the economic crisis, the Committee, I believe, must continue to 
monitor this significant sector. Earlier this month, we met to 
discuss the current state of the housing GSEs and what the 
future may hold for those entities. As I said then, I do not 
believe we as a Committee can address the regulatory 
shortcomings fully that contributed to this crisis without also 
addressing the future of the GSEs. I still believe that is the 
case. But before we can do that, I think we will need to 
understand precisely how existing housing policies shaped our 
housing market and whether major changes need to be made.
    I think one must never forget, however, that Congress 
cannot and does not operate in a vacuum. Our actions have 
consequences. To the maximum extent possible, they should be 
intended. In order to achieve that goal, we must insist on 
having a solid factual basis for every step we take here.
    Senator Isakson will testify today regarding extending the 
$8,000 first-time homebuyer tax credit. And while I believe 
this credit was like a better use of funds than much of last 
year's stimulus bill, you know, I think before we extend any 
portion of any bill, some basic questions need to be answered.
    For instance, some have estimated that as much as 85 
percent of qualifying purchases would have been made without 
the credit, leading to a true new home purchase subsidy of 
$43,000. This is a vastly larger figure than the $8,000 credit 
envisioned during the debate.
    Now, I did not come up with those numbers, Senator Isakson. 
Simply put, Brookings estimates that only 15 percent of 
qualifying home sales were actually spurred by the tax credit. 
Then they take the overall cost of the program, divide it by 
only the number of homes in that 15 percent. This gives them a 
figure per house for just the 15 percent of homes they view to 
be a new purchase. That figure which they come up with, 
Senator, $43,000, is what they estimate to be the true subsidy 
of each new home purchase. We might want to look at those 
numbers together.
    Additionally, will this be net tax relief? Or will the cost 
of the tax credit we are talking about come at the expense of 
another sector of our economy? A credit that is born from a 
reduction in Government spending will have a vastly different 
impact than a credit paired with a corresponding tax increase 
on other Americans.
    This is merely one of the many policies, I believe, Mr. 
Chairman, that we and Congress and other Presidents have 
enacted to promote additional home ownership. There is no doubt 
that these policies have artificially, at least temporarily, 
inflated the value of homes across the country and maybe 
spurred some interest. But I believe we must recognize, Mr. 
Chairman, this and understand that much of the decrease in home 
values was simply a deflation of the bubble created in part by 
our own housing policies underlying all this.
    Many of these policies are now under the supervision of 
Secretary Donovan, who will be here later, and carried out 
through the Federal Housing Administration. Last month, as we 
all know, the FHA announced that its capital reserve ratio will 
fall below the congressionally mandated floor of 2 percent. At 
that time, Americans were assured that the FHA would not need a 
bailout. Is that still the case? We will ask Secretary Donovan 
that.
    What is the true financial status of the FHA? We need to 
know that. What policy changes can we expect if the FHA is 
unable to raise the necessary capital?
    Mr. Chairman, these are just a few of the questions I think 
that need to be addressed here, and hopefully we will get some 
answers today. Thank you for the hearing.
    Chairman Dodd. Thank you very much.
    Senator Isakson, we welcome you to the Committee. Let me 
just say, going over your testimony last night, Johnny, I knew 
you had been involved in this area--I mean, we have Members 
come up and talk and testify about subject matters, and I do 
not question at all their sincerity or their commitment to the 
issue. Rarely do we have a colleague come up and testify on a 
subject matter where you have spent more part of your adult 
life dealing with the very issue, and I did not realize how 
long you had been involved in the real estate industry and 
market. So I congratulate you for that expertise.
    Senator Shelby. Since he was 5 years old.
    Chairman Dodd. Well, early on, so thank you for coming to 
the Committee, and we are happy to receive your testimony.

 STATEMENT OF JOHNNY ISAKSON, A U.S. SENATOR FROM THE STATE OF 
                            GEORGIA

    Senator Isakson. Well, thank you, Chairman Dodd and Ranking 
Member Shelby and other Members of the Committee. I appreciate 
the opportunity to be here. Quite honestly, I have never been 
on this side of the dais before. It is really a treat. And I am 
not learned enough to write for Brookings or do analysis for 
Heritage, but I have 33 years of experience in the business 
actually doing it. And I do have some comments, I think, that 
are relevant to the housing market. That is exactly right.
    You know, I started in 1967 in the housing industry, and 
the average sales price that year for me was $17,900, all FHA 
and VA houses. In 1968, the first recession that I experienced 
took place in housing when the FHA 235 no-down-payment sweat 
equity program collapsed and foreclosures proliferated around 
the country.
    In 1974, I was a branch manager for a company when the 
biggest housing crisis prior to this one act took place, and 
the solution to that housing crisis was a tax credit. Congress 
passed a $2,000 credit for anyone who bought and occupied as 
their principal residence a standing vacant house. There was a 
3-year supply of standing vacant inventory on the market at 
that particular period of time.
    Later on, I became president of that company in 1981 when 
we had the triple misery index--double-digit inflation, double-
digit unemployment, double-digit interest rates. In fact, I 
actually sold houses with 16.5 percent interest on the houses 
and negative amortization on the loans to get the payments to 
an affordable level.
    Then finally, in 1990-91, after the collapse of the savings 
and loan industry and the creation of the RTC, I was in the 
business running that company and went through those difficult 
times. They were all bad, but they were nothing like times are 
today.
    In 1995, I was asked to serve on Fannie Mae's advisory 
board, so I have some experience in what happened at Fannie Mae 
in the late 1990s. And I retired from real estate in 1999 and 
came to the Congress of the United States of America.
    In my 33-year career, I experienced four difficult 
recessions, but nothing like the collapse we have today. Our 
Nation is facing a total collapse of new residential 
construction and development, and this fact, combined with the 
unemployment rate and the highest sustained foreclosure rate 
since the Great Depression, is having a terrible effect.
    I would like to refer to the first chart. Put that first 
one back up, if you would. This is all from Smart Numbers, 
which is a company in Atlanta that does all the analysis for 
the lending industry and the real estate industry. But in the 
metropolitan Atlanta 23-county MSA, you see that beginning in 
the latter part of 2006 and accelerating, if you see the orange 
bar, that is the median price decline of housing over the last 
3\1/2\ years. That last level is the first quarter of this year 
where the average price of houses was down 27 percent. Mr. 
Chairman, in my State, prices are down between 20 and 40 
percent.
    And if you will put the next chart up, I will give you one 
example of what is happening to housing in Atlanta and in most 
major MSAs around the country. This is a house that sold in 
1993 for $216,000 in Clayton County, Georgia. It resold a 
couple of times in between, but after 533 days on the market, 
on the 22nd of April of this year, it sold for $136,500. And 
that is a house that 15 years earlier had sold for $216,000, to 
give you some idea of the Draconian drop in terms of housing 
values.
    Why is this happening, you might ask. Well, it is happening 
for two very important reasons. One is the unemployment rate. 
There are people losing their jobs and having their houses 
foreclosed on. But, quite frankly, it is happening because the 
incentive to stay in a house does not exist nearly like it used 
to.
    Mr. Chairman, if someone bought a house in 2002 in Atlanta, 
Georgia, with standard financing, 90 or 95 percent, 
statistically the odds are their house is worth less than what 
they paid for it. That means people are looking at a monthly 
payment, they are looking at the value, and they are finding it 
easier to walk from that investment and let it be foreclosed 
than stay and manage the house.
    This is the Marietta Daily Journal, which is my home 
county, and I brought this from Friday, and I am not going to 
enter it in the record because it wastes too much Government 
money printing it. But there are 68 pages of foreclosures in 
one county in metropolitan Atlanta, 1,157. When you read the 
foreclosure addresses, it is not the subprime locations. It is 
not the lower-end housing. It is mainstream America. It is the 
move-up marketplace where these houses are now being foreclosed 
on, and that, quite frankly, is a crisis.
    I would like to enter for the record an article that 
appeared in the Atlanta Constitution, Sunday's paper, the title 
of which is ``My $290,000 home is worth what?'' it is about a 
family who bought a house, paid $290,000 for it 10 years ago, 
remodeled it, had it re-appraised--or refinanced, and it 
appraised for $115,000. This is the type of experience people 
are seeing all across the country which is causing a serious 
erosion in confidence.
    Quite frankly, Mr. Chairman--and I think you know this--
most people's equity line of credit is the equity in their 
mortgage. And money market accounts and secured equity lines of 
credit are where most people have sent their kids to college, 
have financed substantial purchases. That value is not there 
anymore. With credit cards down, with housing values down, 
Middle America is really stretched, and it is stretched to the 
core.
    I am asked oftentimes, ``Well, Johnny, how long do you 
think it is going to take to get out of this? You went through 
four of these.'' My answer, reluctantly, is, ``Five years or 
longer, unless Washington does something.''
    One is the tax credit. I appreciate the comments of the 
Chairman. I appreciate the Chairman's support for the $8,000 
credit and for its extension now. I believe it is important, as 
we look at the current termination on November 30th, to 
consider what is going to happen if we do not extent that 
credit. What is going to happen is you are going to go into the 
3 worst months of the year in housing sales--December, January, 
and February--with the only incentive out there for a normal 
sale to take place is gone.
    Now, I am not a believer in extending the tax credit 
forever. In fact, its scarcity or its sunsetting is actually an 
incentive to drive people to the marketplace. But it needs to 
be extended and it needs to be broadened in the following ways:
    One, it should be broadened to any homeowner who buys and 
occupies as their principal residence for 3 years, as long as 
their joint family income is no more than $300,000. That covers 
most of the move-up market, and it brings a lot of Americans to 
the marketplace that are sitting on the sidelines today.
    It will have the effect of stabilizing home values, and 
then on their own velocity as business returns, they will be 
able to build back.
    If we do not do the housing tax credit, in my personal 
opinion, and extend it through midyear next year and take away 
the first-time homebuyer means test and raise the income 
qualification, we will have a dramatic and awful situation in 
the United States of America from which recovery is going to be 
even more difficult than we have experienced already.
    There is a second thing we need to do as well, and with all 
due respect to the FDIC and the tremendous stress that they are 
under, the Draconian interpretation of FASB Rule 114 in mark-
to-market and community banking is having a terrible effect in 
terms of liquidity, in terms of credit availability, to 
potential developers and potential borrowers around the 
country. And, unfortunately, many of the AC&D loans--the 
acquisition, construction, and development loans--to build 
subdivisions, which are main portfolios on the asset side of 
the balance sheet of most community savings and loans, or most 
community banks, are being driven down by mark-to-market, so 
much so that the bank is constrained in its capital, has to 
raise its loan loss reserve, in some cases recognizes losses 
that really have not existed.
    In 1975, right after the 1974 crisis, the same thing took 
place. And after a short period of time of massive foreclosures 
on these acquisition and development loans, the banking 
community turned and started to make their debtors their 
partners. Now, granted, bad loans should be foreclosed on, but 
in real estate, over time you can work your way out of many 
situations, and I think it is critically important that we try 
our best to work our way out of the lot inventory that stands 
out there today rather than foreclosing on it and bankers 
becoming the owners and the operators, which historically they 
have done a very bad job of doing.
    I would like to show you the third chart to make this 
point, and then I will close. This is a little bit misleading 
because it looks like things are improving, but these are the 
23 MSA counties in the metropolitan Atlanta MSA, and the bars 
reflect the number of developed lots on the market, unsold in 
those markets. Bartow County, which is the highest one, has a 
360-month supply of developed lots. Mr. Chairman, that is 
almost 30 years. The biggest counties in metropolitan Atlanta--
Fulton, Gwinnett, Cobb--have supplies of 6 to 12 years. The 
average of the metro market, when you put them all together, is 
a 10-year supply of developed lots, unsold, sitting vacant. 
That is the loans that I am talking about, and that is where 
the partnership between the bank and people that have the loan 
and the developer who has the debt can hopefully help us to 
build out of them rather than have the effect of the short 
sales taking place on those lots, which further depreciates the 
value of housing.
    I appreciate very much the opportunity to be here, and I 
have tremendous respect for this Committee, the Chairman and 
Ranking Member, and all the other Members. Senator Corker, I am 
very aware of his experience in the real estate industry, and I 
look forward to answering your questions. But I will tell you 
this: History is a great teacher. There are things in the past 
this country has done that worked, and there are things that 
did not work. The housing credit of 1975 brought this country 
from the second worse housing recession ever. The extension of 
this credit I think will be the foundation to do so as well. 
And when we turn the corner and stabilize the bottom in terms 
of home values, employment will improve, lots will begin to be 
absorbed, and our economy will get back on its footing, and we 
will get back to the prosperity that all of us hope America 
enjoys sooner rather than later.
    Mr. Chairman, I appreciate the opportunity to testify.
    Chairman Dodd. Senator, thank you very, very much, and very 
eloquent testimony, again, based on a lot of personal knowledge 
over the years, which is very valuable, I think, to the 
Committee.
    A couple of just quick points I wanted to raise with you, 
if I could. One is about the move-up market, and I am worried 
in a way because we were talking before the Committee started 
the formal hearing this morning, and it occurs to me that the 
first-time homebuyer--and, again, I am painting with a broad 
brush here, but that first-time homebuyer, usually it is a 
stretch when they are buying that home the first time. So the 
likelihood that they are going to go out and furnish that home 
or do major repairs to it, in many cases you are just trying to 
get in there. You are living on a futon or you are in a bare-
bone deal because you got that house and you live in it and you 
are trying to make ends meet.
    It is that move-up market where you start to get what I 
call sort of a ripple effect that is always so important in 
housing, and housing and autos being such major parts of our 
recovery historically, but those people then buying those 
carpets, buying the furniture, getting that carpenter or 
whatever, adding on an extension to the home, is more likely to 
occur in a move-up market than it is in a first-time homebuyer 
market. At least that is an impression I have, and I wonder if 
you would pick up on that point, whether or not there is a 
legitimacy to that point about the move-up market, which is 
what we are talking about here, going beyond the first-time 
homebuyer to that move-up market.
    Senator Isakson. Well, the Chairman makes an excellent 
point. If you look at the sales to the first-time homebuyers, 
they are generally at the lower end of the market price range. 
They are at the entry-level pricing in housing, somewhere 
around $150,000 to $200,000 in most metropolitan markets. But 
the move-up market is absolutely dead. I will tell you a couple 
of stories.
    Recently, a Pulitzer Prize-winning writer from Atlanta was 
transferred to Washington. She is a very good friend of mine. I 
had lunch with her a week ago. She complained that she had to 
rent her house in Atlanta and rent a house in Washington 
because she could not sell her house in Atlanta because it was 
in that move-up price range of $300,000 to $400,000.
    Mr. Chairman, I hate to bring this up, but it is the best 
example I can think of. When UPS left Connecticut and came to 
Atlanta, Georgia----
    Chairman Dodd. Thank you, Johnny, for talking about that.
    [Laughter.]
    Senator Isakson. It came to Atlanta, Georgia, a number of 
years ago----
    Chairman Dodd. Don't you have a better example than that 
one?
    Senator Isakson. I knew it would hit home, but it works 
both ways. But the point I want to make is I handled that 
relocation for the UPS Corporation. They could not make that 
move in the climate today because the houses in Connecticut 
would not have sold; therefore, the people moving could not 
have bought in Atlanta. And there are moves out of Georgia to 
other parts of the country where the same thing is true.
    The corporate relocation market is basically dead. 
Companies do not know where the bottom is, so they are scared 
to offer their transferee, who they are trying to move to 
wherever they are--Hartford or wherever--a buyout on their 
house because they do not know where the bottom is. The banks 
will not finance it. The lines of credit are nonexistent for 
corporate relocation. So the heart and soul of the American 
housing market is still sitting on the sidelines.
    Chairman Dodd. Yes. I thank you very much.
    Senator Shelby, any comments?
    Senator Shelby. Yes, I just want to commend him for his 
testimony and giving us his 30-something years of experience in 
the business.
    Senator, we all know--and, gosh, you know it better than we 
do, probably--that the housing crisis is real. It is not 
getting better. You know, you might read the Case-Shiller 
Index, but overall it is not getting better everywhere, and we 
have got to do something, but we have got to score all this, 
and we have got to see what it does. Because if we do not do 
something, we are damned; and if we do something, we might be 
damned. So let us figure it out right. And I know you will.
    Senator Isakson. Well, in response to that, and I will get 
my staffer to submit it for the record, but we have a CBO score 
on the extension that Senator Dodd and I have proposed. That 
score is $16.7 billion if the tax credit is extended until June 
30th. And I am perfectly willing to find pay-fors in the system 
to pay for it, but I would make this point quite clear: Nobody 
argues that the tax credit has worked. I mean, that is why 
there is an interest in extending it.
    Senator Shelby. Absolutely.
    Senator Isakson. Of all the trillions of dollars the 
Federal Reserve has spent, of all the hundreds of billions of 
dollars Congress has appropriated, the one thing we can 
reliably point to that has made a positive change for the 
country is the tax credit. And it is the smallest expenditure 
of all those things that we have made. So, relatively speaking, 
I think it is important for us to find the way to finance it 
because I think it is our way out.
    Chairman Dodd. Well, I do not disagree----
    Senator Shelby. We are all going to be better off if we can 
get housing back moving again.
    Chairman Dodd. And I do not disagree, if we can find a pay-
for, I am all for it, because we have seen over the years we 
have had a lot of tax cuts in the past where we have not had 
offsets for them as well, where they have made a value. This 
one is so important, in my view, that it deserves special 
consideration.
    Senator Tester.
    Senator Tester. Yes, Senator Isakson, welcome. If you could 
pull back into your database, you said in 1974 there was a 
$2,000 tax credit for vacant houses. Could you give me an idea 
if we are talking about the same thing here? Because it appears 
to me to be that would be a little more confining. And did that 
work? And how long did it last for?
    Senator Isakson. Well, it is a great question, Senator 
Tester. And Bob Corker will remember the Butcher brothers and 
some of the liberal banking that took place in the 1970s. What 
happened was a 3-year supply of new construction on the market. 
If you had a pick-up truck and a hammer, you could get a 
construction loan, whether you were qualified to build a house 
or not. And metropolitan Atlanta was one of the poster children 
for just an entirely overbuilt market. That was the problem in 
most of the country. It was not resales, so that is where the 
tax credit was focused. And it was for a year. It was for the 
purchase of any standing vacant house, not an occupied house.
    Things have changed a lot. There are not a lot of new 
houses sitting on the market now. They have been sold, 
foreclosed on, taken over. The plethora of houses on the market 
today are residential resale houses that families live in, in 
Montana and Georgia, that they cannot sell for what is owed on 
them. That is the problem. And the further complication of that 
problem, they have lost their equity, or substantially most of 
their equity, which means they have lost most of their net 
worth, and they have lost most of their ability to borrow. It 
is the single biggest compounding effect on the consumer 
confidence level of anything that is going on, and until we 
turn it around, there is not going to be consumption necessary 
to have a vibrant economy.
    Chairman Dodd. Senator Corker.
    Senator Corker. I will be very brief. I know that this 
issue will be debated, and I know pay-fors will be looked for, 
and I just want to say we have had Senators testify on various 
committees. I do not think I have ever witnessed one that is 
more grounded in knowledge and with greater clarity. And I just 
want to say to Senator Isakson that the people of Georgia have 
to be awfully proud, and I thank you for your great testimony 
today.
    Senator Isakson. Thank you.
    Chairman Dodd. Thank you very much.
    Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair.
    One thing I wanted to ask you about is you noted in your 
comments that you do not support an extension of a credit on a 
permanent basis, and I just wanted to ask you a little bit 
about that. Many, many years ago, when I was working for 
Habitat for Humanity and working with low-income families, when 
they would buy a house, they would often get no value out of 
the home mortgage interest deduction, which was a major subsidy 
for the purchase of a home, because they earned very little 
money and they were buying very modest houses. And so the 
interest did not exceed the standard deduction, or if it did, 
it did just barely.
    And so here we had a program that at that time was a $70 
billion a year program--this is probably 20 years ago--and low-
income families were getting virtually no help to buy homes. 
And I thought at the time, Boy, it would make sense to have a 
tax credit as a base for home ownership in America, because 
then we would be helping all families, not just more affluent 
families buying larger houses.
    Is there any case to be made for a permanent extension at 
some lower level of a tax credit for first-time homebuyers?
    Senator Isakson. That is a good question. There might be a 
case in a narrow focus, but I personally think you would lose 
all the value of the tax credit if it became a permanent 
accepted credit in the general marketplace. One of the benefits 
of the tax credit is the certainty that it is gone at a date 
certain. You are going to hear some testimony in a minute from 
a couple realtors who will tell you that right now in America 
every contract for the purchase of a house that is written has 
a contingency in it, and it says, ``This contract is contingent 
on this property being able to close by November 30, 2009.'' 
The reason for that is, if it goes past that, the tax credit 
goes away, and they do not get the incentive. So the sense of 
urgency of having a sunset is very important in the 
marketplace.
    But in answer to your question, it might be targeted at the 
low end. In certain cases it might make a difference, and that 
might be something to look at in terms of helping people, as 
Habitat has helped people get into houses. But I would not in 
general favor a tax credit that became an accepted norm in 
terms of housing. You need a normal marketplace that is ebb-
and-flowing with demand and supply, where knowledgeable buyers 
and willing sellers are out there in great numbers, which we do 
not have today. But it is something to consider at maybe the 
low end or in a targeted special market. But I would not say 
across the board, no.
    Senator Merkley. Let me ask you one other question about 
the model that is being put forward. As I understand it, the 
vision that you are suggesting would expire--the tax credit 
would expire June 30, 2010----
    Senator Isakson. Right.
    Senator Merkley. ----which is going to be here so quickly, 
and so we will be in the middle of next year. I think we are in 
a long recovery. A long recovery will have a lot of triple-
option loans that are kicking up and driving foreclosures next 
year. We have got it on the commercial side. We have got a 
tremendous number of 7-year balloon loans that are going to 
be--companies are going to have difficulty rolling over. So I 
think we are still going to be deep in the woods, if you will, 
in the middle of 2010.
    Will it really be feasible at that point to have a 
significant tax credit disappear in the middle of the year, or 
would it be better to have it at some more modest level and 
extend it through the balance of 2010?
    Senator Isakson. Well, I learned a long time ago in 
Government that legislation is about the art of the possible, 
and I think the art of the possible is better than the 
improbable. It is improbable that this body or that this 
Administration would support an extension of longer than June 
30 or greater than $8,000. I have done a lot of talking with 
the Administration and economists and with a lot of you all, 
and so it is the art of the doable and the art of the possible.
    But let me make a point here that is so great. Real estate 
is an interesting dynamic, and once you have a confidence level 
in values, you will recover relatively quickly. And by a 
confidence level in values, what I mean is a buyer feels 
comfortable about the price they are paying and a willing 
seller is able to accept it because it is competitive or it is 
fair.
    We don't have that situation right now. You have willing 
sellers who are just getting out, walking away. And you have 
knowledgeable buyers who aren't quite certain where the bottom 
is yet and they are sitting on the sidelines, and this is 
particularly true in the move-up market.
    So I do think the tax credit extended to June 30 will 
accomplish three things. Number one, it will take us through 
the 3 worst seasonal months of the year in real estate sales 
historically, and that is December, January, and February, 
number one.
    Number two, we will enter the best 4 months of the year, 
which are March, April, May, and June, which is the spring 
market, with some velocity and some movement, and values will 
have stabilized, so people will come back to the marketplace.
    What is going to happen on November 30 of this year is the 
market is going to die a sudden death because the only impetus 
that exists is a credit for a narrow band of buyers, being the 
first-time homeowners, and with still the uncertainty as was 
put in by this article that I entered into the record, you are 
not going to have people coming back. But if we can extend it 
through that June 30 date, go into the spring market of next 
year, I think you can stabilize the values at the bottom and 
the market will bring the values back once people have a 
confidence level in those values.
    Senator Merkley. Thank you very much for sharing your 
expertise with the Committee.
    Senator Isakson. Always happy to have my neighbor here. 
Thank you.
    Chairman Dodd. And that point you just made, about coming 
to those 3 best months, I think are very, very valuable, and 
that is why I think leaving that June 30 deadline, if you can 
get something in that gets us really an engine moving in those 
3 months, it can really help, as well.
    Senator Bunning.
    Senator Bunning. Thank you. Good to see you, Johnny.
    Senator Isakson. Thank you, Jim. Congratulations on the 
Phillies winning.
    Senator Bunning. Boy, oh boy. How they won was more 
important.
    [Laughter.]
    Senator Bunning. Let us get back to the housing market. The 
original plan that you proposed was a $15,000 tax credit for 
new and existing homes, is that correct?
    Senator Isakson. That is correct.
    Senator Bunning. And we were able to do only the $8,000 
new-only housing----
    Senator Isakson. Well, it is new or resale, but it is 
first-time homebuyer only.
    Senator Bunning. It is first-time homebuyer. But that 
really limits the market.
    Senator Isakson. Correct.
    Senator Bunning. Remember, what did you call it, the step 
up?
    Senator Isakson. Move up.
    Senator Bunning. Move up. The move-up market. Those are not 
necessarily first-time homebuyers. Those are obviously people 
that were in their house and are looking to move up in the 
marketplace.
    The proposal you have before the Congress presently is a 
renewal of the $8,000 tax credit. Is that for move up and new 
home buyer?
    Senator Isakson. Yes, sir. What I have done is Senator Dodd 
and I and Lieberman and others who were sponsors of it, we 
removed the first-time homebuyer qualification or means test, 
so it is for any buyer----
    Senator Bunning. Any buyer.
    Senator Isakson. ----as long as they are going to occupy it 
as their principal residence for at least 3 years. It is not 
for investors. It is not for speculators.
    Senator Bunning. No, no. This is somebody who wants to 
live.
    Senator Isakson. And also, the current tax credit, you are 
limited to an income for an individual of $75,000 or a couple 
filing jointly, $150,000. We raise that limitation to $300,000 
for a couple filing jointly to accommodate the incentive for 
the move-up market.
    Senator Bunning. OK. Well, I think it is absolutely 
necessary, and being in finance as I was for 30-some years, if 
you don't have a stable housing market, and the equity and the 
wealth or whatever you want to call it that is in the housing 
market for the people who own those houses, you don't have a 
stable financial situation. And you are absolutely right. We 
have to stabilize the homebuyers' market, and in so doing, we 
might even stabilize the credit markets, because those are a 
direct result of the homebuyers' market not being stabilized.
    And if we can do that and find the bottom, and I don't care 
where the stock market is, because we are still a long way from 
stabilizing this economy, if we can do it with that kind of 
incentive, rather than throwing Federal Reserve money and TARP 
money and all the other money we have thrown at this economy to 
try to stabilize it, this stabilizes it at the bottom, the 
basic economy that we have to stabilize, or else we are not 
going to be able to come out of this thing in a normal fashion 
like you did in 1974 or 1975 or whenever.
    We have a business cycle that takes time, and this one is a 
lot deeper than most of them, and I hope and pray that we are 
able to do this in a reasonable fashion, and if necessary, pay 
for it, like we did on other occasions. We have to find pay-
fors to do things for the American people.
    So I wish you good luck with your legislation, John, 
because I think it is the basis on which we will start forward. 
Thank you.
    Senator Isakson. Well, I thank you, and there is one thing 
that you said that should be underscored. There is a direct 
absolute correlation between home values and consumer 
confidence, and one of the reasons you have a declining retail 
marketplace right now and the problems you are seeing in the 
retail industry, shopping centers, commercial loans, is because 
we have got a very low level of consumer confidence, and 
stabilizing housing and building those equities back will bring 
that back quicker than anything.
    Chairman Dodd. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman. I would just say, 
returning again this week from Colorado was a reminder that for 
our working families, this economy is still nowhere near 
appearing to get better and I think proposals like the one 
Senator Isakson is making are critical to moving support. I 
just want to thank you for being here and sharing your 
expertise. It is wonderful to hear from somebody who actually 
knows what they are talking about, so thanks for being here.
    Senator Isakson. Thank you very much.
    Chairman Dodd. Senator Johanns? You may want to stay here 
all day, getting all these compliments.
    Senator Johanns. You are getting a lot of compliments, but 
well deserved.
    As I thought about the charts that you put up there, 
Senator, it occurred to me that we could build those charts in 
just about any market in the United States, really, in any 
market in the United States. And it is hard for me to imagine 
that you get recovery, economic recovery, unless you start to 
see some lift in the housing market. So I really don't have any 
questions for you, but I did want to indicate I like what you 
are doing. I am very anxious to work with you to try to get 
this done. I believe it is a step in the right direction. Quite 
honestly, I wish we could do a little bit more, but I 
appreciate the reality of the economic circumstances we are 
dealing with also on budget issues, but I would be willing to 
help in any way I can to try to get this to the finish line.
    Senator Isakson. Well, thank you very much. I appreciate 
all the kind comments, and I will add one closing remark. I 
neglected in my testimony to mention one other change that we 
put in this amendment. Senator Shelby and Senator Bunning both, 
I think, will be interested in this. The original tax credit, 
if a veteran or a member of the Armed Services used the tax 
credit but they had to sell the house within the 3-year period 
of time of eligibility, they had to pay it back 
proportionately. We waived that provision for any member of the 
Armed Services who is deployed overseas, if they are forced to 
sell because of that deployment. It is a small number of 
people, but they are the number one people in my heart and we 
don't need them penalized just because they are defending our 
country.
    I also want to thank the Committee, thank the Chairman and 
the Ranking Member. It has been an honor to be here today and I 
enjoy serving with each and every one of you.
    Chairman Dodd. Thank you, Senator. The cosponsorship of 
this bill is available to members, and Senator Isakson will 
welcome anyone who wants to join us in this effort. We hope to 
get it done in the next few days.
    Senator Isakson. Thank you, sir.
    Chairman Dodd. Thank you, Senator, very much.
    Let me welcome to our dais once again the Secretary of 
Housing and Urban Development, Shaun Donovan, who has done a 
terrific job under very, very tiring--trying circumstances. 
Tiring circumstances, too, I might add. As many of you know, he 
previously served as the Commissioner for the New York City 
Department of Housing, Preservation, and Development. His 
experience covers both public and private sectors and he does a 
remarkable job.
    Mr. Secretary, we welcome you once again to the Committee. 
I know you have got a lot of ground to cover. I am going to ask 
you if you want to take eight or 10 minutes in your opening 
statement so we can get as much of it. All the other material 
you have will be included in the record.

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

    Secretary Donovan. Good morning, Chairman Dodd, Ranking 
Member Shelby, and Members of the Committee. Thank you for the 
opportunity to testify at today's hearing on the state of the 
U.S. housing market and the progress the Obama administration 
is making to stabilize it, as well as other Administration 
efforts to provide relief to homeowners and neighborhoods 
suffering from the effects of the foreclosure crisis.
    Certainly, we meet at an important moment, as indicators 
continue to show signs that the housing market is stabilizing. 
Nationally, home price indexes have been on the rise for the 
past several months, as reflected in 18 of the 20 metropolitan 
markets covered by the Case-Shiller Index. Inventories of 
unsold homes remain at high levels, but have been receding. In 
selected markets, realtors now report that many homes are 
selling for more than their asking price and new home sales are 
at their highest level since September of 2008.
    With respect to foreclosures, according to Realty Track, 
foreclosure activity in September fell for the second straight 
month by 4 percent. This is somewhat encouraging progress, but 
foreclosures remain at near record levels. Quite simply, there 
are still too many people losing their homes. And with 
delinquency rates on multifamily property mortgages having 
moved up sharply since mid-2008, while property values continue 
to fall, it is clear these numbers do not tell the whole story.
    Nationwide, in the second quarter of 2009, vacancy rates 
for rental properties at the higher end of the market rose to 
nearly 10 percent, while a shortage of affordable rental 
housing persists for low-income families. This imbalance 
threatens families, neighborhoods, and the lending institutions 
on whom these communities depend.
    That is why the Obama administration has made stabilizing 
our housing markets a top priority from its first day in 
office. The comprehensive approach the Administration has taken 
has allowed interest rates to hover around or below 5 percent 
for over 6 months, allowing first-time homebuyers to enter the 
market and helping some 3 million homeowners refinance, putting 
as much as $10 billion of annual purchasing power in the hands 
of American households.
    At the center of the Administration's response to the 
housing crisis is Making Home Affordable, a comprehensive 
program to stabilize the housing markets by providing 
affordable refinance and modification opportunities for at-risk 
borrowers. Earlier this month, the Administration announced 
that servicers had exceeded the goal of beginning 500,000 trial 
modifications by November 1, nearly a month ahead of schedule, 
reflecting the fact that the monthly pace of trial 
modifications now exceeds the monthly pace of completed 
foreclosures.
    And we are committed to improving Making Home Affordable 
performance. On October 8, Administration officials and 
servicer CEOs met to discuss improving servicer efficiency and 
responsiveness to borrowers during the modification process. At 
our urging, servicers agreed not to initiate foreclosure 
proceedings against any borrower that has submitted a HAMP 
application. In situations where a borrower is in the 
foreclosure process at the time a HAMP application is received, 
servicers agreed not to complete the foreclosure until a 
decision on the application has been made.
    This month, the Administration announced new streamlined 
FHA application documents, providing another resource to make 
the process easier and more straightforward for borrowers. The 
Administration is also working to develop a Web portal that 
will provide a centralized application point for HAMP 
applications, allowing borrowers to upload all application 
documents, see that documents have been received and are 
complete, and receive ongoing information about application 
status until the application is approved or denied.
    In addition, I am announcing that we have finalized the 
Hope for Homeowners program guidance to lenders. In keeping 
with changes made by this Committee and Congress, this is a 
critical first step toward providing an additional option to 
underwater distressed borrowers seeking to save their homes and 
preserve equity through principal write-down and refinance. As 
the program goes online, we will closely monitor its progress 
and continue working with Congress to ensure its success going 
forward.
    The Federal Housing Administration is also playing a 
central role in the housing market and our recovery right now, 
not only insuring a third of the home purchase mortgage market, 
but also protecting another half-a-million families from 
foreclosure in 2009 through its loss mitigation programs. As it 
did during the Great Depression and the Oil Patch Crisis of the 
1980s, FHA is again stepping up to ensure housing markets 
function when the private sector alone cannot do so.
    In the current environment, FHA is essential not only to 
low-income buyers, but also to middle-income homeowners as 
well. More than three-quarters of FHA's borrowers this year 
have contributed more than the minimum 3.5 percent downpayment, 
and more than 40 percent have made a downpayment of greater 
than 5 percent.
    Further, we have seen the average FICO scores of borrowers 
increase dramatically, from 633 two years ago to 693 today.
    I do want to address concerns about FHA. In light of the 
severe decline in housing prices and performance of the 
economy, FHA expects higher net losses than previously 
estimated on outstanding loan guarantees which, combined with 
stresses accounted for in prior reviews, will drive its capital 
ratio reserve below 2 percent. However, based on current 
projections and absent any catastrophic home price decline, FHA 
will not need to ask Congress and the American taxpayer for any 
bailout.
    Indeed, because of the quality of loans FHA is making 
today, the independent actuary expects this drop to be 
temporary and to return above 2 percent within the next 2 to 3 
years. That is because FHA sticks to the basic, 30-year fixed-
rate traditional loan products with safe underwriting 
requirements, only insuring owner-occupied residences, and 
never ensuring exotic or no-doc mortgages. It is also because 
we have stepped up our vigilance in protecting taxpayers, with 
increased standards for FHA lenders and appointment of FHA's 
first-ever Chief Risk Officer. And we are committed to further 
improving portfolio analysis and management, tightening risk 
controls, overhauling targeting and monitoring practices, and 
working with you to modernize FHA's information technology 
systems.
    At the same time we take steps to ensure FHA remains 
fiscally healthy for the long term, yesterday, the 
Administration announced it is providing assistance to State 
and local Housing Finance Agencies. HFAs have been reliable 
sources of flexible, affordable mortgage money for lower-income 
first-time buyers, making 2.6 million families homeowners for 
the first time and adding another 150,000 homes to our 
affordable rental housing inventory each year.
    Last year, through HERA, Congress provided HFAs with $11 
billion in new housing bond authority to finance affordable 
single-family and multifamily mortgages, and expanded HFAs' 
ability to, for the first time, refinance borrowers that are 
distressed, as well. To maintain the viability of FHA lending 
programs jeopardized by the economic crisis, the Administration 
has developed a set of programs, including a new issue bond 
program and a temporary credit and liquidity facility program 
for existing bonds, including a range of risk sharing features 
and a pricing structure that encourages FHAs to find 
alternative private market solutions.
    In addition, I am also aware of the strong support in 
Congress for doing more to support the housing market, 
including extending the first-time homebuyer tax credit beyond 
2009. At the same time, I am mindful that these proposals can 
be expensive, especially at a time of significant budget 
deficits. I can assure you that the Administration is 
committing to working with Congress to fashion the most 
effective homebuyer incentives, mindful of both their benefits 
and their costs to the American taxpayer.
    Let me conclude by saying that while the measures I have 
discussed are key elements to addressing the housing crisis, 
there are other ways we can help the housing market recover, as 
well. Indeed, with some estimates finding that almost half of 
all foreclosures are caused in part by financial issues 
stemming from medical costs, health care reform is essential to 
ensuring loan modification efforts stick.
    And, of course, we look forward to working closely with 
this Committee to modernize our financial system and create a 
Consumer Financial Protection Agency that will protect American 
families who buy financial products and services every day, 
from mortgages to credit cards. We must set clearer rules of 
the road for consumers and banks alike. This is a top priority 
for the Administration, as I know it is for you, as well, Mr. 
Chairman.
    And so thank you for the opportunity to participate in 
today's hearing and for your continued leadership, Mr. 
Chairman. Whether it is our Choice Neighborhoods Proposal, to 
link neighborhood revitalization more closely with early 
childhood education, an issue on which you have long been the 
leading voice in Congress, or your Livable Communities Act, to 
help towns and regions across the country better integrate 
their housing, transportation, land use, and economic 
development efforts, we are committed to working with you to 
build a strong, durable foundation for sustainable growth.
    Like you, we recognize that a vibrant housing sector is 
inseparable from a balanced housing policy that supports home 
ownership and provides affordable rental opportunities for 
every American, that it is essential to creating a geography of 
opportunity in America where our children's choices and futures 
are never limited by the zip code they grow up in.
    As always, the Administration stands ready to explore with 
Congress additional ways we can work together to make this 
shared vision of prosperity and opportunity a reality for every 
American. With that, I am happy to answer any questions you may 
have.
    Chairman Dodd. Thank you very, very much, Mr. Secretary. We 
appreciate your strong efforts and those of the staff at HUD 
who are working, I know overtime and through weekends and 
others to try and address these very complex and, as Senator 
Isakson, who you heard testify a few minutes ago, the most 
difficult economic situation dealing with housing, certainly in 
any of our lifetimes. You have to go back to the Great 
Depression era to talk about a time as difficult as this one. 
So we welcome your commitment and those who work with you at 
your agency.
    Let me just pick up, if I can, on the tax credit idea and 
ask you to address that. I listened to you and read your 
testimony about the statement you made of balancing the 
interest, obviously, the benefits as well as the costs 
involved. But you have heard Senator Isakson and those of us up 
here talk about this. We are coming up pretty quickly now on 
the date, and obviously those clauses written are into these 
contracts contingent upon what happens after November 30.
    I wonder if you might share some additional thoughts about 
your views on this issue, in light of the importance of that 
move-up market and what it can mean, given the fact that 
housing historically has been such a strong agent of recovery 
in our Nation, and given the present condition of housing stock 
and the difficulties the buyer and seller are having to come 
together. What are your thoughts on this?
    Secretary Donovan. First of all, let me say that I would 
agree with Senator Isakson. There is clear evidence that the 
tax credit has provided a benefit to housing markets. The real 
issue, and I think the difficulty in really focusing on what 
precisely the definition of a housing tax credit might be in an 
extension is that to truly understand the costs, we will not 
know that until Americans have filed their tax returns. And so 
we feel it is very important within the Administration that we 
gather as much data as we possibly can in advance of that 
before we make a final decision about whether the tax credit 
should be extended, and if so, exactly what that shape should 
look like.
    Chairman Dodd. Is that going to be possible now in the next 
couple of weeks?
    Secretary Donovan. Chairman, I was about to say that we 
understand the urgency of this situation, and we believe that 
within the next few weeks, we will have additional data that 
will allow us to sit down with you and to finalize a decision 
about proceeding with an extension, if we should do so, and if 
so, what that shape should be. I understand the urgency of the 
situation. We continue to hear--I hear this. My FHA 
Commissioner continues to hear this every day from lenders. We 
understand that urgency. We believe it is critical to have the 
information necessary to make a fully informed decision about 
the costs, given the importance of this decision.
    Chairman Dodd. I appreciate your--and I am going to try and 
move along here, so we get a chance with the number of Members 
here on this, but I appreciate your comments about FHA. 
Obviously, we are all very interested in your very optimistic 
outlook that no Government money, taxpayer money, will be 
necessary to bail out FHA. You are confident of that position?
    Secretary Donovan. First of all, let me say, this is not my 
opinion alone. We have an independent actuarial study which is 
done each year, and it is in the process of being finalized and 
we will be providing it shortly to Congress with all of the 
details.
    Let me be clear. I continue to be concerned that we need to 
do more in FHA around risk assessment, around making sure we 
have the systems and the processes in place. My relatively new 
FHA Commissioner, Dave Stevens, has taken a very strong 
position with making sure that we have only strong lenders, 
responsible lenders that are involved in the FHA programs. We 
recently announced some changes to strengthen that portion of 
our risk and oversight management. We suspended a very large 
lender, TBW, recently, took strong action there.
    So I don't want to portray the concern as if I do not have 
concerns about the strength of FHA. But let me say very 
clearly, what we have seen, first of all, is that FHA has been 
absolutely critical to stabilizing this market. Some estimates 
are that--you have heard a lot today already about the 
importance of first-time buyers in this market. Our evidence 
today shows that approximately half of all first-time buyers 
are entering the market using an FHA loan. We have been 
critical on that front.
    And the other thing that the actuarial study will show is 
that the loans that we are making today are some of the safest 
loans that FHA has ever made. Given the fact that our FICO 
scores, our credit scores, have gone up substantially, given 
the fact that we have--these are--after the dramatic declines 
that we have seen in the housing market and have begun to see 
increases in prices, we believe that these are very safe loans 
that we are making today that are both contributing to the 
recovery, but also providing a return to taxpayers.
    And so we believe strongly that while there are changes 
that need to continue to be made at FHA, FHA is a strong 
contributor to the market and must continue to provide the kind 
of support to make sure that the fragile recovery that we are 
seeing at this point continues.
    Chairman Dodd. I appreciate that. I am sure we will get 
some additional questions on FHA.
    Let me jump quickly to the foreclosure issue, as well, and 
I know and I applaud the fact the Administration has now gotten 
some 500,000 families into trial loan modifications, and I say 
trial loan modifications. But certainly the 1.5 million that we 
are talking about that can possibly get some help in all of 
this, that is positive news. But I think most of us up here 
still worry about borrowers who are underwater. We have heard 
that in our opening comments and testimony, as well, the 15.2 
million people in this country who have mortgages that exceed 
the value of their homes, and obviously that is a huge number 
and a potential number that could move into this foreclosure 
area.
    I am just wondering whether or not payment modifications 
will be enough, or do we need principal forgiveness? I know 
this has been an ongoing debate, but many feel as though if you 
could do something on principal forgiveness, making it possible 
for that value, the equity to be able to increase and exceed 
the value, then you would have people more willing to stay in 
their homes. And I know this has been a debate. I know the 
Chairman of the Federal Reserve has argued for principal 
reduction and forgiveness as a way of trying to really 
encourage that, avoiding the walk-away problem, people throwing 
up their hands and just saying, I have had it. This doesn't 
make any sense and I am leaving. Where are we on that 
possibility?
    Secretary Donovan. This is an important debate, as you say, 
Mr. Chairman. You have been eloquent about this, that this has 
been an important debate within the discussion around the 
foreclosure crisis.
    What I would say, first of all, is that, to date, we 
continue to find that there is not any widespread evidence of 
walk-aways from--people who are underwater but can afford their 
mortgages. In other words, we continue to find, and we believe 
the data continues to support, that the most significant 
problem is the problem of affordability. If you can afford to 
stay in your home, you will do so.
    And I think if we think of this not just as thinking about 
a housing market, but we think about the importance of home to 
a family, that it goes beyond just an economic investment. It 
has so many other important pieces that it brings with a 
neighborhood--access to schools, to friends, to neighbors. It 
makes sense, not just in economic terms, but in real human 
terms, as well, that we would not see large numbers of 
homeowners, if they can afford to stay in their home, walk 
away, and, frankly, if they begin to see some expectation as 
the market turns around that there is a bottom there, and I 
think we have begun to see those signs in the last few months.
    Having said that, I do believe that it is important that we 
have some options for certain circumstances for principal 
forgiveness. That is why moving forward, as you have 
consistently said, with Hope for Homeowners, the ability to 
move forward with that program, I think, is an important 
element, and the principal reduction that we are providing 
through the Making Home Affordable program. We have incentive 
payments that encourage folks to stay in their homes and be 
successful long-term by reducing their principal over time if 
they are successful in their payments on the modification, as 
well. So we think those two elements are an important piece, 
but broadly speaking, focusing on affordability is the right 
answer.
    Chairman Dodd. Thank you very much.
    Senator Shelby.
    Senator Shelby. Thank you.
    Mr. Secretary, you testified that--and I will use your 
words--``Based on current projections and absent any 
catastrophic home price decline, FHA will not need to ask 
Congress and the American taxpayer for extraordinary 
assistance. There is no need for any `bailout'.'' Your words.
    FHA Commissioner Stevens has made similar statements. While 
trying to reassure the American public that FHA will not need a 
bailout, however, both you and Commissioner Stevens seem to 
qualify your assurances. Perhaps you should, you know.
    Tell us what you mean by ``extraordinary assistance,'' and 
is there a chance that you might request an additional 
appropriation below the threshold? What bothers me is that 
FHA--not what they are doing. I hope what they are doing, as 
you pointed out, they are underwriting, they are doing things 
prudently and doing right for the American people. But they are 
under the 2 percent, right? That is a dangerous level. You 
know, the 2 percent was mandated by Congress. It might be--and 
I am not saying it is the end of the world. We want to keep FHA 
going. You have that obligation to make it work well as the 
Secretary.
    What do you mean by ``extraordinary assistance''?
    Secretary Donovan. Well, there will be significant detail 
in the actuarial report which will show a look at even 
substantial declines in housing prices beyond what we have 
already seen that show that FHA's reserves never dip below 
zero. In other words, it would never need an injection of 
funding beyond what it currently has in its reserves.
    Let me be clear--so there is significant detail about that, 
and even under our base case, to be conservative, we have 
assumed some continued decline in house prices, close to 10 
percent. And so even with that, what you see in the 
projection--and I think this is very important. The 2 percent 
is a secondary reserve fund. There are two reserve funds that 
are held within FHA. Today they hold more than $30 billion, 
which is equivalent to almost 4.5 percent reserves. So that is 
today. The 2 percent is done based on an assumption that if FHA 
literally shut down business today, made no more loans, and it 
assumes losses over 30 years, a much more stringent requirement 
than any bank or traditional reserve. So even under what is 
assumed to be a relatively conservative scenario, we are still 
looking at FHA reserves never going below $25 billion, and even 
under larger declines.
    Senator Shelby. So you are pretty confident you are going 
to be OK. Is that what you are saying here?
    Secretary Donovan. None of us can ever predict exactly what 
is going to happen in the future. I would like to be more 
secure about FHA systems. There are a range of things that you 
have talked about that we are doing. But what I will say is 
independent actuarial reviews of this have said, first of all, 
that we will not need extraordinary assistance. But second of 
all, and I think even more importantly, loans that we are 
making today are highly profitable for the American taxpayer, 
that these are good loans that we are making. They are safe 
loans. They are written with underwriting basics, as I have 
described in my testimony, and that FHA continues to be 
important to this economic recovery.
    So I believe it is very important that we continue to 
monitor FHA's risk, but not take any undue or hasty actions 
that would hurt this fragile economic recovery that we are 
experiencing.
    Senator Shelby. If we did not pass--Senator Isakson is 
still here, I am glad, to hear your testimony. If we did not 
pass the tax credit, would houses go into a tailspin, a 
downward tailspin? Some people say they would.
    Secretary Donovan. My own view is that there are a number 
of different dynamics happening in the market, and many of 
those are regional dynamics. I believe in general that the tax 
credit, as I said earlier, has been a positive force in the 
market, and that the end of the tax credit would have some 
negative implications for the market. But I do not believe, 
based on all of the other actions that we are taking--for 
example, whether it is keeping interest rates low, the 
concerted actions that we have taken, FHA continuing to be an 
important force in the market--I do not believe that a 
catastrophic decline would be the result of the end of the tax 
credit.
    Again, exactly how big a decline, there would be some 
negative impact, but exactly how big that impact is, is hard 
exactly to say, but I think catastrophic is unlikely.
    Senator Shelby. Mr. Secretary, do you believe, though, that 
central to a recovery of our economy, housing has to play a 
central role?
    Secretary Donovan. I would say not only do I believe that 
is true, but I believe the actions of this Administration, the 
decisive actions that we have taken this year, have shown that 
we do believe housing is a critical part of a recovery.
    Senator Shelby. What actions are you talking about?
    Secretary Donovan. I would just reiterate what I have 
discussed in my testimony, which is, first and foremost, 
concerted actions to keep interest rates at a level that has 
not only allowed millions of homeowners to refinance----
    Senator Shelby. I thought the Federal Reserve did that, not 
the Administration.
    Secretary Donovan. There are also actions taken by the 
Treasury as well as the important actions of FHA to make sure 
that mortgage capital remained available, widely available to 
homeowners in the country, at reasonable rates.
    Senator Shelby. OK. I know my time is getting up, if it not 
already up, but I have a question that I need to get into.
    In your testimony, Mr. Secretary, you state that it is 
critical to HUD that financial regulatory reform, which we are 
considering, create a consumer protection agency that will, to 
use your words, ``protect American families who buy financial 
products and services every day.''
    Were the problems that you believe require the creation of 
a consumer protection agency, something new, the result of 
regulators not enforcing existing rules? Or did regulators not 
have necessary authority to protect the consumers in the first 
place? In other words, if more authority is needed, 
specifically what new statutory powers do regulators need? Some 
people have argued and said the regulators had the power, they 
just did not use it. The Fed had power. Obviously, Senator Dodd 
has questioned them closely on that. They did not use it. To 
create a consumer protection agency--and I know you are the 
Secretary of HUD; you are not the Treasury Secretary or the 
President. But to do this, you are getting into new ground that 
we have never gotten into before.
    Secretary Donovan. What I would say is--and you talked 
earlier, Senator Shelby, about the importance of understanding 
the history of the crisis that we have been through.
    Senator Shelby. Absolutely.
    Secretary Donovan. We recently delivered a report to this 
Committee that showed the very central role that a set of 
unregulated, nontraditional financial institutions making what 
were, frankly, irresponsible loans contributed to the crisis 
that we had. And I believe it is both the problem of a lack of 
regulatory oversight over certain kinds of financial 
institutions that is part of the problem that needs to be 
solved by the consumer financial protection agency, as well as 
the coordination of existing regulation.
    The Balkanization, if you will, of oversight I believe was 
a significant issue as well.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much. And I would just say, 
before I turn to Senator Reed, on that point obviously, you 
know, we had them on the books, some of these regulations. 
Historically, safety and soundness, an important function, 
always trumps consumer protection. And that has been a major 
problem, and we have got to address that, in my view, so I 
agree with your point.
    Senator Reed.
    Senator Reed. Thank you, Mr. Chairman. Thank you, Secretary 
Donovan. I also want to thank Senator Isakson for his very 
eloquent and very profound testimony. Thank you, Senator.
    One of the points that Senator Isakson brought up is the 
fact that what we are seeing now is a shift away from subprime, 
poorly underwritten loans, to loans that were fairly well 
underwritten, but the individual borrower has lost his or her 
job. And the HAMP program generally requires employment as one 
of the gateways to eligibility.
    I know when Secretary Apgar was here in July, he talked 
about some discussions that were ongoing about how we could go 
in and help people who were temporarily out of work or in some 
way did not have the employment to qualify. Can you elaborate 
on what has been done?
    Secretary Donovan. Senator, let me just make one important 
clarification to what you have said. Unemployed homeowners are 
eligible for the HAMP program, and, in fact, there are 
significant numbers of unemployed homeowners that we have 
already helped through the program.
    There are really two ways that we take into account 
unemployment. One is that we will allow any kind of 
unemployment benefits or others to be counted toward income in 
terms of underwriting a modification. So it is not that there 
is no income at all that is counted. Second of all, we will 
allow up to 90 days of a complete cessation of payments for a 
borrower, a stay of payments to allow them to get through a 
temporary period of unemployment. So I do think that those are 
benefits.
    What I would say in addition, based on the input that you, 
Senator Merkley, others, and Chairman Dodd have given us, we 
are looking at the issue of whether it makes sense to go 
farther trying to coordinate those with extension of 
unemployment benefits and others so that the timeframes, the 
current 90-day, whether that window should be longer.
    So I think that there are things we can do in terms of 
changes to the program that could be helpful that we are 
looking at, as we discussed the other day. But I do want to be 
clear that we have helped a significant number of unemployed 
borrowers through the HAMP program. It is really a question of 
whether there are changes that can be made that can go even 
farther.
    Senator Reed. Thank you, Mr. Secretary.
    Another aspect of the HAMP program is that, as I understand 
it, there is a significant number of trial modifications, but 
fewer numbers of permanent modifications. Can you comment on 
that?
    Secretary Donovan. Simply just to make sure it is clear to 
the Committee how the process works, we begin modifications for 
a 90-day period, and then at the end of the 90-day period with 
some potential for extensions we convert them to permanent 
status. The vast majority of the modifications that we have 
made thus far have not reached that 90-day point, and so the 
fact that there are not a lot of permanent modifications at 
this point is not a surprise. It is simply a matter of timing. 
Over 90 percent, I believe, are still within that 90-day 
period.
    We have seen some issues around documentation and other 
things as we reach the permanent phase, and so one of the 
important things that we have done, recently released, is a 
simplification of documentation, removal of need for signatures 
and other things that we felt were not critical to ensuring the 
integrity of the program. So we have made some streamlining 
changes that should allow the conversion process to move more 
smoothly.
    But it is an issue we continue to be focused on with the 
lenders.
    Senator Reed. This transition to permanency is not 
automatic. The individual has to be current in their payment 
and still have the same----
    Secretary Donovan. That is correct. We want to make sure it 
is working. We also, frankly, want to make sure that we do not 
repeat the mistakes that led us to these problems in the first 
place. If a modification is going to be sustainable, if we are 
going to bring it into the program, we want to make sure that 
we have verified income, that we have gone through the steps 
that are necessary to make sure both that it is a sustainable 
modification but also that the homeowner actually deserves the 
kind of relief that the program was set out to provide.
    Senator Reed. And a quick question, as my time is rapidly 
expiring. We anticipate resetting of ARM loans significantly 
this year, which could possibly complicate everything we have 
talked about this morning. Can you briefly comment on that? Do 
you anticipate this as a challenge? Are you prepared for this? 
Are there programs that are in place to anticipate it?
    Secretary Donovan. We have been modifying some number of 
these option ARM loans that are starting to ratchet up, 
particularly in high numbers next year. So they are eligible 
for the program. What we have been doing is looking more 
carefully at whether there is a consistent pattern where it 
will be difficult, given how low some of the payments are, 
because they are adjustable rate, whether there will be enough 
of a benefit in the program to be able to help large numbers. 
Based on that look, it is possible we may make some changes to 
the program to respond to that.
    But at this point, we do not see significant numbers of 
those borrowers, because their payments are so low today, that 
are in distress because their payments need to be brought 
lower. It is really a question of when they reach the resets, 
and that is what we are looking at to make sure we understand 
whether there is going to be an eligibility problem for them. 
At this point, we do not see a large problem happening today.
    Senator Reed. Thank you.
    Chairman Dodd. Thank you, Senator, very much.
    You know, Senator Isakson, I apologize. If you would care 
to join us here on the dais, you are more than welcome to sit 
up here. It was not very courteous of me.
    Senator Isakson. I am enjoying the view. Thank you.
    Chairman Dodd. You like the view from down there better?
    [Laughter.]
    Senator Shelby. He has been elevated--downwards.
    Chairman Dodd. Well, you are more than welcome to join us 
on the dais if you would care to do so.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. And, Mr. 
Secretary, thank you for your testimony.
    I was struck by the comment that you made that you are 
making the best loans you have ever made right now or in recent 
times. Senator Isakson in his outstanding comments talked not 
only about foreclosures but also what is happening at our 
community banks around the country, and he alluded to an 
accounting issue. I would say that that is compounded greatly 
by regulators, creating a self-fulfilling prophecy. So here you 
are out making loans that are the best loans you have ever 
made. Community bankers around our country have the ability 
right now probably to make the best loans they have made in a 
decade, and yet regulators are creating a self-fulfilling 
prophecy.
    I wonder if you would tell us about whether you find that 
frustrating because it exacerbates the problem or whether you 
think that basically things are OK in that regard.
    Secretary Donovan. Senator, maybe you could say a little 
bit more about the specific----
    Senator Corker. Well, I think what is happening is loans 
are continually being criticized, so community bankers are 
continuing to withdraw credit when today is probably the best 
time to be making loans at the bottom of the market. And I am 
wondering if you are seeing that affecting you in any way as it 
relates to your own mission.
    Secretary Donovan. I think there is no question that there 
have been important discussions and interactions in the 
Administration around some of the regulatory issues. Let me 
just say, first of all, that I am not an expert on some of 
these regulatory and accounting issues, and I do not want to go 
too far in terms of expressing an opinion on particular pieces 
of it.
    What I would say is that a significant part of what is 
important to happen--this is true on the multifamily side as 
well as the single-family side--is that we get accurate 
assessments of the valuation of loans, but not go too far. And 
so our focus within the Administration has been to ensure that 
we are getting accurate views but not overly conservative views 
of the valuation of loans today.
    I also would say I believe a significant part of the 
problem is not just accounting. It is also access to capital. 
And that is why I think many of the other actions the 
Administration has taken through TARP, through some of the 
other resources, as well as the announcement that we made 
yesterday around housing finance agencies, here you have a 
group of very important lending institutions that have had very 
good track records, very low default rates--in fact, today 
better than prime mortgages--and yet have been restricted in 
their access to capital because of what has happened more 
broadly in the capital markets.
    And so this is an example of where I think we can 
effectively help to create a market. HFAs today account for 
about 10 percent, almost 10 percent of all loans to first-time 
buyers. They are a very important part of the housing recovery. 
And our support to them, at what we believe will be no cost to 
the taxpayer, can help to make sure that there is adequate 
capital available.
    So I do believe the accounting rules are important, but I 
think access to capital as well is critical.
    Senator Corker. I came into this world probably, the public 
service arena, not in business but civically being involved in 
helping folks in my home town being able to afford housing. And 
so I come from a background of trying to help that happen for 
people who otherwise that would not have happened for.
    Has this whole situation, though, philosophically, affected 
you in any way as we look at the fact that we here in 
Washington have had policies that basically made everyone in 
America feel that they should own a home? We have seen 
trillions of dollars of losses take place on homeowners' and 
citizens' balance sheets. And should this in some way affect 
our underwriting in the future? Much of what we are looking at 
as it relates to reg reform is really just rearranging the deck 
chairs. I am still not sure that we have hit at some of the key 
points in our financial regulation that we should be hitting 
at.
    But I just wonder if philosophically we in America ought to 
look at different underwriting standards trying to get people 
to own homes where basically they are just renting them because 
they have no equity in it. I wonder if you might want to talk 
to us a little bit about the Danish model, talk to us a little 
bit about just the way we have gone about this, and I am 
wondering if this has sort of shaken people who do what you do 
on a daily basis and caused you to think a little differently 
about the way we go about this in the future--because, by the 
way, if we just rearrange the deck chairs, Johnny Isakson, who 
is probably the most eloquent spokesman of this, in another 
decade will be up here talking to us about another crisis that 
has occurred in real estate if we do not change the 
underwriting.
    Secretary Donovan. Well, Senator, that is an important--and 
it is a question we could probably spend an entire hearing 
talking about and addressing, because I think there are many 
different aspects to housing policy that, given the crisis that 
we have been through, we do need to take a look at.
    I do believe very strongly that we need to make sure that 
rental housing, in addition to home ownership, is a valued 
option for Americans. I think too often that we have felt that 
home ownership is the only option that should be valued, and 
really we have to have a more balanced housing policy.
    The other significant point I think I would make is--and I 
referred to this, but maybe if I could focus on it a little bit 
more, in my testimony--that one of the things this crisis has 
done is to remind us the importance of the basics in 
underwriting and thinking about whether it is home ownership or 
more broadly about real estate. Frankly, we got to the point in 
this country where we were making loans to people we knew they 
could not afford, whether it was not checking incomes, 
providing incredibly low rates up front which we knew were 
going to step up, and if they were not unaffordable today, that 
they would be unaffordable within just a few years. And we need 
to make sure that we have--and I believe a regulatory system is 
very important in doing this--that we do not have a system that 
is making loans that we know people cannot afford. And that 
includes, given the complexity of our system, ensuring that 
there is real skin in the game, not just on the homebuyer's 
side but also throughout the chain, whether that be a mortgage 
broker who we make sure is responsible, whether it is the 
securities that are sold down the line and who holds the risk 
for those securities. There is a whole chain of places where we 
have to infuse responsibility back into our system. And that is 
where I think--one of the things, frankly, that disturbs me 
about some of what is being written about FHA today and 
comparing it to subprime loans, nothing could be further from 
the truth.
    During the boom, there is a reason why FHA shrunk to less 
than 2 percent of the market: because we continued to focus on 
fully underwritten, fully documented, 30-year fixed-rate loans, 
not exotic products. And that is why we were doing almost no 
business during that time. We have continued to focus on those 
things, and I think it is important that we remember that we 
get back to basics.
    One last thing I would say on this is I think it is very 
important that we not confuse responsible lending and 
underwriting with whether or not low-income people can have 
access to the American dream of home ownership. When I was 
housing commissioner in New York, we created or preserved 
17,000 units of home ownership. By the time I left, there were 
only five foreclosures among those 17,000 units. Why? Because 
we made sure people could afford them up front. We made sure 
they were trained for the responsibilities of hospital.
    I believe strongly that home ownership is still a laudable 
goal, but we have to get back to responsible, commonsense 
underwriting in the way that we make these products. And I have 
talked about a set of things that we can do to make sure that 
happens.
    Chairman Dodd. Thank you very much.
    Just on that point that Senator Corker raised, I think 
there is unanimity in that thinking up here. Obviously, what 
happened in so many cases, where there were good underwriting 
standards, the problems did not exist. A lot of our community 
bankers across the country had very little problems in this 
area. And where we did not, obviously the problems exploded on 
us. It almost seems we have no memory on these things because 
it comes back over and over again and people just seem to 
believe these things are going to continue to escalate and you 
can do the zero down and zero payments for a year, and you end 
up in the mess you are in. So I appreciate the point, Senator 
Corker.
    Senator Shelby. Mr. Chairman, could I----
    Chairman Dodd. Certainly. Go ahead.
    Senator Shelby. I just want to pick up on something I 
thought Senator Isakson brought up, and I think you have got to 
correlate this into housing. People's confidence comes from--
the average person--what they believe their house is worth, you 
know, home equity. Our next wave of concern is not housing. It 
is going to be commercial properties around, retail businesses, 
people are not buying. And if we do not restore confidence in 
housing, they are not going to be buying a year-and-a-half or 2 
years from now, and we are going to exacerbate, I believe--I 
think that is what Senator Isakson was alluding to earlier, and 
I think, Mr. Secretary, although you are not in the commercial 
business per se, it is all related to some extent, I think.
    Secretary Donovan. I agree.
    Chairman Dodd. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman.
    A couple things. Welcome, Secretary Donovan.
    Secretary Donovan. Good to see you.
    Senator Tester. You listed a number of programs in your 
opening statement that the Administration is doing. Has the 
Administration taken a position on this particular amendment as 
far as the income limits and extending it out to June 30th?
    Secretary Donovan. The income limits within the home 
ownership tax credit?
    Senator Tester. Yes. This will extent it not only to first-
time homebuyers but to everybody, a $300,000 cap, and to June 
30th. Has the Administration taken a position on that?
    Secretary Donovan. We have not. As I said earlier, we 
believe that within a few weeks we will have sufficient data to 
be able to sit down and get to a conclusion on it. We 
understand the urgency of it, and we would like to do that very 
quickly.
    Senator Tester. You have been in the housing business for a 
while yourself, and I guess my question is: With this tax 
credit, are we installing confidence in the system, or are we 
artificially inflating the price of houses?
    Secretary Donovan. I believe that given the decline that we 
have been through, I think the likelihood that the credit is 
inflating the market beyond what it would otherwise be is very, 
very low. I do not believe that that is the overriding concern 
here about whether we are inflating the market in some way that 
is unhealthy for the long-term future. I believe it is much 
more a balance.
    As I said earlier, the tax credit has provided real, 
tangible benefits to the market. It is a question of 
understanding more fully the costs to the taxpayer of those 
benefits and whether the credit should be extended based on 
those costs and shaping the exact form of it.
    Senator Tester. The tax credit goes to the homebuyer, and I 
am not going to quiz you on mark-to-market, but I am going to 
use it as an example because Senator Isakson brought it up 
about recognizing losses that do not exist.
    I have got a nice house. I am making $150,000, $200,000 a 
year so I can make my payments. It is the bottom of the market. 
Why would I ever sell? Any comments on that?
    Secretary Donovan. I believe that one of the real negative 
impacts--and I agree with Senator Isakson on this--is that 
there are lots of folks stuck in homes who have not been able 
to move or to go to other jobs because of the impact. One of 
the things that I think is very important that we do--and we 
have been working with the servicers to do this--is to make 
sure that short sales can happen much more easily. In other 
words, even in a situation where someone wants to sell, where 
their mortgage is higher than the value of their house, they 
have been unable to short of going through the full foreclosure 
process. It does not make sense for----
    Senator Tester. Isn't there a situation--doesn't that 
situation exist almost entirely with folks with low incomes?
    Secretary Donovan. No. In fact, given the price declines 
that have happened in California, they have been concentrated 
in a certain number of markets where there were actually 
relatively high-priced homes compared to the national average.
    Senator Tester. From a regional perspective.
    Secretary Donovan. I do not think this is a problem that is 
facing just low-income Americans. I think it is facing middle- 
and even some upper-income Americans.
    Senator Tester. How well has the program worked, the 
original program, in rural America? Do you have any sort of 
numbers that would indicate whether it has worked well or not?
    Secretary Donovan. The tax credit program?
    Senator Tester. Yes, the original one for first-time 
homebuyers.
    Secretary Donovan. Generally speaking--we do not have 
detailed numbers. As I said earlier, without getting the actual 
tax returns filed, it is very hard to get detailed geographical 
information.
    What I would say generally is that in rural areas we have 
seen less of a decline--there was less of a bubble. There has 
been less of a decline, and we have fewer homes changing hands 
in rural areas than we do in suburban and urban areas. And so, 
therefore, my educated guess would be that we have less of an 
impact in rural areas relatively speaking, but that there would 
be some real variation across the country.
    Senator Tester. I have heard from a number of lenders and 
appraisers and realtors and home buyers that there is a 
frustration with the Home Valuation Code of Conduct. While 
certainly a worthwhile intent, the HVCC is problematic in 
certain parts of the country, specifically in lightly populated 
States like Montana, in which appraisers may be chosen who 
aren't familiar with a market area. There were new rules 
forged, and I am sure you are very, very familiar with them, 
with an agreement between the New York State Attorney General 
and the two secondary mortgage market companies.
    Have you heard of problems about the HVCC and compliance 
with the HVCC? And do you think Congress should weigh in on 
that issue, which was basically a byproduct of the deal between 
the AG and two GSEs?
    Secretary Donovan. Not only have I heard often about issues 
with HVCC, we have actually taken some action on that.
    Senator Tester. OK.
    Secretary Donovan. We recently, through FHA, clarified what 
I think were some of the unintended consequences of the HVCC.
    Senator Tester. All right.
    Secretary Donovan. Very briefly, we had certain companies 
that were assigning appraisals that I think there was somewhat 
of a misperception in the market that they needed to be used 
and that that had led to a lot of, frankly, less qualified 
nonlocal appraisers----
    Senator Tester. Correct.
    Secretary Donovan. ----being used based on the HVCC. What 
we have done in FHA is not only clarified that you don't need 
to use those referral companies, but, in fact, we have 
increased our standards on local knowledge to ensure that the 
appraisals that are being done are based on real, intimate 
knowledge of what is happening in that local market, not an 
appraiser that may be coming from a different city or even a 
different State to do the appraisal.
    Senator Tester. When did you do that?
    Secretary Donovan. I don't have an exact date in my mind, 
but within the last weeks.
    Senator Tester. OK. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    I have so many questions, I don't know where to begin. 
First of all, on the GSEs and the housing market, what do you 
think the future of the GSEs will be, especially Fannie and 
Freddie?
    Secretary Donovan. We have begun a process within the 
Administration to look at that. We have laid out a set of 
options this past summer and we are----
    Senator Bunning. Secretary Donovan, the GSEs have been in 
trouble for 4 years. If you are just looking at it now, it is 
too late, because we are going to own 100 percent of them----
    Secretary Donovan. Well----
    Senator Bunning. ----before you act.
    Secretary Donovan. Senator, I would say that there have 
obviously been substantial concerns and problems at the GSEs, 
but today, they are playing a very important role----
    Senator Bunning. We own them. That is why.
    Secretary Donovan. They are providing today, or helping to 
provide, about two-thirds of all the mortgage financing today 
in the country.
    Senator Bunning. Secretary, you know that the United States 
taxpayers own them. So it is taxpayers' money.
    Secretary Donovan. I understand, and I believe that this 
Administration has taken responsible actions to ensure both 
that the housing market stabilizes and that the losses within 
the GSEs don't get even worse from the decline that we have 
had, and to put them on a path toward having a more stable, 
more responsible housing market in the future. So I 
understand----
    Senator Bunning. Do you want to answer my question? What do 
you think is the future of GSEs?
    Secretary Donovan. We have, as I said, begun a process 
within the Administration to come to a decision about what the 
future of the GSEs should be, but I----
    Senator Bunning. When do you expect to make a decision?
    Secretary Donovan. We have said publicly that we expect to 
put out a set of recommendations early next year, at the time 
that we publish our budget. But I want to reemphasize that it 
is--we cannot lose sight of the important role that the GSEs 
are playing today in the recovery of the market. Without their 
role today, I think it is fair to say that there would not be 
mortgage capital available broadly, and it would certainly not 
be available at the rates that have been available to allow the 
housing market----
    Senator Bunning. It is the taxpayers' money.
    Secretary Donovan. I understand that, and----
    Senator Bunning. So we are financing our own bailouts 
through GSEs through the taxpayer, period. That is all there is 
to it. I mean, so if you want to continue doing that, I think 
you are making a big mistake. You have got to get either the 
GSEs owned by private capital or you have got to do it 100 
percent.
    Now, the Administration has known that the housing credit 
was going to expire November 30 of this year for how long? 
Since the beginning, since we passed the law. Why haven't you 
made a decision on that prior to this time?
    Secretary Donovan. As I explained earlier, we believe it is 
critically important, as I believe we have heard from this 
Committee, that we understand as fully as possible the costs of 
that extension----
    Senator Bunning. Don't you think the people up here do, 
too?
    Secretary Donovan. I agree. There is, at this point--and we 
have been talking regularly to lenders in the market about the 
timing of the extension, and we understand that a decision 
needs to be made within just a few weeks to be able to ensure 
that those buying houses understand whether they are going to 
be eligible for the credit. And I am committed--the 
Administration more broadly is committed to getting to that 
decision within just a couple weeks to make sure that the 
market doesn't become interrupted.
    On the other hand, we believe it is critical, as I have 
said before, that we understand as much as possible about what 
the costs are. That data is not easy to gather because it is--
--
    Senator Bunning. We feel that we--or we would not have made 
the proposal that has been made if we didn't feel that it were 
just absolutely necessary to keep the housing market from 
falling out of bed if we didn't continue this.
    One other thing you brought up--you brought this up in 
response to a question by Senator Shelby on the Consumer 
Protection Agency--you said, unregulated financial institutions 
caused this problem. I want you to know, in 1994, we handed the 
Federal Reserve--we handed them the power to regulate all banks 
and all mortgage brokers on the loans that they make. That is 
all of them. In 1994, they didn't do a thing. They didn't do a 
thing in 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, all 
the way up to 2008. Then they wrote some regulations on 
mortgages. Fourteen years later, after we gave them the power 
to regulate mortgages, they decided maybe some of those 
sophisticated mortgages, those no-interest mortgages, those 
balloon mortgages are not too good for the marketplace.
    So it isn't a question of having the power to regulate, it 
is the question of the power to regulate being used by those 
that we gave them to. Now, why would we write a new protection 
agency if they are not using the power we gave to the Federal 
Reserve to start with?
    Secretary Donovan. Senator, as I said earlier, I believe 
strongly that we had a set of institutions that were not 
traditional financial institutions, that were not subject to 
the----
    Senator Bunning. Did you just listen to what I said?
    Secretary Donovan. I did, Senator.
    Senator Bunning. What did I say about the Federal Reserve? 
We passed a law that said, you are responsible for every bank 
that makes a mortgage and you are responsible for every 
mortgage broker that makes a loan. Now, do your job. Well, they 
didn't do their job, and now you want to create a new 
institution because the Federal Reserve didn't do their job. I 
say you are wrong in creating a new institution. We should 
insist that the Federal Reserve does their job, and we can make 
it, our take the power away and give it to someone else. But 
every time you talk about taking power away from the Fed, they 
want more.
    So I am telling you that you have, in my opinion, very 
little chance of getting a Consumer Protection Agency past this 
Committee. Maybe they will pass it, maybe they won't, but we 
have given the power to regulate mortgages a long time ago to 
the Federal Reserve and they didn't do their job. Thank you.
    Chairman Dodd. Thank you, Senator.
    Let me just say, in a sense, and I want to get to Senator 
Merkley, my good friend from Kentucky makes the case--in fact, 
I have given the speech that Senator Bunning did probably a 
thousand times, the 1994 Act and why nothing happened and why 
it should have happened. And my concerns are exactly those 
expressed by Senator Bunning and the argument for the Consumer 
Protection Agency.
    The fact of the matter is, when they had the authority, 
they never did anything with it, and that has been the problem 
with too many of the regulators that had the authority. They 
never did anything. Hence, the argument of creating an agency, 
in effect, that has the authority and the power to do something 
about people walking in their door.
    So in a sense, his argument was one I thoroughly endorse 
and support, having made it many times, but I come to a 
different conclusion than he does, that, in fact, the very 
argument he makes creates the case for why we need a Consumer 
Financial Protection Agency.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you, Mr. Secretary.
    One of the things you noted in your testimony was that in 
order to facilitate loan modifications, you are going to have a 
Web portal up and running in a few weeks, I think by about 
December 1, approximately, 6 weeks from now, and that this will 
allow folks to file their applications electronically and to 
post their documents.
    You also note in your testimony that it is going to be 
divided into a couple of phases. Will the first phase of the 
Web portal allow folks to file their application electronically 
and post their documents, or will that come in phase two?
    Secretary Donovan. I believe it will allow that in the 
first phase. We are still deciding on the final amount that we 
are able to get into that first phase, but that is certainly 
one of the things that we are aiming for in the first phase.
    Senator Merkley. Well, I really want to compliment you and 
the Department for pushing forward with that portal. Just this 
weekend, I was at a gathering of loan modification agents and 
the public and this issue of being able to know that--for folks 
to be able to know that their application had been received, to 
be able to know that the documents that they had filed to 
support it had been received and were available and not to be 
in limbo, almost blind, if you will, in their conversation for 
months at a time will be a tremendous step forward. So thank 
you for pushing forward with that.
    Secretary Donovan. Thank you.
    Senator Merkley. You noted in your comments that because 
you have a responsible loan design in the FHA program, that 
foreclosures, it really minimizes the number of foreclosures. 
Does the FHA program specifically exclude loans that have 
prepayment penalties or that have any form of yield spread 
premiums attached to the transaction?
    Secretary Donovan. Yes, it does.
    Senator Merkley. Thank you. And that is an expectation that 
will continue into the future?
    Secretary Donovan. Absolutely.
    Senator Merkley. I want to ask you the question that I 
asked to Senator Isakson a little bit earlier, and that is back 
when I was working with lower-income Americans, many of them 
when they bought a home didn't get much significant help from 
the home mortgage interest deduction because their salaries 
were low and they were buying very low-end starter houses, and 
so the amount of interest didn't necessarily exceed the 
standard deduction. I believe that that home mortgage interest 
deduction now costs about $100 billion a year, somewhere around 
that. Is there an argument to be made for an ongoing tax credit 
for first-time homeowners in order to recognize and assist the 
lower-income Americans who are becoming homeowners in a 
significant fashion?
    Secretary Donovan. In fact, as a candidate, Senator Obama 
talked about the need to ensure that the mortgage interest 
deduction was available to lower-income families, that it was--
because of the deductions available to--the standard deduction 
available to many low-income families, that they weren't 
benefiting in the same way. So I do think that it would be 
valuable to look at the mortgage interest deduction and make 
sure that benefits a broad spectrum of Americans, obviously 
recognizing the cost and looking at how broadly that might be 
expanded. But I do think, as the Senator advocated during the 
campaign, that that would be an important thing to look at.
    Senator Merkley. Well, I certainly would applaud your 
Department to look at that. I recall a study that looked at 
home ownership for low-income families that concluded it had 
perhaps the most powerful externalities of virtually anything 
that we have in Government policy. Children were stabilized, 
did far better in school. Families were stabilized. They got 
involved in their communities in more significant ways because 
they felt like they had a stake in the community. And there 
were just many, many features. The likelihood of the family 
being involved in crime dropped. The tax contributions 
increased. In just measure after measure, home ownership for 
low-income families had a very positive impact.
    And I preface this all on the basis of when responsible 
loans were utilized, not the kind of phony financing that 
really meant that home ownership wasn't a stabilizing factor, 
and by that, I am going back to the exploding interest loans, 
the subprime loans, the triple-option loans, and so forth were 
not so helpful.
    Do you anticipate that the Administration might come 
forward in the middle of this debate with a specific proposal 
on how to strengthen home ownership for lower-income Americans, 
kind of following on with the theme that President Obama struck 
during his campaign?
    Secretary Donovan. Well, first of all, Senator, let me just 
say that I appreciate your raising that point. As I said 
earlier, I think one of the misperceptions that I want to make 
sure is clarified out of the crisis that we have seen is that 
home ownership is a valuable goal and that it is a valuable 
goal for Americans aspiring to be in the middle class, not just 
for those already in the middle class. So I think it is very 
important that we not lose focus of that. And I have seen very 
personally, as you, I am sure, did with Habitat for Humanity, 
that lower-income Americans can be not only successful as 
homeowners, but it can be a critical part of building wealth 
for them as they move up the economic ladder. So I think that 
is a very important lesson.
    I also believe that that is one of the reasons, not only 
about taking future action, whether it is the HFA policies that 
we announced yesterday, whether it is the continuing importance 
that FHA plays in the market, that there is a set of things we 
have done to make sure that home ownership remains available 
for lower-income Americans with exactly the kind of responsible 
products that we have talked about.
    Beyond that, I do think that there are a set of things that 
we can do. Importantly, I think the kind of assistance that we 
are providing through Making Home Affordable, but also through 
programs like the Neighborhood Stabilization Program, where we 
are ensuring that, particularly in low-income communities that 
have been hit hard by foreclosures, that if we can begin to use 
some of those what are vacant and now abandoned homes as an 
asset to open up home ownership to lower-income Americans, that 
that can be an important role. In fact, Habitat for Humanity 
has been very interested and has begun using those Neighborhood 
Stabilization funds to not only build new construction, but, in 
fact, to renovate homes and make them available to lower-income 
Americans.
    So I think there are a set of things that we could do and I 
would look forward to talking to you more about some of the 
details of those.
    Senator Merkley. Thank you very much.
    Secretary Donovan. Thank you.
    Chairman Dodd. Senator Merkley, thank you very much. I was 
in with Senator Merkley a few days ago in his State. We had a 
wonderful meeting with consumers in his State and people who 
had gone through a lot of difficulties, Mr. Secretary, like we 
have in all of our States. I want to commend Senator Merkley 
for his leadership in his State and on this Committee. He has 
been consistent in his concerns about this issue from the day 
he arrived here, so we thank you very much, Senator, for that.
    Secretary Donovan, we thank you. We have kept you here a 
while and we appreciate it very much and appreciate your hard 
work----
    Secretary Donovan. Thank you. Good to be with you.
    Chairman Dodd. ----on these issues. Obviously, we will be 
looking fairly soon, if we can--we would obviously like to hear 
from the committee on the tax credit idea. Many of us up here, 
as you know and heard up here, feel very strongly about moving 
forward on this, but obviously, we always welcome the counsel 
and advice of the Administration, any Administration, and what 
your thoughts are on these matters. I know Senator Isakson 
shares that view, so we are interested in hearing what you have 
to say about that, as well. So thank you for being with us.
    We will leave the record open. There may be some additional 
questions that Members who could not make it here this morning 
would have for you. I would urge you to respond to those when 
you get the chance.
    Let me turn to our third panel quickly, if I can, here, and 
some very fine people who have come to join us today. I have 
already introduced, in a way, Diane Randall, who is the 
Executive Director at the Partnership for Strong Communities, 
an organization she has led for 5 years in my home State of 
Connecticut. She does a tremendous amount of work dedicated to 
providing affordable housing to hard-working, low-income 
Americans, and we thank her for joining us.
    We want to welcome Ron Phipps, the First Vice President of 
the National Association of Realtors. Mr. Phipps has been a 
Realtor for 30 years, almost equaling the time that Johnny 
Isakson spent in the field of the real estate business. He is 
with Phipps Realty and only about 45 minutes away from where I 
live, in Warwick, Rhode Island, so we thank you, Mr. Phipps. My 
mother was from Westerly, Rhode Island, and I went to 
Providence College, and my in-laws and my sisters-in-law live 
in Narragansett and Providence, as well, the Bonnano family, 
that I suspect you know, as well.
    Jay Brinkmann is the Chief Economist and Senior Vice 
President for Research and Economics at the Mortgage Bankers 
Association, and we thank you, Jay, as well for being with us, 
and patiently sitting here this morning. I hope you found it 
interesting, the conversation.
    And last, I welcome to the panel Dr. David Crowe, who is 
the Chief Economist for the National Association of Home 
Builders, and we thank you, David, for joining us, as well.
    Let me begin in the order that I have introduced you, and 
if I can--did I miss someone? Diane Randall, I introduced. She 
is from Connecticut, as well, and does a great job in our State 
as the Director of our low-income Partnership for Housing.
    So let me thank you, and Diane, we will begin with you. I 
would ask you to try and keep your remarks to about 5 minutes 
apiece. That way, we will get to some questions for you. 
Obviously, all of your testimony and statements, we welcome and 
will include as part of the record. That is true of all my 
colleagues here, as well, for any opening statements or 
thoughts they have. But welcome to the Committee, Ms. Randall.

STATEMENT OF DIANE RANDALL, EXECUTIVE DIRECTOR, PARTNERSHIP FOR 
                       STRONG COMMUNITIES

    Ms. Randall. Thank you very much, Senator Dodd, Senator 
Shelby, and the entire Banking Committee, for the opportunity 
to testify today. My name is Diane Randall. I am the Executive 
Director of the Partnership for Strong Communities, which is a 
Connecticut-based organization dedicated to solutions to 
homelessness, the development of affordable housing, and the 
creation of vibrant communities. I am also a member of the 
Board of Directors of the National Low-Income Housing 
Coalition, which works on solving housing problems for low-
income people in our country.
    For millions of Americans, many of them vulnerable by 
disability or age, the opportunity to own a home, even with a 
very generous home ownership tax credit, is beyond their reach. 
For these Americans, the American dream is a safe, secure, 
affordable, rental home.
    The opportunities for Congress to intervene with solutions 
for the low-income rental market are immediate and can have 
dramatic benefits, not only for the Nation's economy, but also 
for people who need the security of an affordable rental home. 
Indeed, one of the lessons from this housing crisis is that 
efforts to fix only the home ownership market is not an 
adequate housing policy for our Nation, our States, or even our 
local communities.
    It is important also to understand that there is no such 
thing as the Nation's housing markets. There are thousands of 
markets, each with its own needs, and it is critical that 
Congress provide States and localities with the tools and 
resources that can be tailored to address conditions in those 
different markets.
    Let me give you a snapshot of our State, Connecticut. It is 
a wealthy State that nonetheless has deep pockets of poverty, 
with an unemployment rate of 8.1 percent, which while less than 
the Nation's 9.7 percent unemployment rate shows no signs of 
declining. As Senator Dodd mentioned earlier, nearly half of 
our renting households pay more than 30 percent of their income 
for housing. For many of these folks, it means that there is no 
money left over at the end of the day for their children to 
have music or dance lessons or even have a night out at the 
movies.
    Connecticut's suburban and rural towns have very little 
supply of multifamily housing, especially affordable housing. 
In order to afford a two-bedroom rental home, a family would 
need an annual income of nearly $45,000, which is more than the 
median wage of almost half the occupations in our State.
    The percentage of Connecticut homes valued under $200,000 
shrunk from more than 65 percent of the total in 2000 to less 
than 20 percent in 2008. Even if they could muster the 
downpayment and receive a tax credit, low-income households 
have few opportunities to become homeowners due to the very 
high housing prices and limited supply.
    Across the country, the same story is played out. The 
National Low-Income Housing Coalition has culled information 
from the American Community Survey showing that while some 
renters in every category pay more than 30 percent of their 
income for housing, 86 percent of renters who are earning less 
than $20,000 a year pay over 30 percent of their income for 
housing. In other words, the poorer you are--and recent reports 
indicate that throughout the country, household incomes are 
declining--the greater your challenge in finding a home you can 
afford.
    Americans with growing rent burdens in rural, suburban, and 
urban communities include people with disabilities, veterans, 
the elderly, and families with young children. People with 
disabilities who rely on Social Security income as their sole 
source of income continue to be some of our Nation's poorest 
citizens. The monthly SSI income payment in 2008 of $637 a 
month is supplemented by almost half of the States. In 
Connecticut, that brings an individual's income up to $805 a 
month, but it would require a person to pay 116 percent of this 
income just to afford a one-bedroom apartment.
    Many of those with low incomes are also at an increased 
risk of experiencing homelessness, particularly during these 
difficult economic times. Connecticut's 2009 Point-In-Time 
Count of Homelessness, which is a 1-day look at the number of 
people using emergency shelters and out on the streets, does 
not include families doubled up with friends or family. It 
challenges some of the traditional challenges about 
homelessness. In fact, it demonstrated a shift that 
homelessness is growing at a faster rate in suburban and rural 
towns than in our urban centers. It is a finding that is 
consistent with many national studies.
    Has the current housing crisis increased the availability 
of rental housing for low-income households? Quite simply, that 
is not the case. The loss of regular income experienced by 
millions of Americans, whether through unemployment, reduction 
in work and benefits, or crises related to mortgage and 
foreclosure problems, pushes more lower-income households to 
look for affordable rentals. This pressure on the low-income 
rental market, in turn, drives up rents for these homes.
    The market for rental housing for low-income households is 
not the same as the market for those who have higher incomes 
and an increased ability to pay more. Although recent reports 
indicate that rental prices may be declining in some markets, 
these reports are coming primarily from large rental buildings 
that primarily rent to higher-income segments of the 
population.
    There also appears to be an influx of troubled properties 
in the rental market, as homeowners try to rent property they 
can no longer afford themselves.
    Finally, I want to just say a few words about the loss of 
existing public housing. We estimate that there has been a loss 
of almost 200,000 units of public housing stock, which is 
mostly for low rental, and that there is an immediate need to 
preserve rental housing stock in the next decade.
    My testimony indicates some of the benefits of a low-income 
housing rental market working. Those obviously inure to the 
education of children, to the stability of households, and to 
the health and well-being of people with disabilities and the 
elderly.
    I just want to thank Congress for the steps that you have 
taken, particularly through the ARRA Act, in terms of the 
Homeless Prevention and Rapid Rehousing Program, and the Tax 
Credit and Assistance Program to bolster the low-income housing 
tax credit market. They are very important.
    Again, my testimony names a number of things that you could 
do immediately, including remedies to the Section 8 program, 
which assures that we fully fund the Section 8 Tenant Rental 
Assistance Program. We believe it is incredibly important and 
valuable to include new rental assistance vouchers that could 
be used both for Tenant-Based Vouchers as well as for Project-
Based Vouchers, to enact SEVRA, to fund the National Housing 
Trust Fund, which would be one of the first major initiatives, 
and again, Senator Dodd and this entire Committee have been 
great champions of that. That would provide a permanent source 
of financing for the development of affordable rental housing.
    We are very partial to the Frank Melville Supportive 
Housing Act, which serves people with disabilities, and hope 
you will pass that. It has bipartisan support. And again, to 
enhance the Livable Communities Initiative that Senator Dodd 
has championed.
    Thank you very much.
    Chairman Dodd. Thank you very much, Diane. We appreciate 
your testimony and your presence here today.
    We will begin with you, Mr. Phipps.

  STATEMENT OF RONALD PHIPPS, FIRST VICE PRESIDENT, NATIONAL 
                    ASSOCIATION OF REALTORS

    Mr. Phipps. Good morning, Chairman Dodd, Ranking Member 
Shelby, and Members of the Committee. Thank you for inviting me 
to testify today.
    My name is Ron Phipps. I am a practicing licensed real 
estate broker from Warwick, Rhode Island, and the 2009 First 
Vice President of the National Association of Realtors. My 
family has been actively involved in residential real estate 
and appraisals for four generations. It is an honor to be here 
on behalf of the 1.2 million fellow realtors.
    The latest housing data suggests that the $8,000 first-time 
homebuyer credit has been effective. Sales have increased to 
annual rate of 5.1 million units. Housing inventories, while 
still higher than ideal, are down to an 8-month supply. 
Additionally, the decline in housing values and prices has 
slowed.
    Housing sales are important for the overall economy. One 
economist estimates that for every 1,000 home sales, $112 
million of economic activity and more than 700 jobs are 
created. While the focus is on the statistics, it is important 
to remember that each one of these transactions is purchased by 
a household. These are people and families just like yours and 
mine.
    While the facts are encouraging, the current situation in 
the housing market is very fragile. We face serious challenges 
for successful, sustained housing recovery and economic 
revitalization.
    First, the lack of private capital, specifically in the 
jumbo markets, made it difficult if not impossible to obtain 
mortgage loans. This has increased the number of foreclosures 
and short sales as people cannot refinance.
    Second, the FHA does not have the resources to do its job. 
The Federal Reserve reported that one-half of home purchases 
and one-quarter of refinances were backed by the FHA or VA at 
the end of 2008. The FHA is working on technology that averages 
18 years. That is, the technology is 18 years old.
    Last Friday, I had clients, Mary and Dan Cerissi, who 
closed on their first house with 3.5 percent down. Dan is a 
police of course, in Narragansett. Mary is a school teacher. 
She teaches seventh grade English. Without the $8,000 credit 
and the FHA, they would not have been buyers. They would not 
have purchased their first home. It is a very valuable tool 
that we need to keep in place--both tools. Remember, statistics 
are families. Each one of these is a family.
    Third, the new Home Valuation Code of Conduct, while well 
intentioned, has delayed the appraisal process and 
significantly increased the cost for consumers. Earlier, there 
was a question about have people seen problems with it. We 
surveyed our members, and 70 percent of them have had problems 
with appraisals, not just value but the process.
    Fourth, short sales are still a mess. They are delayed and 
denied due to unreasonable price expectations, lost documents, 
full voice-mail boxes, insufficient or untrained staff. Last 
spring, one of my clients, an officer in the Navy, was 
relocating, being transferred to Jacksonville. He was 
underwater in his mortgage. After putting his house on the 
market, we received an offer. We contacted the lender to get a 
response on the short sale. It took 6 weeks to get any 
response, and the buyer had moved on. When the lender finally 
responded, the message was direct: ``We don't care. PMI will 
figure it out. And, by the way, they are going to say no.''
    Frustrated, the naval officer went to his family and 
borrowed the money from them in order to close with another 
buyer and report to his new post.
    Fifth, the Federal Reserve's unwinding of the MBS program 
is critical to the housing market and the overall economy. A 
significant increase in rate would result in a derailing of the 
housing recovery. Incidentally, the commercial real estate 
market is worse. The mortgages are due now. They will not be 
renewed or extended, and there is no source for money. It is 
the perfect storm, and the net result may be the loss of the 
entire commercial fleet.
    Today we come to you urgently. We need to act now.
    First, we need the $8,000 first-time homebuyer tax credit 
extended and expanded. It is responsible for 350,000 to 400,000 
additional sales this year. Each sale generates approximately 
$63,000 in economic activity. We appreciate the $10 billion 
cost, but the direct benefit of this is to Americans, and the 
multiplier effect cannot be ignored. We need this done now. The 
average closing takes 45 days. We are at threshold. If you do 
not act immediately, then sales will wane. We are writing 
offers literally in our office today that are contingent on 
closing by the 30th of November or the sales agreement is null 
and void, meaning the transaction goes away. It will not 
happen. And that is when people qualify for the $8,000.
    Second, NAR urges you to make GSE and FHA mortgage loan 
limits, higher limits, permanent. They expire on the 31st of 
December. Action is required now.
    Finally, realtors believe that the Federal Government must 
continue to play a role in mortgage markets. The secondary 
market must meet two key goals. First, we need to ensure that 
the housing market works at all times, regardless of the 
economy; and, second, we need to provide mortgages to all 
qualified homeowners for sustainable home ownership.
    It has been an American tradition for communities to work 
together and help people in need. When a barn burned, the 
neighbors would rebuild it. We are asking for you to work with 
us, not to build a bar but, rather, to build homes--homes for 
American families. I cannot overstate the immediacy now. You 
need to act on the extension today. Now, now, now. In 2 weeks, 
3 weeks, or when the reports come in, it is too late. We will 
be in wane period, and we really need the activity now.
    Thank you.
    Chairman Dodd. Well, thank you very much, Mr. Phipps. And 
we hope the next time you testify you would be more certain 
about what you would like to see happen.
    [Laughter.]
    Mr. Phipps. I tend to equivocate.
    Chairman Dodd. Mr. Brinkmann.

  STATEMENT OF EMILE J. BRINKMANN, CHIEF ECONOMIST AND SENIOR 
  VICE PRESIDENT FOR RESEARCH AND ECONOMICS, MORTGAGE BANKERS 
                          ASSOCIATION

    Mr. Brinkmann. Good morning. Whenever I am asked when the 
housing market will recover, I explain that the economy and the 
housing market are inextricably linked. The number of people 
receiving paychecks will drive the demand for houses and 
apartments, and the recovery will begin when unemployment stops 
rising.
    Since September 2008, we have lost 5.8 million jobs in the 
U.S., many more than the previous year. Job losses of this 
magnitude put incredible strains on all of our systems, 
especially housing.
    What is different about this recession is we entered it 
with an already weakened housing market. In past recessions, it 
was unemployment that increased delinquencies and weakened 
demand for housing. Prior to the onset of this recession, 
however, the housing market was already weak, and due in part 
to the heavy use of loans like pay option ARMs and stated 
income loans by borrowers for whom these loan products were not 
designed, together with rampant fraud by some borrowers buying 
multiple properties and speculating on continued price 
increases, this led to very high levels of construction to meet 
that increased demand--demand that turned out to be 
unsustainable. When that demand disappeared, a large number of 
houses were stranded without potential buyers. The resulting 
imbalance in supply and demand drove prices down, particularly 
in the most overbuilt markets like California, Florida, 
Arizona, and Nevada--markets that had previously seen some of 
the Nation's largest price increases.
    The nature of the problem has shifted. A year ago, subprime 
ARM loans accounted for 36 percent of foreclosures started, the 
largest share of any loan type despite being only 6 percent of 
the loans outstanding. Now, prime fixed-rate loans represent 
the largest share of foreclosures initiated. Perhaps more 
significantly, almost 40 percent of all prime fixed-rate 
foreclosures are in the States of California, Florida, Arizona, 
and Nevada. So even though those States consistently had about 
two-thirds of the foreclosures on pay option ARMs, stated 
income ARMs, et cetera, they now also have a disproportionate 
share of the prime fixed-rate problem.
    It is difficult to overstate the degree to which those four 
States continue to drive the national mortgage delinquency 
numbers. The national quarterly foreclosure rate reported by 
the MBA for the second quarter of this year was 1.36 percent. 
However, in the four States I mentioned, it was 2.34 percent, 
roughly 10 times the rate we saw in those States during the 
boom years. Without those four States, the national foreclosure 
rate would be about 1 percent, or roughly double the rate we 
saw for the rest of the country during the previous boom years.
    Unfortunately, the consensus is that unemployment will 
continue to get worse through the middle of next year before it 
slowly begins to improve. While we have seen certain good 
signs, like stabilization of home prices and millions of 
borrowers refinancing into lower rates, we still face major 
challenges. Perhaps the most immediate challenge is what will 
happen to interest rates when the Federal Reserve terminates 
its program for purchasing Fannie Mae and Freddie Mac mortgage-
backed securities in March. The Federal Reserve has purchased 
the vast majority of MBS issued by these two companies this 
year and in September purchased more than 100 percent of the 
Fannie and Freddie MBS issued that month. The benefit has been 
that mortgage rates have been held lower than they otherwise 
would have been without the purchase program, but there is 
growing concern over where rates may go once the Federal 
Reserve stops buying and what this will mean for borrowers. 
While the most benign estimates were increases in the range of 
20 to 30 basis points, some estimates of the potential increase 
in rates are several times these amounts.
    The extension of the Fed's MBS purchase program to March 
gives the Obama administration time to announce its interim and 
perhaps long-term recommendations for Fannie and Freddie in 
February's budget release. All of this, however, points to the 
need to begin replacing Fannie Mae and Freddie Mac with a long-
term solution. MBA has been working on this problem for over a 
year now and recently released a plan for rebuilding the 
secondary market for mortgages. MBA's plan envisions a system 
composed of private, nongovernment credit guarantor entities 
that would insure mortgage loans against default and securitize 
those mortgages for sale to investors. These entities would be 
well capitalized and regulated and would be restricted to 
insuring only a core set of the safest types of mortgages and 
would only be allowed to hold de minimis portfolios. The 
resulting securities would in turn have a Federal guarantee 
that would allow them to trade similar to the way Ginnie Mae 
securities trade today. The guarantee would not be free. The 
entities would pay a risk-based fee for the guarantee, with the 
fees building up an insurance fund that would operate similar 
to the Bank Insurance Fund. Any credit losses would be born 
first by private equity in the entities, any risk-sharing 
arrangements with lenders and MI companies, and then only when 
these entities failed would the insurance fund come into play, 
and only if that fund then failed would the Federal guarantee 
be called upon.
    We believe this proposal represents an important 
improvement over the present structure in a number of areas. We 
are eager to discuss it with Members of the Committee as well 
as other proposals detailed in the written testimony, 
especially the extension of the homebuyer tax credit.
    Chairman Dodd. Thank you very much for that, and thank you 
for the suggestions on the GSEs. I welcome that. We had a 
hearing on the GSEs a few weeks ago, and obviously it is a 
concern for all of us up here. But we all recognize, I think 
most of us do, the value they are playing right now in terms of 
stabilizing the market, but we also recognize that we have got 
to reform this fundamentally, and how we do that is still open 
to some debate. But we welcome the suggestions made by the 
mortgage bankers. Very helpful.
    Mr. Crowe, we thank you as well, David, for being with us.

STATEMENT OF DAVID CROWE, CHIEF ECONOMIST, NATIONAL ASSOCIATION 
                        OF HOME BUILDERS

    Mr. Crowe. Thank you, Chairman Dodd, Ranking Member Shelby, 
and Members of the Committee.
    The current housing recession is the worst since World War 
II. Starts are down nearly 80 percent from their peak in 
January of 2006, from 2.3 million down to 488,000 on an annual 
basis. The inventory of newly constructed homes reached a 
record high of almost 12 months. And, finally, home prices have 
declined in every quarter since the beginning of 2008, which 
undermines housing wealth and also aggravates foreclosures.
    These price declines did improve affordability, and that 
should have translated into an increase in housing sales and 
starts. However, this has not occurred as strongly as history 
would suggest because consumer confidence is still so deeply 
shaken. Further, access to mortgage lending and challenges in 
appraisals continue to reduce the pool of eligible homebuyers, 
thereby keeping housing demand at a reduced level and 
encouraging a damaging negative feedback cycle.
    While there are glimmers of hope that the 3-year decline in 
housing may have recently stabilized, there remain other 
significant obstacles to recovery, including: an excess 
inventory being fed by more foreclosures; continued downward 
pressure on house prices; an increase in unemployment; and a 
lack of financing for builders.
    One factor playing a proven positive role is the $8,000 
first-time homebuyer tax credit. NAHB estimates conservatively 
that this credit fostered at least an additional 200,000 home 
sales and resulted in an increase of 187,000 jobs. These 
impacts are consistent with recent increases in the NAHB's 
Housing Market Index, a measure of builder confidence, which 
languished at historically low levels in late 2008 and early 
2009. The HMI improved from its low through September, but its 
most recent report did lose ground.
    The impending expiration of the tax credit seems to be the 
primary reason for this retreat in builder confidence. 
Consequently, to propel the fragile recovery in the U.S. 
housing market and to promote economic growth, NAHB urges 
extending the sunset date to December 1, 2010, and enhancing it 
to include any purchaser of a principal residence.
    We estimate that this proposal would increase home 
purchases by almost 400,000 in the next year, increase housing 
starts by about 82,000, create more than 347,000 jobs, yielding 
$16 billion in wages and salaries, $12.1 billion in small 
business and corporate income, and almost $12 billion in 
Federal, State, and local taxes.
    Expanding the tax credit to all buyers will address the 
inability of the existing credit to stimulate the move-up 
market. NAHB survey data reveal that only 27 percent of the 
builders sold a new home to a move-up buyer who was in turn 
able to sell their old home to a first-time homebuyer.
    Home sales data from Census also confirms the success of 
the credit for the starter home market, but not necessarily for 
the move-up market. Increases in sales for homes priced below 
$300,000 were evident, while those above $300,000 were very 
weak. All of this suggests the great stimulus potential in 
expanding the tax credit to all buyers of principal residences.
    It is important to note that the production of new housing 
remains far below a sustainable level as the market works off 
all of the excess inventory. NAHB is still forecasting only 
560,000, 570,000 housing starts for 2009 and perhaps 716,000 
for 2010--a long way from the sustainable production level of 
1.8 million. While this gulf persists, we are losing jobs.
    NAHB surveys also reveal that as the housing market 
recovers, financing of the production of those houses will be 
very challenging. More than 60 percent of the builders surveyed 
reported worse conditions in obtaining production credit from 
the last time we asked, which was last quarter. Removing this 
barrier will be critical for housing and job creation.
    I thank you and I welcome your questions.
    Chairman Dodd. Thank you very, very much, Mr. Crowe, and we 
appreciate your comments here this morning as well. Let me 
thank all four of you for your patience here in listening to 
all of this and the importance of these issues.
    I wonder if we might quickly have the three of you comment 
on some of the comments by Ms. Randall when she talked about 
the rental housing. Obviously, what we are talking about here 
is the tax credits for home purchases. But I think we all 
recognize as well there has been a paucity or lack of stock in 
rental housing, and, therefore, you see the kind of rates we 
have in Connecticut, where 30 percent of an income is necessary 
to afford a rental unit.
    I wonder--and the area that the three of you while 
specialize, obviously, in sales and so forth--what your 
comments and thoughts would be on rental stock.
    Mr. Crowe. Senator, I would be glad to start. The home 
builders build rental housing just as much as they build owner-
occupied housing, so they are deeply concerned about the lack 
of affordable rental housing, and we have fostered many 
programs and lobbied for many additions to the current 
programs, including the low-income housing tax credit, which 
has added a significant stock of affordable homes to Americans. 
But we share that concern. We are simply here to tell you that 
the housing market in general is way out of equilibrium, and 
the consumer is really the dictator of our success right now. 
If we can stimulate the consumer back into the marketplace, we 
can get this market moving, and then the entire economy.
    Chairman Dodd. Mr. Brinkmann, any comments?
    Mr. Brinkmann. Sure. One of the things we are pushing for 
is an increase in the FHA limits for multifamily, because we 
believe a lot of the return of rehabilitated units and that for 
affordable housing will come from these other units, and that 
just has not kept track with increased costs. And when you look 
at where the supply of money is for the type of financing, as 
David mentioned, that is going to be through the FHA program 
for the foreseeable future.
    Chairman Dodd. Mr. Phipps.
    Mr. Phipps. Senator, the only thing I would add is that we 
actually handle rentals within the office. We are a small firm. 
We are a dozen people. It is not just the lack of supply, but 
the landlords are reading the papers as well, and they have 
been much more rigorous in their expectations on the financial 
qualification of who is renting. So we have got a convergence 
of two major problems: a lack of supply that is affordable and 
an unwillingness of landlords or owners to rent to people who 
have been just displaced by a foreclosure or a short sale. So 
you have got a huge human cost, and then there is a premium. 
They will say, ``Well, I will rent, but you have substandard 
credit. What I want to do is have you pay a premium,'' which is 
the antithesis of what they really do need. So they pay a 
higher rent in order to rent market space simply to have 
shelter.
    So it is--it is a mess. It is just ugly.
    Chairman Dodd. Yes. Diane, would you comment on the--I do 
not know if you have any thoughts on the tax credit. I realize 
your business and what you focus on is the other side of the 
equation. But what are your thoughts on this idea--you heard 
this morning Senator Isakson and others here talk about this--
the value of providing some financial support for the move-up 
market?
    Ms. Randall. Thank you, Senator Dodd. We look at actually 
future development, and we also understand that it is important 
to be able to have a move-up market because that is where we 
see some activity, and it opens up opportunities for first-time 
homeowners as well.
    Our organization has not taken a formal position on this 
tax credit proposal. I think that what we are hopeful is that 
as we look at this challenging situation that has been so ably 
described by so many people this morning is that we just look 
at a balanced approach to this and assure that we are not--that 
as much as we try to help create a fix for homeowners, we are 
creating a fix for renters as well.
    I would hope we could do both, but I also understand your 
position as Congress to try to do the balancing act on the 
budgetary side of what this will mean.
    You know, I do think it is incredibly important that, as 
has been described here, we understand that home ownership 
provides asset building and wealth building for households and 
families, and we certainly support that initiative as being one 
that we all strive for. But we are very concerned that there 
are a number of people for whom home ownership simply will be 
out of reach if we do not try to address that.
    Chairman Dodd. Well, not only that, but I think there is 
also--and Senator Corker raised this point, and others have as 
well. I happen to be one who thinks home ownership does so many 
positive things, in neighborhoods, communities, in families, 
obviously, wealth creation, long-term stability, all the values 
that are associated with it. But I think we also need to remind 
ourselves as well that it is not necessarily right for 
everybody, and we ought not to be shoving people through a door 
here to get there. You see the kind of problem that happens 
when we tell everybody they can all do this, when they cannot, 
obviously, for various reasons. You end up in the mess we found 
ourselves in.
    So we need to be able to provide affordable, decent shelter 
for people who either do not want, cannot afford, or should not 
be necessarily in that market at this point given their 
circumstances so they are not left on the side. So striking 
that balance I think is something we all agree on. I appreciate 
your comments on that.
    I am going to turn the gavel over to Senator Merkley of 
Oregon here to preside while I have to run off to another 
meeting myself, but I thank you all very much for your 
testimony, and I thank Senator Merkley as well, and Senator 
Shelby and Senator Bunning as well for hanging around for this, 
too. Thanks.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Mr. Phipps, in your testimony, you state that affordable 
housing goals must be reasonable and, your words, ``should not 
provide incentives for the institution that are inconsistent 
with sustainable home ownership.'' I think this is an important 
point. Ensuring proper underwriting standards and not exposing 
consumers to mortgages they cannot afford, cannot pay, that 
does not provide home ownership. You know, it provides 
problems, because ultimately I think the most important 
consumer protection we can do, because if you put people in 
something that they cannot walk with, you know, cannot sustain, 
we are asking for problems, and we have seen a lot of those 
today, have we not?
    Mr. Phipps. We have, Senator, and I think the words speak 
for themselves. There is a human cost in addition to the cost 
to financial institutions, to society in general.
    Senator Shelby. Absolutely.
    Mr. Phipps. People who entered into the instruments based 
them on a couple assumptions: that prices would go up, that 
their income would go up, that they would be able to sell the 
house. So there were inherent assumptions. They acted in what I 
am going to describe as blind faith, but they acted with the 
best of intention.
    That said, it is important that the housing that we put 
people in is affordable. It is funny----
    Senator Shelby. That is affordable for the people to pay 
and to own it.
    Mr. Phipps. Right.
    Senator Shelby. If you cannot pay, you will never own 
anything, right?
    Mr. Phipps. Correct. And if the mortgage instrument was so 
sophisticated that initially the payment was really low and 
then it had escalator clauses that it was not sustainable, then 
that was not a good instrument for the people to be in. So at 
the end of the day, there needs to be common sense. You need to 
figure out what you can afford, either buy or rent based on 
what you can afford, and not anticipate huge increases in 
salary, a huge increase in the market, et cetera. You need to 
be able to sustain the house. That is helpful.
    Senator Shelby. Doesn't that go back to basic, fundamental, 
sound underwriting standards for all of us?
    Mr. Phipps. I think it does. The problem, Senator, is that 
the underwriting requirements now have become reactionary. They 
are overreactive. I spoke in Maine 2 weeks ago. You need to 
document all of the money that is gift money in the 
underwriting process. An agent came up to me from northern 
Maine and said, ``Ron, you will not believe this.'' And I need 
to tell you, realtors are used to unbelievable stories about 
underwriting lately because every one of us has a lot of them. 
She said she was working with a first-time homebuyer. The 
first-time homebuyer was getting ready to close. They had 
$6,000 available to put down on the transaction. The 
underwriter wanted to know where the money came from. They had 
just gotten married. There were 80 guests at the wedding. They 
were given $6,000 by the 80 guests. The underwriter wanted gift 
letters from the 80 guests.
    Senator Shelby. That is crazy.
    Mr. Phipps. That is ridiculous. And what it causes us to do 
is be creative because what they did is they regifted the money 
back to the parents, and the parents both gave two gift 
letters. That is silly. We have lost common sense in the 
process.
    Senator Shelby. That is too much.
    Dr. Brinkmann, do you have a comment on this?
    Mr. Brinkmann. Yes, I would say that sometimes when--the 50 
letters perhaps is their interpretation of some new regulation 
or interpretation from whether it is Fannie, Freddie, FHA, 
because after the fact, if something goes wrong with that loan, 
they will come back to the lender and say, ``Well, you did not 
have full documentation, and you have to buy it back.'' So 
there is a defensive----
    Senator Shelby. But that is a literal, strictly literal 
interpretation, is it not? And maybe more than that, if you can 
get more literal. OK.
    Mr. Phipps, Mr. Crowe, and Dr. Brinkmann, all of you cited 
the unemployment rate, which we have talked about, as a major 
factor behind foreclosures in our troubled housing market and 
what it could do in the next quarter and the next quarter and 
the next quarter. This was also touched on by Secretary 
Donovan.
    Given the importance in any economy, especially ours right 
now, of employment levels to the housing market, isn't it vital 
that Congress take up pro-growth economic initiatives designed 
to encourage businesses to expand and create jobs? We are 
talking about housing now. But housing creates a lot of jobs, 
too, and create jobs in particular. In other words, we are all 
concerned about the rising unemployment. I think if we have a 
recovery--we are always praying for one--that it will be 
probably a jobless recovery.
    Do you agree, do all three of you agree that a robust job 
market is the best protection against foreclosures, that and 
good underwriting to begin with? Mr. Brinkmann.
    Mr. Brinkmann. I would say that absolutely, ultimately the 
solution is going to be with the growth of the jobs market, 
that a lot of these programs that we look at, we can shift some 
demand from the future to now to try and rebuild consumer 
confidence efforts. But when you look at the magnitude of the 
loans of the houses we have out there on the market now, the 
magnitude of the loans that are in serious delinquency right 
now and when those volumes come in, ultimately it is going to 
take a recovery in the economy. And what we have seen recession 
after recession is it is taking longer and longer for the jobs 
to recover after they get into that recession.
    Mr. Crowe. I would just add to that, one of the benefits of 
this first-time homebuyer tax credit, and hopefully extended to 
all buyers, is more jobs. Not only does home building create 
jobs in the home-building industry, but it creates jobs in the 
manufacturing sector; it creates jobs in the mortgage banking 
sector and the real estate sector. All of those products that 
go into a house have to be made, and they are made somewhere 
across the entire country, so the job benefit actually spreads 
itself out much beyond wherever that home is located.
    Mr. Phipps. Senator, the only thing that I would add is 
that in addition to good underwriting standards, we need to 
stabilize prices. The majority of the problems will go away if 
housing values----
    Senator Shelby. Wait a minute. You said stabilize prices. 
Doesn't the market basically stabilize prices?
    Mr. Phipps. It would if there were not such impediments to 
the markets.
    Senator Shelby. OK.
    Mr. Phipps. And we can talk about what those are, and I 
identified some in my testimony, but the underwriting 
requirements, the new appraisal requirements, those become 
impediments to price stabilization, the lack of response from 
short sales within 2 weeks.
    Senator Shelby. OK.
    Mr. Phipps. Thank you.
    Senator Shelby. GSE reform, I talked about it earlier. Some 
of you were here. Dr. Brinkmann, in your testimony, you state 
that ambiguity surrounding the Federal Government's support for 
long-term securities issued by Fannie and Freddie, your words, 
``partially caused credit spreads to increase significantly 
earlier this year.''
    Does some uncertainty about the future of the GSEs--and 
there is uncertainty there--impact other segments of our 
financial markets and our national economy? And if so, does 
this mean that the GSE reform should be included as part of any 
financial regulatory reforms considered by Congress this year? 
In other words, I do not know--if we are going to get into 
regulatory reform, GSEs seem to be a central part of this for 
the long-term viability of our housing market.
    Mr. Brinkmann. Senator, I will answer the second part of 
your question first, is that we think it needs to be done. We 
think we have some good ideas. Clearly, I think it is an 
extremely complicated issue and our concern----
    Senator Shelby. Thank you very much.
    Mr. Brinkmann. ----to the extent it gets tied up with the 
rest of the regulatory reform. But as to how it fits itself 
into the work schedule and coverage. But we are here with an 
idea as to how it should be addressed.
    In terms of what the ambiguity of failing to deal with this 
is that it continues to become expensive, because the 
uncertainties--if you look at the nature of the instruments 
that are sold, these are long-term nominal duration MBS of 30 
years, even though the expected life is shorter than that, and 
then what is the actual extent of the support behind it? So 
investors are looking at that and saying, well, until there is 
some clarification, the days of the benefits of implicit 
guarantees are long gone.
    Senator Shelby. Sure.
    Mr. Brinkmann. The investors say, we have to know, is it 
there or is it not, and we are going to price accordingly, and 
I think the longer we go with this ambiguity, we are going to 
have problems.
    Senator Shelby. Certainty is always better than ambiguity, 
isn't it?
    Mr. Brinkmann. Yes, sir.
    Senator Shelby. Thank you, Mr. Chairman, for your 
indulgence.
    Senator Merkley [presiding]. You bet.
    I want to turn to Diane Randall and ask you to comment a 
little bit on how the changing tax credit market for affordable 
housing tax credits has impacted the ability to construct new 
units.
    Ms. Randall. Thank you very much. I will refer to my 
experience on the Board of Directors for the Connecticut 
Housing Finance Authority, where we are the administrating 
agency for our State's allocation of low-income housing tax 
credits. As I referred to in my testimony, the support that 
Congress gave through the ARRA legislation to address the tax 
credit markets is incredibly important and valuable and has 
allowed us, in fact, to do a little bit more this year.
    The challenge that we have, I think, with regard to--and 
again, as I said, every market is different. We find that our 
tax credits are doing a little bit better in the lower 
Fairfield County, closer to New York, the more rural counties, 
and as we try to do more housing using tax credits that is 
deeply targeted or housing that is serving a more vulnerable 
population, it is a much harder market to use.
    We do think that it is very important that we continue to 
have a robust housing tax credit program, because at this 
point, it is really what I call the workhorse of affordable 
housing, multifamily development for low-income populations. So 
anything that we can do to assure that that is extended, I 
think is very important.
    Senator Merkley. Am I right in thinking that the market for 
tax credits dropped by about 20 percent or something close to 
that?
    Ms. Randall. I believe that is probably correct. I know 
that the raise on the tax credits has changed dramatically. At 
one point, I mean, even 2 years ago, we were getting almost a 
dollar for every tax credit. It has gone down in some places to 
below 70 cents, and that has been very difficult to do more of 
that. And I think the other opportunity here is the use of--we 
are looking in Connecticut at trying to use the 4 percent tax 
credits in conjunction with some of the tax-exempt bonds. But 
again, even using those two together still makes it challenging 
without some kind of subsidy to underwrite these deals, to 
preserve the existing affordable housing we have.
    Senator Merkley. Let me turn to the Section 8 rental 
vouchers. I believe in your testimony, you called upon not only 
stabilizing the ones we have, but adding a couple hundred 
thousand more. How did you get to that number, or what is the 
number you are recommending, and what drives that vision for 
increasing Section 8?
    Ms. Randall. Well, Section 8, as you know, has been an 
incredibly successful program in serving elderly people and 
people with disabilities and families who are vulnerable and 
who are very low-income, and I think the consensus of a number 
of national organizations who have worked on this is that just 
in terms of an absorption rate, we would like to see the 
program continue to grow, but you can't flood vouchers into a 
market. So there needs to be some process by which that 
happens.
    One of the interesting conversations I was involved in just 
last week in Connecticut was about how to use more Housing 
Choice Vouchers to project base with particular development, so 
that it is both doing a development process in terms of 
multifamily and using it with some of the programs. For 
example, there was a question about whether Housing Choice 
Vouchers would be able to be used with a Neighborhood 
Stabilization Program to assure that the target of addressing 
some housing for people who are homeless could be met. Again, 
in our State, without a Project-Based Voucher, it is extremely 
difficult to create a rental unit for a family below 30 percent 
of area median income.
    Senator Merkley. Mr. Phipps, I wanted to turn to you. You 
had made comments about the appraising process and the troubles 
that that has created. I believe Secretary Donovan mentioned 
earlier that the Administration is issuing a new set of rules. 
Have you had a chance to look at the Administration's 
adjustments and will those address the issues you are concerned 
about?
    Mr. Phipps. Senator, I would preface this conversation by 
saying my grandfather was an appraiser, my mother was an 
appraiser, and my wife is an appraiser, so while I may not be 
as intimately familiar with them as I should be, I assure you 
that the people involved with me remind me regularly.
    We believe that what Chairman Donovan identified goes the 
direction. The practical application in the field right now, it 
is still just not working, and between the AMCs--frankly, the 
appraisals themselves are fine. It is what happens to them when 
they are in the system. We have underwriters, credit managers, 
and people then reviewing the appraisers and going back to the 
appraisers and saying, why did you use this appraisal? Why 
didn't you do that one?
    Sally Corbin, one of my competitors in East Greenwich, had 
an appraisal last week. They had three offers on a house on 
Hemlock Drive, three offers, all within $2,000 of price. The 
appraisal came through. The appraisal came in $400,000 and the 
transaction fell apart. The reason wasn't that the appraiser 
wasn't directed. The appraiser had influence saying this is 
still a distressed market. So we are dealing with what 
distressed means in terms of an application for value.
    We are looking at lots of problems with the AMCs. There is 
just--I would be delighted to provide lots of specific case 
studies for you and lots of documentation, but it is 
aggravating and further deteriorating value, because people are 
willing, ready, and able, and qualified to buy the houses and 
the appraisal comes back below value.
    Senator Merkley. Thank you very much. I would certainly be 
interested in seeing the additional material you are referring 
to. That would be very helpful.
    Senator Bunning.
    Senator Bunning. Thank you. Mr. Phipps, Mr. Brinkmann, Mr. 
Crowe, your organizations all were flying very high--very, very 
high, in fact--the Homebuilders, 1.8 million units, the 
Mortgage Bankers Association were thriving with their newly 
acquired credit and away they wrote mortgages, and the Realtors 
were selling houses so fast, they couldn't keep up with them. 
Now, somewhere along the line, we hit a big snag, and I want to 
start with Mr. Brinkmann.
    Since low downpayment mortgages have performed very poorly 
and the housing bubble was inflated by purchases by those who 
had little or no money down to buy homes they couldn't afford 
when they should have been renting, what do you think is an 
appropriate downpayment going forward?
    Mr. Brinkmann. Senator, downpayment, of course, is one of 
the factors that is considered, so you would also have to look 
at, well, what is the income relative to----
    Senator Bunning. Well, I think----
    Mr. Brinkmann. ----so a newly minted----
    Senator Bunning. Let us assume all others. In other words, 
I am trying to get to the basis by which you sell a house or 
the basis by which a house is sold, or the basis on putting Mr. 
Crowe back in business again so he can build some houses. So 
what do you think, a 30-year mortgage--when I bought my first 
house, it was 30 percent. You had to have 30 percent down and 
then I could get a 30-year mortgage at 5\1/4\ percent. That is 
a long time ago. I can get the same mortgage right now, going 
through a lot of rigmarole, with 4.7 percent for a 30-year 
mortgage, 4.75, maybe. So what do you think is appropriate?
    Mr. Brinkmann. Senator, my background before this was 
actually in credit modeling.
    Senator Bunning. OK.
    Mr. Brinkmann. One of the factors that we would see was 
that downpayment was important once a loan then went into 
default, but the key driver of putting that loan in default was 
a loss of income, so that it offers protection to the lender. 
It is important, but there have been successful low downpayment 
mortgages out there.
    I think when we look at what caused ultimate problems of 
the past, it was not necessarily just the low downpayment or 
people that literally had zero in the house. That was the 
problem, that they were expected to put up something. But it 
was also the misstatement of income, the either lack of 
understanding of----
    Senator Bunning. It took me 26 pages worth of paperwork to 
get a mortgage.
    Mr. Brinkmann. And how that is----
    Senator Bunning. That wasn't enough----
    Mr. Brinkmann. ----the borrower, whether or not that 
borrower knew or didn't know that if they continued to make 
this minimum payment every single month, they were digging 
themselves into a hole that they may not be able to get out 
of----
    Senator Bunning. Right. That is because they didn't put 
enough money down on the house and the house devalued by 30 
percent. I mean, those were things I don't think you or you or 
you or anybody in this room anticipated. So you are telling me 
that I should have anticipated it, or you should have?
    Mr. Brinkmann. There were a number of things that I think I 
should have anticipated, I think the industry should have 
anticipated, and I think the breakdown that we saw was that 
some of these loan types, whether it is low documentation, 
whether----
    Senator Bunning. All of the above.
    Mr. Brinkmann. ----all the various things worked for a 
small sliver of borrowers. But there was a breakdown of sort of 
the macro credit view of how much were these kinds of loans 
driving the entire market and what was going to happen when 
the----
    Senator Bunning. And the collateral----
    Mr. Brinkmann. ----and what----
    Senator Bunning. When they collateralized the loans----
    Mr. Brinkmann. When they----
    Senator Bunning. ----it just added, too. Nobody knew who 
owned the loan.
    Mr. Phipps, what do you suggest to restart the private 
secondary mortgage market without guaranteed Government 
guarantees?
    Mr. Phipps. Senator, we have a group of Realtors and 
economists actually meeting later this week here in D.C. to 
identify choices. We believe that a sustainable source for 
mortgages needs to be identified. The current situation is 
challenging, and as a result, we are actively engaged in 
identifying what those other alternatives are. Literally this 
week, I think Wednesday and Thursday of this week----
    Senator Bunning. It sounds like Mr. Donovan's explanation 
about the new proposed legislation that they didn't know was 
going to expire by November 30. I don't think that is a very 
good answer.
    Mr. Phipps. Actually, Senator, the group has been meeting 
for almost a year at this point and we are meeting again. We 
are trying to come up with some specific recommendations, and 
we have identified and articulated principles that we can 
provide you with copies of as to what we----
    Senator Bunning. I would appreciate that very much.
    Mr. Phipps. Thank you.
    Senator Bunning. Mr. Crowe, when will the housing market be 
able to stand on its own without Government subsidies?
    Mr. Crowe. When the consumer decides to come back into the 
marketplace, Senator.
    Senator Bunning. When will that be?
    Mr. Crowe. I don't think we will be back to what I would 
consider to be full equilibrium until----
    Senator Bunning. When are we going to build 8,800,000 homes 
again?
    Mr. Crowe. Late 2012.
    Senator Bunning. Late 2012. And what will the unemployment 
rate in the United States be by that time?
    Mr. Crowe. It may take that long before it is back down to 
what we would consider----
    Senator Bunning. We are at 11-and-a-half percent in 
Kentucky going to 13. Michigan is at 15 percent going higher. 
The United States is at 9.7 going to ten. When will it all 
stop?
    Mr. Crowe. That is why it will take so long for the housing 
recovery to occur, because we don't----
    Senator Bunning. In other words, the Government subsidies 
are going to have to continue until that time?
    Mr. Crowe. No, I didn't say that.
    Senator Bunning. Well, that is the question I asked.
    Mr. Crowe. No. We are asking for a 1-year extension. We 
feel like that is enough to get the ball rolling, to get the 
buyer back in the market----
    Senator Bunning. Until the end of 2010?
    Mr. Crowe. To the same date, 2010, until December 1, 2010.
    Senator Bunning. That is all I have for now. Thank you.
    Senator Merkley. Thank you very much, Senator.
    Before we shut down the hearing, I wanted to ask a 
question, Mr. Brinkmann, in regard to your testimony about the 
mortgage credit guarantee entities. As I understand it, you are 
presenting that as the replacement for the GSEs, and as I was 
reading your testimony, I wondered how many of these entities 
you envision, whether it is two or is it 25, and also, you note 
that they should be implicitly or explicitly--the acquisitions 
should be, or the securities should be guaranteed by the 
Federal Government. Can you just address whether that doesn't 
just put us back in the same place we were in terms of the type 
of risks that might be taken by the entities?
    Mr. Brinkmann. Yes, sir. I think the key differences are, 
first of all, in terms of how many. Two is too few. Twenty-five 
is probably too many. Our vision is for a sufficient number so 
that no one of which is too big to fail, that if there is too 
much credit risk taken, the others can step in, absorb what is 
lost without creating systemic risks to the economy.
    The other issue is toward what is exactly guaranteed in 
this. We think that certainly the equity, but also any of the 
debt sold by these entities would be explicitly not guaranteed 
by the Government, that the nature of the Government guarantee 
be made explicit. It would only be for the MBSs that were 
issued, and it would be very much a backstop to other forms of 
covering these losses, so that if a loss occurred, you would 
first go back to the equity in the institution, you would go 
back to any risk sharing arrangements that existed with the 
lenders, you would go back to the insurance pool that would be 
established, and only in the event that you actually ate 
through all those other sort of private label layers would then 
the Federal support come in.
    Would Federal support have been my first choice in a 
structure like this, and I would have to say no. I would prefer 
to actually have tried to think of a model that excluded it. 
The problem is, the reality in the international markets today 
is that if we would need to attract the capital internationally 
that is going to be needed to support the housing market in the 
U.S. as we had in the past, they are looking at, OK, is the 
Government standing behind it, because are they providing 
adequate and sufficient regulation of these entities to ensure 
us that if something goes wrong, then ultimately it is the U.S. 
Government that is on the hook and not us.
    Senator Merkley. So to restate that and make sure I 
understand your point, you are saying, rather than have an 
implicit guarantee, it is better to make it explicit that such 
a guarantee is essential to the acquisition of the appropriate 
levels of international capital and it should be explicitly 
structured in a fashion in which investors know that they are 
on the hook first?
    Mr. Brinkmann. Yes, sir, and I would add to that and 
explicitly paid for, that this would not be a free good, but 
that it would be something that these entities would pay for, 
for the guarantee as well as paying into the fund and----
    Senator Merkley. Premium penalties----
    Mr. Brinkmann. Yes, sir.
    Senator Merkley. ----or premium fees. Well, thank you very 
much, and thank you to all of the witnesses for your 
presentations. We appreciate it a great deal.
    The record will remain open for a couple of days for 
Members to provide questions for the record and for you all to 
have a chance to provide responses.
    The hearing is hereby adjourned.
    [Whereupon, at 12:22 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                PREPARED STATEMENT OF SENATOR JACK REED
    Thank you, Mr. Chairman, for convening this important hearing. We 
know that the housing market lies at the core of the current economic 
crisis. If we want to stabilize the economy, we must be sure we also 
address the root of the problem.
    Of utmost importance is the current foreclosure crisis. After the 
Bush administration's failure to respond to the burgeoning crisis, the 
Obama administration's Making Home Affordable program was a step 
forward. Seventy-eight percent of loan modifications tracked by the 
second quarter Mortgage Metrics Report led to reduced payments for 
homeowners, up from 54 percent.
    However, we must do more and move aggressively to ensure that 
qualified homeowners get access to existing initiatives. I still hear 
troubling reports from Rhode Islanders of long waits and unnecessary 
obstacles to obtaining loan modifications. Consumer advocates have also 
reported examples of homeowners being offered modifications that don't 
comply with the Home Affordable program and homeowners being denied a 
modification without clear justification. The process can and should be 
more transparent.
    There are other signs that we must do more. Realty Trac reports 
that foreclosure actions are still on the rise. Job losses will likely 
only drive those numbers up--even among well underwritten loans. 
Indeed, in the second quarter, foreclosures for prime mortgages 
continued to outpace efforts to help families remain in their homes. 
With unemployment at an alarming 13 percent in Rhode Island and rising 
across the Nation, the issue of how we help unemployed homeowners is of 
growing importance. The Preserving Homes and Communities Act, which I 
recently offered along with my colleagues Senators Durbin, Merkley, and 
Whitehouse, includes a plan to help homeowners experiencing a temporary 
loss of income remain in their homes. This is an issue that needs to be 
addressed.
    In addition to the problems in the commercial real estate market, 
it is also reported that a wave of option adjustable rate mortgages 
will reset in the next 4 years. One estimate puts the number of 
mortgages in question at one million. Already, 10 percent of payment 
option ARMS are in the process of foreclosure, three times the 2.9 
percent rate for all mortgages. We need to ensure we are moving into 
action to respond and prevent future crises.
    Recent reports point to modest signs of improvement in the overall 
housing market. Nationally, prices in the second quarter showed the 
first quarterly increase in 3 years. The Mortgage Bankers Association 
projects home sales will rise in 2010. However, many of these 
transactions are foreclosures or short sales. Higher priced homes are 
moving more slowly, and there's still a significant inventory. And it's 
unclear how many homes in the foreclosure process will eventually be on 
the market.
    Stabilizing the housing market is the key to economic recovery, and 
we must continue to use all of the tools at our disposal to ensure that 
homeowners get the relief that they need. Furthermore, we have to be 
vigilant in anticipating--and preparing for--the other challenges that 
await.
    I also want to welcome Ron Phipps of Rhode Island who will testify 
at today's hearings not just about my State's problems but the range of 
issues facing our housing sector. I know that Ron's testimony will help 
ensure that this Committee hears from the frontlines of the foreclosure 
crisis.
                                 ______
                                 
PREPARED STATEMENT OF JOHNNY ISAKSON, A U.S. SENATOR FROM THE STATE OF 
                                GEORGIA
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
I appreciate the invitation to speak this morning on the state of the 
housing market in America.
    I began my career in residential real estate in 1967 as a real 
estate agent specializing in FHA and VA home sales with an average 
price of $17,900. In 1968, I experienced the first of four housing 
recessions I would face during my 33 years in the business. That first 
housing recession was brought on by the failed FHA 235 no-down-payment 
program.
    In 1974, I was a branch office manager for Northside Realty in 
Atlanta when our country experienced what at the time was the worst 
housing recession our Nation had ever faced. That recession ended in 
1976 after Congress passed a $2,000 income tax credit for the purchase 
of a single family home in 1975. That tax credit effectively reduced a 
standing vacant 3-year supply of housing to less than a 1-year supply.
    In 1981, I was President of Northside Realty, and experienced my 
third housing recession. Interest rates rose to 16.5 percent, and for 
the first time ever lenders made negative amortization loans to make 
monthly payments affordable.
    In the late 1980s, the savings and loan crisis caused institutional 
failures across the Nation, and the Resolution Trust Corporation was 
created. This brought on the housing recession of 1990-91, and 
mortgage-backed securities became the primary source of capital to fund 
residential conventional loans. This is when Freddie Mac and Fannie Mae 
became dominant in housing finance.
    In 1995, I was asked to serve on the advisory board of Fannie Mae. 
In 1999, I was elected to Congress and stepped down as President of 
Northside Realty, which had grown into a residential brokerage company 
with 1,000 agents, 25 offices, 11,000 annual home sales and volume 
exceeding $2 billion dollars.
    During my 33-year career in real estate, I experienced many 
challenges and difficult markets, but never anything like the current 
housing market in America. Our Nation is facing a total collapse of new 
residential construction and development. This fact, combined with the 
highest sustained foreclosure rate since the Great Depression, also has 
placed our community banking system under enormous stress.
    America's families have lost trillions of dollars in home equity as 
home values have fallen, and in some markets, continue to fall today. 
Second only to unemployment, this fact has the single greatest impact 
on consumer confidence. In my home town of Atlanta, home values have 
declined 10 to 40 percent, depending on the neighborhood or the county.
    While the current crisis began with the failure of subprime 
mortgages, today it continues with the failure of loans that a year ago 
were performing quality assets. Why is this happening, you might ask? 
In part because of rising unemployment, but more because as values 
decline below the mortgage balance owed the positive incentives of home 
ownership vanish. Historically, foreclosures on residential home 
mortgages were rare because families would do anything to protect their 
home and their equity. But when the equity disappears and the 
prospected for recovery are bleak, the incentives are gone.
    That, Mr. Chairman, is the problem America faces today. I am 
frequently asked by my constituents back home, ``When do you think 
housing will recover?'' My answer is reluctantly, ``Without some policy 
changes in Washington, 5 years or more.''
    There are two actions we can take now that will make a positive 
difference in the rate of recovery of America's housing market. The 
first is to extend the existing homebuyer tax credit that expires on 
November 30th, and to make it available to all buyers who purchase a 
home for their principle residence and whose joint income is $300,000 
or less. In my opinion, the extension should be through June 30, 2010. 
I believe this will provide the stabilization necessary for home values 
to begin to return. Most importantly, it will thaw the current freeze 
in the move-up market, which must recover if we are to return to a 
viable market.
    Second, I believe the FDIC must revisit its Draconian 
interpretation of mark-to-market rules in terms of real estate 
development loans and other similar assets. It also should look to its 
real estate development borrowers not as liabilities but as potential 
partners. Sure, some of these real estate loans are bad and losses 
should be recognized, but many of these loans could be worked out over 
time, benefiting the bank and the developer. By the way, this was what 
happened in 1975. Combined with the housing tax credit, these two 
actions brought America's housing market back from disaster.
    Mr. Chairman, prior to this current recession, I had lived through 
four major housing recessions and four recoveries. History is always a 
good teacher. America should repeat that which worked and remember that 
which didn't.
    Thank you.
    
    
    
                  PREPARED STATEMENT OF SHAUN DONOVAN
         Secretary, Department of Housing and Urban Development
                            October 20, 2009
    Good morning, Chairman Dodd, Ranking Member Shelby, and Members of 
the Committee. Thank you for the opportunity to testify at today's 
hearing on the state of the U.S. housing market and the progress the 
Obama administration is making to stabilize it, as well as other 
Administration efforts to provide relief to homeowners and 
neighborhoods suffering from the affects of the foreclosure crisis.
    Today, I would like to summarize the conditions of the housing 
market and discuss how our efforts--particularly Making Home Affordable 
(MHA)--are impacting the market, as well as outline the essential role 
the Federal Housing Administration (FHA) plays in ensuring the 
viability of our housing market and some of the steps we are taking to 
shore up its fiscal health for the long-term.
Housing Market Conditions
    Certainly we meet at an important moment, as indicators continue to 
show signs that the housing market is stabilizing. In September, 
according to RealtyTrac, foreclosure activity fell for the second 
straight month, by 4 percent. Nationally, home price indexes have been 
on the rise for the past several months, as reflected in 18 of the 20 
metropolitan markets covered by the Case-Shiller index. Inventories of 
unsold homes remain at high levels, but have been receding. In selected 
markets, realtors now report that many homes are selling for more than 
their asking price and new home sales are at their highest level since 
September 2008.
    However, with the rental market showing increasing signs of 
distress, it is clear these numbers do not tell the whole story. 
Delinquency rates on multifamily property mortgages have moved up 
sharply since mid-2008, while property values continue to fall. 
Nationwide, in the second quarter of 2009 vacancy rates for rental 
properties rose to nearly 10 percent. This softness was sparked in part 
by an influx of new supply arising from the conversion of condominiums 
into rental properties and home foreclosures adding to the available 
housing stock, and it continues today as multifamily housing and other 
commercial real estate are among America's weakest market sectors.
    This is a source of considerable concern at HUD, as growing 
vacancies and increasing delinquencies threaten not only the families 
and neighborhoods who live in these properties but also the lending 
institutions, particularly smaller regional and community banks, that 
have financed them and on whom these communities depend.
    Further, this softness doesn't necessarily mean that housing is 
more affordable at the low end of the economic spectrum where recent 
hits to income have been the biggest. Indeed, the number of people 
facing high rental cost burdens remain extremely high in light of 
weaker incomes and higher rents due to increasing demand for the most 
affordable housing. In fact, the number of families earning between and 
$20,000 and $50,000 who now pay more than a third of their income for 
housing has increased by 20 percent in just the last 3 years. So, it's 
clear that the need for rental assistance for the most vulnerable 
families continues.
    The connection of these indicators to what we're seeing in our 
overall economy is clear. The annual rate of real growth in the economy 
during the second quarter of this year was a decline of 0.7 percent--a 
significant improvement from the first quarter, when real GDP decreased 
6.4 percent. Decreasing investment in residential construction reduced 
overall GDP growth by 0.67 percentage points compared to a reduction of 
1.33 percentage points in the first quarter of 2009. What that means is 
that as the housing sector has begun to stabilize, our economy has as 
well--but we still want to see more progress from both.
    That is why the Recovery Act is so important. Slowing the rise of 
unemployment--a leading cause of foreclosures--and creating jobs is 
critical to helping stabilize the single-family market, helping 
families meet their mortgage payments, and stimulating home sales. But 
it's also important to families at the lower end of the economic 
spectrum where the unemployment rate remains extremely high--according 
to the Current Population Survey, more than double what it is for upper 
income families, at least partially offsetting any gains these families 
might have realized by the softer market.
Making Home Affordable: Progress to Date
    Mr. Chairman, from its first day in office, the Obama 
administration has made stabilizing our housing markets a top priority, 
with a particular focus on preventing foreclosures and mitigating the 
impact that foreclosed and abandoned properties have on neighborhoods, 
communities and the broader economy. Working with the White House, 
Treasury Department, and other key Administration agencies, HUD has 
played a central role in these efforts.
    One result of the comprehensive approach the Administration has 
taken is that interest rates have hovered around or below 5 percent for 
6 months--allowing first-time homebuyers to enter the market and 
helping some 3 million homeowners refinance, putting as much as $10 
billion of purchasing power in the hands of American households 
annually. For a family in a median-price house of $200,000, an interest 
rate saving of one percent on a 30-year mortgage rate saves that family 
$1,200 a year. That's money that goes to homeowners all over the 
country.
    At the center of the Administration's response to the housing 
crisis is the Making Home Affordable Program, a comprehensive program 
to stabilize the housing markets by providing affordable refinance and 
modification opportunities for at-risk borrowers. The initiative 
includes the following two key components:

  1.  The Home Affordable Modification Program (HAMP): HAMP is 
        providing up to $75 billion dollars, including $50 billion of 
        funds from the Troubled Assets Relief Program (TARP), to 
        encourage loan modifications that will provide sustainable, 
        affordable mortgage payments for borrowers. Importantly, HAMP 
        offers incentives to investors, lenders, servicers, and 
        homeowners to encourage mortgage modifications.

  2.  The Home Affordable Refinance Program (HARP): HARP expands access 
        to refinancing for families whose homes have lost value and 
        whose mortgage payments can be reduced at today's low interest 
        rates. It helps to address the problems faced by homeowners who 
        made what seemed like conservative financial decisions 3, 4, or 
        5 years ago, but who have found themselves unable to benefit 
        from the low interest rates available today because the value 
        of their homes have declined below that of their existing 
        mortgages.

    MHA has achieved clear success in a relatively short time period 
and there are indications that the housing market is stabilizing. Since 
the launch of the program in March, [64] servicers--representing more 
than 85 percent of the market--have signed contracts with the 
Administration. On October 8th, the Administration announced that 
servicers had exceeded the goal of beginning 500,000 trial 
modifications by November 1, nearly a month ahead of schedule. 
Moreover, the monthly pace of trial modification are now exceeding the 
monthly pace of complete foreclosures which indicates that we've 
reached a turning point in our modification efforts.
    This program is not only the largest single program of its kind, 
but unlike many previous loan modification efforts, the MHA program 
generates true affordability by ensuring that participating homeowners 
pay just 31 percent of their monthly income towards mortgage expenses.
    In addition, since February there have been more than 3 million 
home loans refinanced, both as part of the HARP and more broadly as a 
result of historically low interest rates. By extending the HARP 
program to individuals with up to 125 percent loan-to-value (LTV) 
ratio, we assist underwater borrowers who were previously unable to 
take advantage of the refinancing program, particularly in areas of the 
country that have seen larger than average drops in home prices.
    In addition to these MHA programs, earlier this year the 
Administration supported low mortgage rates more generally by 
increasing support for the Government-Sponsored Enterprises (GSEs), 
Fannie Mae, and Freddie Mac, through an expansion of Treasury's 
Preferred Stock Purchase Agreements with the GSEs. To this effect, 
under HERA authority, we have committed up to an additional $200 
billion in support to the GSEs, and Treasury has purchased over $200 
billion in Agency securities on the open market.
Improving Servicer Accountability, Transparency, and Responsiveness
    Despite the significant progress under MHA, we recognize that more 
needs to be done to improve the responsiveness and accountability of 
servicers participating in the program so that additional homeowners 
facing, or at risk of, foreclosure are contacted and assisted in a 
timely manner. As the Chairman is well aware, many borrowers who are 
interested in modifying or refinancing their mortgages under MHA have 
experienced difficulties in contacting the servicers of their loans or 
obtaining information from the servicers. Others, having made contact 
with servicers, have found it difficult to shepherd their applications 
through the process, with instances of lost application materials, 
changing personnel and delays in response times.
    Indeed, HUD has played a lead role in pressing the servicers to do 
more. We have put pressure on servicers to ramp up their efforts. For 
instance, Treasury Secretary Geithner and I sent a strong letter to the 
CEOs of all participating servicers on July 9, calling upon them to 
devote more resources to the program, and requiring each servicing 
entity to designate a senior official to serve as a liaison with the 
Administration and work directly with HUD and Treasury on 
implementation of all aspects of MHA.
    At a meeting on July 28, servicers committed to significantly 
increase the rate at which they were performing loan modification and 
agreed to the set a goal of beginning 500,000 trial modifications by 
November.
    On October 8th, Administration officials and servicer CEOs met to 
assess the progress under MHA and discuss improving servicer efficiency 
and responsiveness to borrowers during the modification process. The 
discussion also included working with servicers to set more exacting 
operational metrics to measure the performance of servicers, including 
evaluating the time between applying for a modification and receiving a 
final decision and average time to pick up incoming borrower calls. The 
HAMP guidelines require all borrowers to be screened for HAMP 
eligibility prior to any foreclosure sale. If a consumer is deemed 
eligible for HAMP, the servicers have agreed to explore mechanisms for 
reducing foreclosure fees that accrue during the foreclosure process.
    We have made significant progress in reaching implementation 
objectives outlined during our July 28 meeting, including:
    Administration began publicly reporting servicer-specific 
        performance under the program on August 4. While this data 
        shows a wide range in servicer performance, we are already 
        seeing evidence that the ``peer pressure'' being created by a 
        publicly available scorecard has motivated servicers to ramp up 
        their efforts.
    Administration will require servicers to report on more 
        exacting operational metrics to measure the performance of the 
        program.
    On July 28, the Administration asked Freddie Mac, in its 
        role as compliance agent, to develop a ``second look'' process 
        pursuant to which Freddie Mac will audit a sample of MHA 
        modification applications that have been declined. This 
        ``second look'' process began on August 3, and is designed to 
        minimize the likelihood that borrower applications are 
        overlooked or that applicants are inadvertently denied a 
        modification. In addition, the program is examining servicer 
        nonperforming loan (NPL) portfolios to identify eligible 
        borrowers that should have been solicited for a modification, 
        but were not.
MHA Program Improvements
    As always, we are committed to improving MHA performance--by 
ensuring homeowners have the information they need and that servicers 
have the tools and resources they need to process applications and make 
these modifications permanent.
    On October 8, the Administration announced the issuance of a new 
Supplemental Directive on streamlining MHA application documents which 
provides another resource to make process easier and more 
straightforward for borrowers. The Directive: (i) creates a standard 
HAMP Request for Modification and Affidavit form that incorporates 
borrower income and expense information, the existing Hardship 
Affidavit and portions of the existing Trial Period Plan, (ii) updates 
and simplifies income documentation and verification requirements, 
(iii) allows for the conversion of the current trial period plan to a 
notice that does not require a borrower signature, and (iv) 
standardizes borrower response timeframes applicable to completed HAMP 
requests. Pursuant to the supplemental directive, within 10 days of 
receipt of financial information verbally or in a completed Request for 
Modification Affidavit, the servicer must acknowledge the borrower's 
request for HAMP participation in writing. And within 30 calendar days 
following the servicer's receipt of all required documentation, the 
servicer must complete its evaluation of borrower eligibility and 
notify the borrower of its determination in writing.
    The Administration is developing an application portal through the 
MakingHomeAffordable.gov Web site. Over the coming weeks, borrowers 
will be able to find all the necessary resources to complete a HAMP 
application, and eventually they will be able to apply on line through 
the Web site, and check the status of their applications. Borrowers 
will soon be able to obtain all application forms from the Web site so 
that they can be sure they are providing the servicer with the required 
documentation. Soon thereafter, borrowers will be able fill out 
application documents on line, and submit applications to their 
servicers via e-mail. Eventually borrowers will be able to obtain 
ongoing information about application status until the modification is 
approved or denied. The standardized nature of the portal will help to 
provide a clearer, more consistent format for processing borrowers and 
help to successfully move more loans from trial to official 
modification status.
    The Administration understands the concern that many consumers and 
counselors are not given adequate reasons for rejection from the 
program. As a result, we have established denial codes that will 
require servicers to report the reason for modification denials in 
writing, both to Treasury and to borrowers. Servicers will be required 
to send borrowers denial letters containing the reason that the 
modification was not approved in plain language. Moreover, in the 
denial letters, borrowers will be provided with a phone number to 
contact their servicer in order to obtain additional details about the 
inputs used in making the modification decision. This will give 
borrowers an opportunity to call and verify that that servicers 
evaluated their application based on accurate and correct information.
Reaching Troubled Borrowers
    We have launched a consumer focused Web site, 
www.MakingHomeAffordable.gov, with self-assessment tools for borrowers 
to evaluate potential eligibility in the MHA program. This Web site is 
in both English and Spanish and has had well over 34 million page 
views.
    We have worked with an interagency team to establish a call center 
for borrowers to reach HUD approved housing counselors, so that they 
are able to receive direct information and assistance in applying for 
the HAMP program.
    Working closely with Fannie Mae, we have launched an effort to hold 
foreclosure prevention workshops and borrower outreach events in cities 
facing high foreclosure rates across the country. These foreclosure 
prevention events include counselor training forums where 
representatives from Treasury, Fannie Mae, HUD, and other agencies 
provide information and training to local housing counselors and 
nonprofit groups, leveraging local resources to expand the reach of the 
HAMP program. We had visited 10 hard hit markets by October 1, and will 
continue our outreach efforts throughout the fall and the year to come.
    HAMP has made significant progress in reaching borrowers at risk of 
foreclosure. However, much more remains to be done and we will continue 
to work with other agencies, regulators and the private sector to reach 
as many families as possible.
FHA: Essential to the Viability of our Housing Markets
    At the same time MHA has helped 500,000 families keep their homes, 
FHA has protected many more homeowners from foreclosure through its 
loss mitigation programs. Indeed, last year, more than 500,000 families 
were assisted through forbearance, partial claim, loan modification, 
preforeclosure sale, and deed-in-lieu of foreclosure among others. 
That's in part because servicers of FHA-insured loans are required to 
notify delinquent homeowners about the options available to help them 
make their monthly payments and take such steps before initiating 
foreclosure proceedings. As a result, we expect as many as a half 
million families will be assisted in 2009 through benefits provided by 
FHA insurance, bringing the total number of homeowners assisted by FHA 
to over a million.
    In addition, FHA is playing a critical role in the housing market 
and our economy right now--insuring a third of the home-purchase 
mortgage market and 80 percent of its purchase loans are for first-time 
homebuyers. But as this Committee knows, an independent actuarial 
review is expected to predict that FHA's capital reserve ratio will 
fall below 2 percent.
    Based on current projections and absent any catastrophic home price 
decline, FHA will not need to ask Congress and the American taxpayer 
for extraordinary assistance--there is no need for any ``bailout.'' 
Combined, FHA's Reserve Receipt Account and Mutual Mortgage Insurance 
Fund hold more than $30 billion in cash reserves.
    However, in light of the severe decline in house prices, overall 
performance of the economy, and future housing price projections, FHA 
expects higher net losses than previously estimated on outstanding loan 
guarantees which, combined with stresses accounted for in prior 
reviews, will drive the ratio below 2 percent.
    I should note, however, that the independent actuary expects this 
drop in the capital reserve ratio to be temporary--and to return above 
2 percent within the next 2 to 3 years, even if FHA were to make no 
policy changes at all. That's because FHA stuck to the basics during 
the housing boom: 30-year, fixed rate traditional loan products with 
standard underwriting requirements. It only insures owner-occupied 
residences and has never insured exotic subprime, Alt-A, or ``no-doc'' 
mortgages. It's precisely this responsible approach that has allowed 
FHA to limit losses during this economic crisis and fulfill its mission 
of providing safe opportunities for home ownership to those who can 
afford a home.
    Still, we are committed to ensuring the agency takes every step 
possible to remain financially healthy for the long-term--improving 
portfolio analysis and management, tightening risk controls, and 
overhauling targeting and monitoring practices. Indeed, FHA has made 
more significant credit policy changes in the past few months than FHA 
has in decades, bringing on new leadership with broader and deeper 
knowledge and skills and is in the process of hiring a Chief Risk 
Officer.
    And with Congress's help, we are working to modernize FHA's 
information technology systems, so that it can develop a set of 
commonly used fraud detection tools and a fully automated underwriting 
system that helps us focus our attention on the loan files that are 
most likely to contain serious deficiencies.
Announcements--HFA Assistance and Hope for Homeowners Guidance
    While there can be no doubt that the housing market is on the mend, 
work still remains to build on this initial promise.
    I am announcing that that the Administration is providing 
critically needed assistance to State and local housing finance 
agencies (HFA's) and their efforts to aid distressed homeowners, 
stimulate first-time home-buying, and provide affordable rental homes. 
Since HFAs are key players in making home ownership possible for 
hardworking families who otherwise would not be able to buy or remain 
in their homes, this initiative is a logical part of the 
Administration's overall support for the housing market, which has 
included the First-Time Homebuyer Tax Credit, and our support for low 
interest rates and liquidity through the FHA and the GSEs. The two 
initiatives are designed to address challenges facing HFAs, including 
lack of Financing for New HFA Housing Bond Issuance and lack of 
Liquidity to Support State HFA Variable Rate Debt Obligations.
    HFAs are located in all 50 States and have been reliable sources of 
flexible, affordable mortgage money for lower-income first-time home 
buyers. HFAs have made approximately 3 million families first-time 
homeowners, and add another 100,000 families each year. HFAs also play 
a key role in HUD's efforts to promote expanded access to affordable 
rental housing through the HOME Investment Partnerships Program, 
Section 8, and the Low Income Housing Tax Credit. HFAs and their 
partners have produced nearly 2 million affordable rental homes, 
financing an additional million affordable rental homes with Housing 
Bonds. At a time when we need it most, HFAs add another 150,000 homes 
to our country's affordable rental housing inventory each year.
    In light of their strong track record and considerable capacity, 
last year under the Housing and Economic Recovery Act (HERA), Congress 
allowed HFA to refinance loans and provided HFAs with $11 billion in 
new Housing Bond authority, to be available through 2010 to finance 
affordable single-family and multifamily mortgages. Unfortunately, HFAs 
have not been able to translate these additional resources into 
expanded housing opportunities in this time of expanded housing need. 
The health and viability of many HFAs have been jeopardized by the 
economic crisis. State and local HFAs have experienced a number of 
challenges, including: a lack of liquidity support, credit and cash 
flow concerns, and an inability to issue new bonds to fund single- and 
multifamily loans even though the bond cap was increased.
    Given the critical role HFAs play, the Administration, together 
with the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie 
Mac, has developed a set of programs to maintain the viability of HFA 
lending programs infrastructure. The new HFA initiative includes both a 
New Issue Bond Program (NIBP) and a Temporary Credit and Liquidity 
Facility (TCLF) Program for existing bonds. These programs will 
generally be available to all HFAs who meet eligibility criteria. To 
minimize cost to the taxpayer, the HFA initiative includes a range of 
risk sharing features and a pricing structure that encourages HFAs to 
find alternative private market solutions as soon as possible.
    I am also announcing that we have finalized the Hope for Homeowners 
(H4H) program guidance which provides instructions to lenders about the 
program. In keeping with changes made by Congress in the ``Helping 
Families Save Their Homes Act of 2009,'' this is a critical first step 
toward revamping an important component of the Administration's plan to 
stabilize the housing markets--providing an additional option to 
underwater distressed borrowers seeking to save their homes and 
preserve equity through principal write-down and refinance. As the 
program goes online, we will closely monitor its progress and continue 
working with Congress to ensure its success going forward.
    In addition, I am also aware of the strong support in Congress for 
doing more to support the housing market, including extending the First 
Time Home Buyer Tax Credit beyond 2009. At the same time, I am mindful 
that these proposals can be very expensive, especially at a time of 
significant budget deficits. I can assure you the Administration will 
work with Congress to fashion appropriate and effective home buyer 
incentives, mindful of both their benefits to stimulating new demand 
and their costs to the American taxpayer.
Preventing Another Crisis
    Let me conclude by saying that helping to prevent foreclosures 
through Making Home Affordable is one way to address the housing 
crisis, but there are other ways we can help the market recover as 
well. That's one reason President Obama is working to reform our 
Nation's health care system. With health care costs the leading cause 
of personal bankruptcies--with some estimates finding that almost half 
of all foreclosures are caused in part by financial issues stemming 
from medical costs--reform is an important part of stabilizing the 
housing market.
    And of course, we look forward to working closely with this 
Committee to modernize our financial system. Critically important to us 
at HUD is the creation of a Consumer Financial Protection Agency that 
will protect American families who buy financial products and services 
every day--from mortgages to credit cards. The need is clear to set 
clear rules of the road for consumers and banks, including requiring 
brokers to look out for the interests of hardworking Americans if they 
give advice about mortgages.
    This is a top priority for the Administration--and I know it is for 
you as well, Mr. Chairman. You have spoken powerfully about the central 
role consumers play in our economic growth and the need to build a 
strong foundation of protections for consumers. We agree--and look 
forward to working with you closely to do that through the creation of 
a strong Consumer Financial Protection Agency.
Conclusion
    And so, thank you, Mr. Chairman, for the opportunity to participate 
in today's hearing and for your continued leadership--not only on these 
issues, but all your work to create sustainable communities. Whether it 
is our Choice Neighborhoods proposal to link neighborhood 
revitalization more closely with early childhood education--an issue on 
which you have long been the leading voice in Congress--or your Livable 
Communities Act to help towns and regions across the country better 
integrate their transportation, housing, land use, and economic 
development efforts, we are committed to working with you to build a 
strong, durable foundation for sustainable, inclusive growth.
    Collectively, I hope the initiatives I have described today signal 
to you and to every family across the country that we believe, as you 
do, that a vibrant housing sector is essential to creating a geography 
of opportunity in America--where our children's choices and futures are 
never limited by their zip code. As always, the Administration stands 
ready to explore with Congress additional ways we can work together to 
make this shared vision of prosperity and opportunity a reality for 
every American.
    With that, I am happy to answer any questions you may have.
                                 ______
                                 
                  PREPARED STATEMENT OF DIANE RANDALL
         Executive Director, Partnership for Strong Communities
                            October 20, 2009
    Thank you, Senator Dodd and Members of the Senate Banking Committee 
for the opportunity to testify today on ``The Nation's Housing 
Markets.'' I am Diane Randall, Executive Director of the Partnership 
for Strong Communities, a Connecticut based organization dedicated to 
solutions to homelessness, the development of affordable housing and 
the creation of vibrant communities. I am also a member of the Board of 
Directors of the National Low Income Housing Coalition, which works on 
solving the housing problems of the lowest income people in our 
country.
    For millions of Americans--many of them vulnerable by disability or 
age--the opportunity to own a home, even with a very generous home 
ownership tax credit, is beyond their reach. For these Americans, the 
American Dream is a safe, secure, affordable rental home. The 
opportunities for Congress to intervene with solutions for the low-
income rental market are immediate and can have dramatic benefits--not 
only for the Nation's economy but also for people who need the security 
of an affordable rental home. Indeed, one of the lessons from this 
housing crisis is that efforts to fix only the home ownership market is 
not an adequate housing policy--for our Nation, our States, or our 
local communities.
    It is important to understand that there is no such thing as the 
Nation's Housing Market. There are thousands of markets, each with its 
own needs, and it is critical that Congress provide States and 
localities with tools and resources that can be tailored to address 
conditions in those different markets.
    Let me give you a snapshot of the picture in my State--
Connecticut--a wealthy State that nonetheless has deep pockets of 
poverty, with an unemployment rate of 8.1 percent which, while less 
than the Nation's 9.7 percent unemployment rate, shows no signs of 
declining.

    In Connecticut, nearly half (48.2 percent) of renting 
        households pay more than 30 percent of their income for 
        housing. For many of these folks, managing the family budget is 
        high wire act, deciding among the priorities of food, 
        healthcare, transportation, or clothing. Forget things like 
        music or dance lessons for the kids or even a trip to the 
        movies.

    Connecticut's suburban and rural towns have very little 
        supply of multifamily housing, especially affordable housing. 
        This results in relatively few rental homes available and 
        affordable to Connecticut's low-income population.

    The ``housing wage'' for renters in Connecticut has risen 
        to $21.60 hour in 2009 from about $14/hour in 2001. In order to 
        afford a 2 bedroom rental home, a family would need an annual 
        income of more than $45,000, more than the median wage of 
        nearly half the occupations in Connecticut. \1\
---------------------------------------------------------------------------
     \1\ Housing wage information on all States and additional data on 
the low income housing market is available at www.nlihc.org, National 
Low Income Housing Coalition. Other resources for information on 
housing that prevents and ends homelessness and meets the needs of 
people with disabilities: www.csh.org, Corporation for Supportive 
Housing; www.naeh.org, National Alliance to End Homelessness; and 
www.tacinc.org, Technical Assistance Collaborative.

    The percentage of Connecticut homes valued under $200,000 
        shrunk from more than 65 percent of the total in 2000 to less 
        than 20 percent in 2008. Even if they could muster the down 
        payment and receive a tax credit, low-income households have 
        few opportunities to become homeowners in Connecticut due to 
---------------------------------------------------------------------------
        very high housing prices and limited supply.

    Across the country, the same story has played out. The National Low 
Income Housing Coalition has culled information from the American 
Community Survey showing that some renters in every income category are 
paying more than 30 percent of their income for housing. These data 
demonstrate that as income decreases, the number of renters paying more 
than 30 percent of their income for housing dramatically increases, 
with 86 percent of renters earning less than $20,000 a year paying over 
30 percent for housing. In other words, the poorer you are--and recent 
reports indicate that throughout the country household incomes are 
declining--the greater your challenges in finding a home you can 
afford.
    The Americans living in poverty and facing growing rent burdens in 
rural, suburban, and urban communities include people with 
disabilities, veterans, the elderly, families with young children. 
People with disabilities who rely on Social Security Income as their 
sole source of income continue to be our Nation's poorest citizens.

    The monthly Federal Social Security Income payment in 2008 
        was $637 per month. About half of the States provide a modest 
        supplement to this income. In Connecticut, the supplement is 
        $168 per month, bringing the SSI income up to just $805 a 
        month.

    In our State, 34,289 nonelderly adults with disabilities 
        would need 116 percent of their income to rent a one-bedroom 
        apartment, according to ``Priced Out in 2008,'' a report by the 
        Technical Assistance Collaborative.

    Many of those with low incomes are also at an increased risk of 
experiencing homelessness, particularly during these difficult economic 
times. The need for affordable and supportive rental housing to prevent 
and end homelessness is critical. Connecticut's 2009 Point in Time 
Count of homelessness conducted 8 months ago challenges some 
traditional assumptions about homelessness. The one day snapshot of 
people who are living outdoors or in emergency shelters demonstrated a 
shift: homelessness is growing at a faster rate in suburban and rural 
towns than in our urban centers--a finding consistent with national 
studies. Findings from the Connecticut 2009 Point in Time Count also 
show:

    4,154 people were homeless; 801 of those people were 
        children.

    32 percent of families were working at the time of the 
        count and 78 percent said they had income from some source.

    60 percent of adults in homeless families had a 12th grade 
        education or higher.

    57 percent of adults in families reported no history of 
        hospitalizations for mental illness or drug/alcohol abuse. Yet, 
        43 percent of Connecticut families had to leave their last 
        place of residence due to problems with rent or eviction.

    The number of individuals who are homeless over the course 
        of a year in Connecticut is estimated at over 30,000.

    Has the current housing crisis increased the availability of rental 
housing for low-income households? Quite simply, that is not the case. 
The loss of regular income experienced by millions of Americans--
whether through unemployment, reduction in work/benefits, or crises 
related to mortgage/foreclosure problems--pushes more lower incomes 
households to look for affordable rentals. This pressure on the low-
income rental market, in turn, drives up rents for these homes.
    The market for rental housing for low-income households is not the 
same as the market for those who have higher incomes and an increased 
ability to pay more for housing. Although recent reports indicate that 
rental prices may be declining in some markets, these reports are 
coming primarily from large rental buildings that generally rent to 
higher-income segments of the market.
    There also appears to be a recent influx of troubled properties 
into the rental market as individual owners try to rent properties that 
they can no longer afford themselves. However, these owners are likely 
to sell once market conditions turn favorable, adding to instability in 
the rental market. These properties generally have high maintenance 
costs, making rents high or making the properties vulnerable to neglect 
and eventual abandonment if the owners are unable to make enough on 
rent to cover their costs.
    Another problem that exacerbates the low-income rental market is 
the loss of nearly 200,000 public housing units over the past decade, 
according to the Center for Budget and Policy Priorities. Additional 
private sector units were also lost due to poor condition, condo 
conversions and sales, and demolitions.
    Our communities stand at risk to lose thousands of rental housing 
units over the coming decade if we don't act to preserve the units that 
currently are home to low-income households. The homes in need of 
preservation are falling into disrepair, becoming obsolete or need to 
be recapitalized to extend the affordability. Connecticut faces a huge 
challenge in preserving our State housing portfolio--over 17,000 units 
of housing inhabited by low-income elderly and families. Preservation 
of this housing and other affordable Government assisted housing is 
drawing heavily on our State's allocation of Low Income Housing Tax 
Credits, our tax exempt bond cap and the very limited State capital 
subsidy programs, making it virtually impossible to develop more than 
150-200 units of net, new rental housing each year that is dedicated to 
low income households in Connecticut.
Benefits of Low Income Rental Market Working
    Health, education and employment outcomes for individuals with 
disabilities and families with children are vastly improved when rental 
housing is affordable and safe for low income people.

    Our aging rental housing stock in the Northeast often has 
        problems with environmental hazards, including lead, asbestos, 
        mold, and dust mites. These factors have sparked significant 
        increases of asthma in urban schools, the leading cause of 
        absenteeism and diagnoses in school-based health clinics 
        according to CT's Department of Education.

    The rate of school stability--students finishing the year 
        in the same school they started in--is 95 percent in 
        Connecticut's affluent school districts, but only 77 percent in 
        its 6 poorest districts. Children who move in midschool year 
        are more likely to underperform, have learning disabilities and 
        exhibit violent behavior. Most (58 percent) cases of mobility--
        moving from one school to another--are the result of 
        residential moves, often because of affordability or housing 
        quality issues.

    Stable housing reduces public health costs. Connecticut's 
        supportive housing Demonstration Program developed mixed income 
        housing for 282 formerly homeless people in nine different 
        locations in the 1990s. The tenants who have psychiatric 
        disabilities and/or addictions experienced a 72 percent 
        reduction in in-patient Medicaid costs according to a 2002 
        study published by the Corporation for Supportive Housing. 
        Connecticut has produced nearly 4,400 units of permanent 
        supportive housing, using Federal, State, and philanthropic 
        resources; housing that has helped people get back to work and 
        school and restored property values in communities that 
        benefited from the housing investment.

    In Connecticut and in every State, we need Congress to respond 
affirmatively to the low income housing market; States and communities 
across the country look to the Federal Administration and Congress to 
offer leadership on a rational housing policy that assures all 
Americans have opportunity for a home they can afford.
    Thank you for the leadership you have provided--this spring passing 
legislation that protects renters in foreclosure, and through ARRA 
establishing a homeless prevention and rapid rehousing program and the 
tax credit assistance program and tax credit exchange program to keep 
the Low Income Housing Tax Credit program moving. These steps are very 
important. Let me suggest in closing a few additional immediate actions 
you could take to further bolster the low income housing rental market 
and our economy--to assure the American dream of a safe, affordable 
home for all.
A Few Modest Solutions for the Low Income Rental Housing Market
  1.  Fully renew all Section 8 tenant and rental assistance in order 
        to prevent homelessness and assure stability for people who 
        currently have housing choice vouchers.

  2.  Fund 200,000 new housing choice vouchers a year for 10 years--
        begin immediately to ramp up new tenant based and project based 
        vouchers over a 10 year period to create long term 
        affordability/stability and mixed income communities.

  3.  Enact SEVRA--Section 8 Voucher Reform Act that improves the 
        ability to project base vouchers, streamlines the program and 
        improves the funding formula.

  4.  Fund the National Housing Trust Fund--capitalize at $1 billion 
        immediately; Senator Jack Reed's bill SB1731 offers a viable 
        option to assure that this program which has wide bipartisan 
        support could be operational in 2010. Find a permanent source 
        of funds to increase annual support of the National Housing 
        Trust Fund to $15 billion a year, This new program would 
        require 90 percent of the funds to be used for production and 
        preservation of multifamily rental housing, all serving very 
        low income households, with an emphasis on serving extremely 
        low income households.

  5.  Enact SB 1481, The Frank Melville Supportive Housing Investment 
        Act--which modernizes the Section 811, Housing for Persons with 
        Disabilities and creates a demonstration program with project-
        based rental assistance.

  6.  Advance the Livable Communities Act--an initiative that 
        recognizes and encourages effective community development 
        planning and practice that includes affordable housing, based 
        on the local housing market needs and plans. Incentives and 
        project based vouchers could insure that low income households 
        would have housing opportunities through this initiative.
                                 ______
                                 
                  PREPARED STATEMENT OF RONALD PHIPPS
         First Vice President, National Association of Realtors
                            October 20, 2009
Introduction
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
on behalf of more than 1.2 million REALTORS' who are 
involved in residential and commercial real estate as brokers, sales 
people, property managers, appraisers, counselors, and others engaged 
in all aspects of the real estate industry thank you for inviting me to 
testify today regarding the current state of the Nation's housing 
market.
    My name is Ron Phipps. I am a 3rd generation member of a 4 
generation family tradition in the Rhode Island residential real estate 
industry. My passion is making the dream of home ownership available to 
all American families. As direct result of my passion, I have become 
very active within the National Association of Realtors' 
(NAR); holding significant positions at both the State and national 
levels. Since 2000, I have been President of the Rhode Island 
Association, an NAR Regional Vice President, and a member of the NAR 
Executive Committee. Most recently, I was elected NAR First Vice 
President for 2009.
Current Housing Trends
    A review of the latest data strongly suggests that the homebuyer 
tax credit has had its intended impact of significantly stimulating 
home sales. From about 4.5 million annualized home sales pace in the 
few months prior to the stimulus, sales have jumped to 5.1 million in 
recent months. That is a change of 600,000 additional existing home 
sales. New home sales have risen from mid 300,000 to low 400,000 over 
the similar period. The rise in sales has been concentrated in the 
lower-priced homes largely because first-time buyers are looking to 
stay, rightly, well within their budget.
    Housing inventories, while still higher than a desired level, have 
been trimmed. The latest 8-month supply of existing-home inventory is 
much better than the double-digit figures of last year. Home values 
have likewise moved in an ``improving'' direction. Broadly speaking, 
they are down from 1 year ago, but the declines have been less steep in 
recent months compared to the prestimulus times. The median existing 
home price as of August was down 12.5 percent compared to a nearly 20 
percent decline early in the year. In short, sales have risen and home 
prices are on the verge of stabilizing.
Housing's Impact on the Economy
    At a cost of about $10 billion, should the first-time homebuyer tax 
credit be extended through the middle of next year, the housing market 
will likely have recovered nicely with the broader economy on track for 
a solid robust expansion. The $10 billion price tag is rather modest 
compared to the $700 billion in TARP funding and $800 billion of the 
broader economic stimulus package that was passed early in the year. 
Moreover, the $10 billion cost is a static measure that does not take 
into account job creation and increased tax revenue from rising 
economic activity. Actually, if all of the economic dynamic responses 
are taken into consideration, the home buyer tax credit can be argued 
as a net positive revenue generator for the Federal Government.
    As an example, Arun Raha, the chief economist for the State of 
Washington, is quoted in the Seattle Times as indicating that,

        The tax credit has prompted 7,000 purchases by first-time 
        homebuyers [in the State of Washington]--purchases that 
        otherwise would not have occurred. Every 1,000 home sales 
        generate $112.4 million of economic activity with $71.9 million 
        of it directly from home-sale preparation and the actual real 
        estate transaction. In addition, more than 700 new jobs are 
        created. This is not a balance-sheet bailout, it's real help 
        for our neighbors and communities. One reason for the tangible 
        success and economic impact of the tax credit is that it 
        focuses on first-time buyers, whose purchases spark a surge of 
        home buying that ripples across the economy and into the 
        future. Most of their purchases are homes that someone else has 
        been waiting to sell so that they, in turn, can purchase 
        another house. The Washington Center for Real Estate Research 
        at Washington State University estimates that 65 percent of 
        those who sell their home to first-time buyers subsequently buy 
        another house in the State. The people from whom they bought 
        their home also purchase a new residence, and so on.

    There is nothing like economic growth to dent budget deficits. If 
the economy was already at full capacity, the housing stimulus would 
simply be moving dollars from one sector of the economy to another. But 
as is fully visible out on the street, we are nowhere near full 
capacity. Factory capacity utilization was 69.6 percent in August, 
compared to an 80 percent rate that should be the case in normal 
economic times. On the job market front, the country is facing a 
double-digit unemployment rate rather than the healthy 5 or 6 percent 
unemployment rate. Therefore, there is a plenty of room for growth and 
a win-win situation for the housing market and other sectors of the 
economy.
Outlook
    Despite these vast potential benefits to the economy from extending 
the homebuyer tax credit, valid questions should nonetheless be asked. 
Is there any pent-up demand remaining? Will the tax credit just go to 
the people who would have bought a home anyway and thereby will simply 
pocket the $8,000 check? Well, a compelling case for tapping the 
financially healthy renter population follows.
    In 2000, before the housing market boom, there were 11.5 million 
renter households who had the necessary income to buy a median priced 
home at prevailing market conditions. Today, the pool of renters who 
can buy a median priced home is over 16 million. Just nudging even a 
small share--say 5 percent--of these financially healthy renters into 
buying via a tax credit check will mean 800,000 additional home sales. 
That number is sufficiently meaningful to get the inventory down to the 
level of home value stabilization. The housing market will then be on 
the path to a self-sustaining recovery.
    The key to any future sustainable economic recovery lies in home 
values stabilizing or, better yet, a return to a historical home price 
appreciation rate of 3 to 5 percent each year.
    The bubble prices crash landed, but all the excesses have already 
been removed. In fact, one could legitimately argue that home values 
have overshot downward. Price-to-income ratio is now below the 
historical average, and the monthly mortgage payment for a middle 
income person buying a middle priced home is well below its historical 
norm.
Housing Challenges
    Although the future of the housing market looks bright, that future 
is extremely tenuous as a number of obstacles must be cleared to ensure 
a successful recovery. NAR believes that Congress and housing industry 
participants must adequately address jumbo mortgages, commercial 
mortgages, HVCC, the modernization of FHA, short sales, and the 
unwinding of the Federal Reserve's MBS program to guarantee a smooth 
economic recovery.
Jumbo Mortgage Issues
    For residential borrowers seeking to purchase or refinance homes 
that are above the existing GSE loan limits, the lack of Government 
participation has caused a situation similar to that faced by 
commercial mortgage market participants. A severely reduced amount of 
private capital in the jumbo market space has constricted the 
consumer's ability to get an affordable loan, if funding is available 
at all. For homeowners needing to refinance to a more reasonable 
mortgage product, the lack of liquidity is all but forcing many 
homeowners into foreclosure or short sale, which continues to place 
severe downward pressure on housing and the economy.
Commercial Mortgage Issues
    Currently, banks and the CMBS market represent 75 percent of all 
outstanding commercial real estate loans. However, banks have tightened 
their credit standards and moved to reduce commercial real estate 
exposure, while the CMBS market has ceased to function--all of which 
points to systemic dysfunction. Hundreds of billions of dollars of 
commercial real estate loans from a variety of sources are expected to 
mature this year and over $1 trillion in the next few years. However, 
under current conditions, there is insufficient credit capacity to 
refinance this wave of loan maturities. With no liquidity, commercial 
borrowers face a growing challenge of refinancing maturing debt and the 
threat of rising delinquencies and foreclosures. Without the presence 
of a GSE to support liquidity and provide capital, the current crisis 
facing the commercial credit markets is even more profound.
Home Valuation Code of Conduct (HVCC)
    The Home Valuation Code of Conduct (HVCC) has been in effect for 
over 5 months and REALTORS' report many adverse, unintended 
consequences since its implementation. According to a July 2009 survey 
of REALTORS', 76 percent of respondents said the length of 
time to obtain a completed appraisal report increased after May 1, 
2009. More than one third of REALTORS' have lost at least 
one sale because of a delay in the appraisal process. At the same time, 
respondents who identified themselves as appraisers said their time 
frame to submit an appraisal reports decreased and half of these 
respondents say this impacts the quality of the appraisal report. 
Finally, consumers are paying more for delayed appraisal reports that 
may have quality issues.
The Need for FHA Modernization
    NAR does support some additional changes for FHA to ensure its 
continued strength and availability to homeowners.
    Technology and Staffing--NAR strongly supports increased funding 
for FHA to upgrade their technology. FHA operates with technology that 
is an average of 18 years old. Quickly upgrading the dozens of 
incompatible systems, such as the 30-year-old COBOL system, to Web-
based customer centric applications is necessary for the agency's 
continued existence and future success. Legislation has recently passed 
the House, H.R. 3146, the 21st Century FHA Housing Act of 2009, which 
would provide this authorization. This bill, introduced by 
Representatives Adler (D-NJ) and Lee (R-NY), will provide a number of 
reforms to modernize FHA. We also understand funding has been included 
in the Appropriations bill for HUD, and we urge that funding to be 
included in the final version of the FY2010 Appropriation for HUD.
    We also believe HUD should have the ability to hire the 
professional staff they need to run what is now such a large and 
critical component of our housing finance system. H.R. 3146 provides 
HUD flexibility to hire appropriate staff using the compensation 
guidelines of similar agencies, such as the Federal Housing Finance 
Agency or the Federal Deposit Insurance Corporation. The legislation 
would also permit the hiring of expert consultants to work on specific 
program areas within FHA's operations. We think these changes are 
necessary to ensure the FHA is able to work efficiently and effectively 
with qualified, experienced staff.
Uniform Short Sales Policies
    The number of short sales are increasing due to the current 
economic crisis. Since a short sale generally costs the lender less 
than a foreclosure, it can be a viable way for a lender to minimize its 
losses. A short sale can also be the best option for homeowners who are 
``upside down'' on mortgages because a short sale may not hurt their 
credit history as much as a foreclosure. As a result, homeowners may 
qualify for another mortgage sooner once they get back on their feet 
financially.
    However, too often, a short sale is a story of delay, unrealistic 
expectations of the value of the home, lost documents, full voicemail 
boxes, and insufficient or untrained staff. NAR has been working with 
lenders and servicers to try and ease the closing of short sales. As 
you may be aware, the vast majority of short sales never close--even 
after the offer has been accepted. On May 14, 2009, the Administration 
announced incentives and uniform procedures for short sales under a new 
Foreclosure Alternative Program. These guidelines and forms are in the 
process of being completed, and are expected to be released later this 
month. NAR was extremely pleased that the Administration heard the 
concerns of our members that short sales reform is crucial to helping 
families, who are unable to keep their homes, nevertheless avoid 
foreclosure.
    The new program offers the hope of uniformity, transparency, and 
speed. But those goals will only be achieved if a large majority of 
servicers agree to participate and if they apply it uniformly to all 
eligible families. Completed short sales are not only good for the 
seller and the buyer, but saves the lender tens of thousands of dollars 
and benefits the community by keeping the home occupied and maintained. 
REALTORS' anxiously await implementation of the program and 
continue to report, every day, problems getting short sales to closing 
resulting in unnecessary foreclosures.
Unwinding of the Federal Reserve MBS Program
    NAR believes that the manner in which the Federal Reserve unwinds 
the MBS program is critical to the housing and mortgage industries and 
to the economy as a whole. It will take considerable planning and 
effort to ensure that phasing out of this program does not lead to a 
significant spike in interest rates, disruptions to the flow of 
mortgage capital, and a halt to the fledgling recovery in the housing 
industry.
    To ensure a smooth transition, NAR recommends the following steps:

    The Fed, Treasury, FHFA, and the GSEs should document that 
        recently issued MBSs under the program are performing well and 
        disseminate this information widely and publicly, in order to 
        instill confidence among investors.

    The Fed, Treasury, FHFA, and the GSEs should work with 
        banks and others in the financial industry to bring private 
        investment back into the MBS market.

    The FHFA and/or the Treasury should signal that new agency 
        MBS are, at least in effect, backed by the United States 
        Government.

    If private investment does not return to the market in 
        sufficient amounts to replace the current rate of Fed MBS 
        investment, the Fed should increase the dollar size of the 
        program and extend its term beyond the end of the first quarter 
        of 2010.
Recommendations To Enhance Recovery and Spur Growth
    REALTORS' believe that in order for the U.S. housing 
market and economy to thrive, the housing market requires strong 
consumer demand and the secondary mortgage market must be safe, sound 
and contain dependable participants in are economic situations, good or 
bad. NAR suggests that the following suggestions regarding the first-
time homebuyer tax credit, the FHA/GSE loan limits, and ``Principles 
for Ensuring a Robust Financing Environment for Home Ownership'' be 
considered as legislation is entertained to further stimulate and 
sustain the housing market.
Extend the 1st Time Homebuyer Tax Credit
    The $8,000 first-time homebuyer tax credit expires as of December 
1, 2009. But the usefulness of the credit diminishes daily if the 
credit is not extended well before that date. A homebuyer is eligible 
for the tax credit only if the home is ``purchased'' before December 1, 
2009. That means that buyers have to find a house, complete a contract, 
satisfy any contingencies, secure financing, and go to closing by 
November 30. Accomplishing those tasks by November 30 will become more 
difficult with every passing day. In today's market, it generally takes 
between 45 and 60 days to go from contract to closing. Without 
Congressional action now, the market may freeze again--possibly as soon 
as this month. NAR's research suggests that as many as 350,000 sales 
this year can be directly attributed to the availability of the credit. 
The tax credit stimulated market activity. The volume of housing sales 
has improved steadily every month since the credit was enacted. The 
credit pulled people from the sidelines and created some momentum that 
had been absent.
    The housing market remains fragile. The market has improved and 
prices have stabilized in many areas, but the market has not fully 
corrected. Retaining the tax credit sustains that recovery. Inventory 
may remain unusually high. The waves of foreclosures attributable to 
subprime and other improper lending practices are working themselves 
through the system. Presently, high unemployment rates pose a threat to 
homeowners and could set another round of foreclosures in motion. If 
foreclosure rates were to spike again, inventories could become bloated 
again. Incentives are still needed to keep the market moving.
    Home sales continue to stimulate economic activity. The economy 
will never fully recover until housing markets fully recover. Thus, the 
stimulus the credit provides is still needed. NAR estimates that every 
sale generates approximately $60,000 of additional economic activity. 
And expanding the credit beyond first-time homebuyers would give the 
economy a much needed kick. We continue to need the homebuyer credit. 
Congress must act now to be sure that the credit is available through 
2010.
FHA/GSE Mortgage Loan Limits
    NAR strongly supports making permanent the GSE and FHA mortgage 
loan limits that are currently in effect. The GSEs and FHA have played 
a critical role in providing mortgage liquidity as private financing 
has dried up. The current loan limits are set to expire in just a few 
months, on December 31, 2009. Last year, when the limits temporarily 
expired, many communities saw dramatic declines in mortgage liquidity. 
More than 612 counties in 40 States and the District of Columbia saw 
their limits fall. The average decline in the loan limits was more than 
$51,000.
    In today's real estate market, lowering the loan limits further 
restricts liquidity and makes mortgages more expensive for households 
nationwide. FHA and GSE mortgages together continue to constitute the 
vast majority of home financing availability today, which makes it 
particularly critical to extend the current limits. Without the 
additional liquidity created by maintaining these loan limits at 
current levels, families will have to pay more to purchase homes, face 
the possibility that they will not be able to obtain financing at any 
price or find it more difficult or impossible to refinance problematic 
loans into safer, more affordable mortgages.
Principles for Ensuring a Robust Financing Environment for Home 
        Ownership
    NAR believes that these principles, which require a continuing role 
for the Federal Government in the mortgage market, should be used in 
the development of a model for secondary mortgage market going forward, 
in order to encourage a safe and sustainable housing market. According 
to the principles, the secondary mortgage market model must:

  1.  Ensure an active secondary mortgage market by facilitating the 
        flow of capital into the mortgage market, in all market 
        conditions;

  2.  Seek to ensure affordable mortgage rates for qualified borrowers;

  3.  Establish reasonable affordable housing goals so all qualified 
        borrowers, including low- and moderate-income households, have 
        an opportunity to realize the dream of home ownership. 
        Affordable housing goals should not provide incentives for the 
        institution that are inconsistent with sustainable home 
        ownership;

  4.  Require the institution to pass on the advantage of its lower 
        borrowing costs (and other costs of raising capital) by making 
        mortgages with lower rates and fees available to qualified 
        borrowers;

  5.  Ensure mortgage availability throughout the Nation. NAR supports 
        indexing conforming loan limits based on increases in median 
        sales prices, including higher indexed limits for areas with 
        high housing costs;

  6.  Require sound underwriting standards;

  7.  Require the highest standards of transparency and soundness with 
        respect to disclosure and structuring of mortgage related 
        securities;

  8.  Ensure there is sufficient capital to support mortgage lending in 
        all types of markets; and,

  9.  Provide for rigorous oversight.

    These principles espouse two major themes. First, the housing 
market must work in all markets, and at all times, no matter the 
existing economic condition. As we have mentioned in previous 
testimonies before Congressional Committees, the housing market has 
brought us out of nearly all of the major economic downturns, and will 
continue to do so if we as a Nation protect the housing mission or the 
GSEs. Pure privatizing of the GSEs without any level of Government 
support, which would incent them to act as current private investors 
and flee the market during an economic downturn, would create a major 
draft on future housing and U.S. economic recoveries.
    Second, mortgage capital needs to be available to ALL potential, 
qualified housing consumers. NAR is not advocating going back to the 
excesses that we saw during the housing boom, where everyone, 
practically regardless of their ability to repay the loan, could get a 
mortgage. On the contrary, the housing goals that the Government 
imposed on the GSES, when they were reasonable, fostered opportunity 
for many creditworthy consumers who were in the lower portion of the 
income spectrum to pursue and obtain the dream of home ownership. 
Removing the Government's involvement in the secondary mortgage market 
will offer no incentive for market participants to reach out to lower 
income, creditworthy consumers which will ultimately deprive them of 
their ability to own a home, and build wealth that future generations 
can use to move up the economic ladder.
Retain Strength of FHA
    With the collapse of the private mortgage market, the importance of 
the Federal Housing Administration has never been more apparent. As 
liquidity has dried up and underwriting standards have been squeezed 
tight, FHA is one of the primary sources of mortgage financing 
available to families today. Without FHA, families would be unable to 
purchase homes and communities would suffer from continued foreclosure 
and blight. On September 30, the Federal Reserve published its draft 
explanation of the 2008 Home Mortgage Disclosure Act (HMDA) data. That 
report shows the critical role FHA is playing in the market. According 
to the Federal Reserve, by the end of 2008, nearly one half of home 
purchase loans and one quarter of refinancing loans were backed by 
either FHA or the VA. In addition, minority borrowers rely heavily on 
FHA. According to the Federal Reserve, ``In 2008, more than 60 percent 
of home purchase loans and almost 40 percent of refinance loans to 
blacks were from either the FHA or VA. For Hispanic-white borrowers, 
nearly 50 percent of their 2008 home-purchase loans and 21 percent of 
their refinance loans were from the FHA or VA.''
    FHA has announced that their 2009 audit will demonstrate that their 
capital reserve fund has fallen below the Congressionally mandated 2 
percent ratio. The reason the capital reserves have fallen below 2 
percent actually has nothing to do with FHA's current business 
activities. It simply is a reflection of falling housing values in 
their portfolio. FHA actual total reserves are higher than they have 
ever been--with combined assets of $30.4 billion. The audit is also 
expected to confirm that FHA has ``positive'' reserves--meaning they 
have adequate resources to cover all claims and expenses from their 
portfolio. In addition, the audit will show that if FHA makes no 
changes to the way they do business today, the reserves will go back 
above 2 percent in the next several years. It is important to note that 
there has not been a significant increase in defaults on the part of 
borrowers, or underwriting problems on behalf of FHA and its lenders. 
Instead, the decrease in the capital reserve account is a direct effect 
of the state of our economy and our housing markets.
    Given the devastating impact home price declines have had on banks, 
lenders, and even the Government sponsored enterprises (GSEs) Freddie 
Mac and Fannie Mae, FHA has performed remarkably through this crisis. 
Why? FHA has never strayed from the sound underwriting and appropriate 
appraisals that have traditionally backed up their loans. FHA meets it 
mission of serving low and moderate income homebuyers, but has never 
resorted to abusive loans, improper or nonexistent underwriting, or 
other bad practices. As a participant in the home mortgage process, FHA 
cannot be immune to the pitfalls of the housing crisis. But solid 
policies and practices have protected it from the biggest failures.
    Today, FHA borrowers have never been stronger. The Federal Reserve 
report shows that FHA is not the new subprime lender--its FICO scores 
have increased, and its LTVs decreased. The average credit score for 
FHA's current customer has grown to 693, and only 7.5 percent of their 
purchase borrowers this year had FICO scores below 620. Borrowers have 
more equity, as the percentage of FHA's Loan-to-Value (LTV) ratios 
above 95 percent fell from 72 percent in 2007 to 62 percent in 2008. 
FHA's cash reserves are strong, and sufficient to pay claims. We 
believe FHA is taking the necessary steps to assure it remains a 
critical source of mortgage insurance for America's homebuyers at all 
times--good and bad.
Conclusion
    The National Association of REALTORS' sees a bright 
future for the housing market and the overall economy. However, our 
members are well aware that the future we see rests on the industry's 
ability to successfully navigate some very serious issues. Congress and 
the housing industry must maintain a positive, aggressive, forward 
looking partnership if WE are to ensure that a housing and national 
economic recovery are sustained.
    I thank you for this opportunity to present our view of the state 
of the Nation's housing market. As always, The National Association of 
REALTORS' is at the call of Congress, and our industry 
partners, to help facilitate a sustainable housing and national 
economic recovery.
                                 ______
                                 
                PREPARED STATEMENT OF EMILE J. BRINKMANN
 Chief Economist and Senior Vice President for Research and Economics, 
                      Mortgage Bankers Association
                            October 20, 2009
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for the opportunity to testify on the state of the Nation's 
housing market. I am Emile J. Brinkmann, Chief Economist and Senior 
Vice President for Research and Economics for the Mortgage Bankers 
Association (MBA). \1\
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     \1\ The Mortgage Bankers Association (MBA) is the national 
association representing the real estate finance industry, an industry 
that employs more than 280,000 people in virtually every community in 
the country. Headquartered in Washington, DC, the association works to 
ensure the continued strength of the Nation's residential and 
commercial real estate markets; to expand home ownership and extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. Its membership of over 2,400 
companies includes all elements of real estate finance: mortgage 
companies, mortgage brokers, commercial banks, thrifts, Wall Street 
conduits, life insurance companies and others in the mortgage lending 
field. For additional information, visit MBA's Web site: 
www.mortgagebankers.org.
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    Whenever I am asked about the state of the mortgage and housing 
market, I explain that the economy and the housing market are 
inextricably linked. The state of the overall economy and the number of 
people receiving paychecks will drive the demand for houses and 
apartments. The recovery of the housing market will be the result of a 
larger economic recovery, not a driver of that recovery, but there are 
a number of policy initiatives that can assist in improving the housing 
market which I will discuss in my testimony.
    What is different about this recession, compared to others for 
which we have data, is the higher rates of delinquencies and 
foreclosures for the levels of unemployment we are experiencing, 
particularly in certain States.
    Why is that? Perhaps the most important reason is that we entered 
this recession with an already weakened housing market. In past 
recessions, it was the loss of jobs and the paychecks needed to make 
mortgage or rental payments that weakened the housing market. In this 
recession, the housing market was already weak before the recession 
even started.
    The use of loan products like pay option adjustable rate mortgages 
(ARMs) and stated income loans by borrowers for whom these loan 
products were not designed, together with rampant fraud by some 
borrowers buying multiple properties and speculating on continued price 
increases, led to very high levels of construction to meet demand that 
turned out to be unsustainable. When changes in the market caused 
demand for homes to suddenly shrink, a large number of houses were 
stranded without potential buyers. The resulting imbalance in supply 
and demand drove prices down, particularly in the most overbuilt 
markets like California, Florida, Arizona, and Nevada--markets that had 
previously seen some of the Nation's largest price increases.
    The problem is that when the recession hit and people began to lose 
their jobs, the equity in their properties may already have been wiped 
out. In past recessions, they may have been able to sell their home and 
recover some of their equity, but in markets where we have seen 
sizeable price drops, that is no longer an option.
    Here are a few numbers to illustrate the point. A year ago, 
subprime ARM loans accounted for 36 percent of foreclosures started, 
the largest share of any loan type despite being only 6 percent of the 
loans outstanding. As of June 30, 2009, prime fixed-rate loans 
represented the largest share of foreclosures initiated. Perhaps more 
significantly, almost 40 percent of those prime fixed-rate foreclosures 
are in the States of California, Florida, Arizona, and Nevada. Due to 
the imbalance between supply and demand in those States, prices have 
dropped so far that any life event that would normally lead simply to a 
delinquency--like the loss of a job or a divorce--is now also leading 
to a foreclosure.
    The national quarterly foreclosure rate reported by the MBA for the 
second quarter of this year was 1.36 percent. However, in the four 
States I mentioned, it was 2.34 percent, roughly 10 times the rate we 
saw in those States during the boom years. Without those four States, 
the national foreclosure rate would be about 1.04 percent, roughly 
double the rate we saw for the rest of the country during the boom 
years.
    Exacerbating the problem of the oversupply of homes is the 
potential shadow inventory from mortgages that are either in 
foreclosure or that may enter foreclosure and ``pent up'' supply, i.e., 
households the have been unable to sell due to the frozen housing 
markets. The current supply of previously owned and new homes on the 
market is roughly 3.9 million. The number of loans 90 days or more past 
due nationwide is also about 3.9 million. Some of these mortgages will 
be successfully modified or otherwise become current, but some of these 
problem loans will result in additional homes being put on the market. 
Freddie Mac, for example, estimates that 36 percent of its mortgages 
that are at least 90 days past due or in foreclosure are already 
vacant. There is no borrower living in the house to whom a modification 
plan can be offered. In Florida, 56 percent of this category of 
properties is vacant. In Nevada it is 45 percent, in Ohio 46 percent, 
and in Texas 44 percent.
    When you see numbers of this magnitude, it is clear that recovery 
in the housing market will occur when the number of jobs in the economy 
begins to expand, thus creating the economic demand needed to absorb 
some of this excess inventory. Only then will we see an expansion in 
the number of households sufficient to fill the many vacant homes and 
apartments now available. Unfortunately, MBA's projection, and the 
projections of many other economic forecasters, is that unemployment 
will continue to get worse throughout the middle of next year before it 
slowly begins to improve. The lags between the recovery of the economy 
and the recovery in employment have grown longer and longer over the 
past several recessions and we expect this recession to continue this 
trend.
    One problem for the housing market, however, is that there is no 
guarantee that when the jobs come back, they will come back where the 
excess single-family and rental housing units are located. For example, 
employment in Michigan has still not recovered from the 2001 recession. 
There may well be some areas of the country that stay mired in a 
housing recession for several years after the rest of the Nation 
recovers.
    In addition, it is important to note that the mortgage lenders 
doing business today are the ones who did not make the riskiest loans 
and who had the greatest control over their underwriting standards. 
These surviving lenders are, by the mere fact that they are still here, 
the most conservative and the least likely to become very expansionist 
with their lending policies. These lenders largely did the right thing 
and were often criticized by shareholders and others for losing market 
share during the middle of this decade because they did not rush into 
the riskiest forms of lending. Now they are bearing the brunt of bad 
publicity and strict supervisory actions from Federal agencies such as 
the Federal Reserve and the Department of Housing and Urban Development 
(HUD) and a patchwork of inconsistent State regulations that are the 
result of the behaviors of their now-defunct competitors. The effect of 
the regulations and the negative publicity will likely make these 
institutions even more conservative in their policies.
    Another series of challenges facing the mortgage and housing 
industries in both the immediate and long term stem from the 
Government's actions to provide stability to the financial markets. 
Perhaps the most immediate challenge is what will happen to interest 
rates when the Federal Reserve terminates, in March 2010, its program 
for purchasing Fannie Mae and Freddie Mac mortgage-backed securities 
(MBS). The Federal Reserve has purchased the vast majority of MBS 
issued by these two companies this year. The benefit has been that 
mortgage rates have been held lower than what they would have been 
without the purchase program, but there is growing concern over where 
rates may go once the Federal Reserve stops buying and what this will 
mean for consumers. While the most benign estimates are for increases 
in the range of 20 to 30 basis points, some estimates of the potential 
increase in rates are several times those amounts.
    We believe the termination of the program was extended to March in 
order to provide the Obama administration some cushion for announcing 
its recommendations for the future of the Government sponsored 
enterprises (GSEs), Fannie Mae and Freddie Mac, which are expected to 
be included in February's budget announcement. We hope the 
Administration will address some of the ambiguity in the degree of 
Federal support for the long-term securities issued by Fannie and 
Freddie--ambiguity that partially caused credit spreads to increase 
significantly earlier this year and led to the initiation of the Fed's 
MBS purchase program.
    In addition to whatever additional interim measures are announced 
for Fannie Mae and Freddie Mac, the Administration and Congress will 
need to address the long-term structure of the secondary market. The 
Federal Government has played a key role in providing stability to the 
secondary market since the creation of Fannie Mae in the 1930s. 
However, the current housing crisis has tested the Government's role 
and led to calls for a fundamental rethinking of how the Government 
plays its part.
    In the fall of 2008, MBA established the Council on Ensuring 
Mortgage Liquidity to provide information and insights to this 
rethinking. The council's mission has been to look beyond the current 
crisis, to what a functioning secondary mortgage market should like for 
the long term. After nearly a year of discussions and deliberations 
that resulted in a set of key considerations and principles for 
ensuring mortgage liquidity, the council formulated a suggested new 
framework (attached) for the Government's involvement in the secondary 
market, with a particular focus on the roles currently played by Fannie 
Mae and Freddie Mac.
    MBA's plan envisions a system composed of private, nongovernment 
credit guarantor entities that would insure mortgage loans against 
default and securitize those mortgages for sale to investors. These 
entities would be well-capitalized and regulated, and would be 
restricted to insuring only a core set of the safest types of 
mortgages. The resulting securities would, in turn, have the benefit of 
a Federal wrap that would allow them to trade similar to the way Ginnie 
Mae securities trade today. The Federal wrap would not be free. The 
entities would pay a risk-based fee for the wrap, with the fees 
building up an insurance fund that would operate similar to the bank 
deposit insurance fund, and would be subject to tight regulation. The 
advantage to this system is that any credit losses would be borne first 
by private equity and any risk-sharing arrangements put in place with 
lenders and private mortgage insurance companies. In the event one of 
these entities failed, the insurance fund would cover the losses. Only 
if the insurance fund were exhausted, would the Government need to 
intervene.
    While not the only potential framework, the council's 
recommendations represent a clear, concise and workable approach to 
ensuring liquidity to the mortgage market. The proposed framework 
carefully balances the Government's involvement with the need to 
protect taxpayers from credit and interest rate risks associated with 
mortgage finance. We believe this proposal represents an important 
improvement over the present structure in a number of areas and we are 
eager to discuss it further with the Members of this Committee.
MBA Policy Recommendations
    As Congress continues to examine ways to stabilize the economy, MBA 
has endorsed a series of near term measures to enhance liquidity, 
assist homebuyers and improve the overall functioning of the housing 
market.
Market View on Loan Limits
    When the housing finance system collapsed nearly 2 years ago, 
private investors fled the secondary market, leaving Fannie Mae, 
Freddie Mac, and the Federal Housing Administration (FHA) as the only 
significant sources of liquidity. However, these entities are 
restricted from purchasing loans above a statutory limit. For the GSEs, 
this limit is known as the conforming loan limit. The temporary 
increase in the FHA and conforming loan limits under the Economic 
Stimulus Act of 2008 and the continued temporary extension for high-
cost areas under the American Recovery and Reinvestment Act of 2009 
clearly had a positive impact on the mortgage market by increasing 
liquidity for and lowering the interest rates of loans that were 
previously beyond the GSEs' and FHA's reach.
    Due to the temporary nature of the higher loan limits, which are 
scheduled to expire on December 31, 2009, the investment community will 
not purchase bundles of loans if they include more than ten percent of 
loans over $417,000. Because many lenders report their volume of high 
loan balance transactions exceed this ten percent threshold, they are 
being forced to resort to costlier alternatives to the securitization 
market.
    Due to the pending loan limit expiration, MBA members are already 
seeing the investment community pull away from certain transactions. 
MBA believes it is critical for the GSEs and FHA to provide support for 
the broadest possible spectrum of home prices in all areas during these 
challenging times. By permanently increasing the FHA and conforming 
loan limits to $625,500, and up to $729,500 in high-cost areas, the 
investment community will be provided the necessary certainty to remain 
in the market, and American consumers will continue to have access to 
affordable mortgage credit.
    MBA would also like to highlight the importance of FHA's 
multifamily programs in today's housing market. During the current 
market downturn, affordable rental housing has become a more urgent 
need for families and elderly individuals who either cannot afford to 
buy or who chose to rent. While FHA's multifamily loan limits are 
sufficiently high in most markets, in some areas of the country they 
are severely restricting the ability to use FHA insurance programs to 
finance rental housing. MBA encourages Congress to consider increasing 
the loan limits for elevator buildings and provide the HUD Secretary 
with additional discretion in extremely high-cost areas (similar to 
that provided in Alaska and Hawaii today).
Homebuyer Tax Credit
    The Internal Revenue Service (IRS) recently reported that more than 
1.4 million taxpayers have benefited from the first-time homebuyer tax 
credit enacted by Congress as part of the Housing and Economic Recovery 
Act of 2008. \2\ MBA has supported the homebuyer tax credit since it 
first passed Congress and recognizes that we have an excessive 
inventory of available homes in many parts of the country. As I noted 
earlier, demand is simply not keeping up with the current oversupply. 
MBA supports tax initiatives that would encourage home purchase 
activity.
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     \2\ http://www.irs.gov/newsroom/article/0,,id=213375,00.html.
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    Specifically, MBA recommends the following changes to the current 
tax credit:

    Extend eligibility to all primary residence homebuyers.

    Increase the tax credit to up to 10 percent of the home 
        purchase price up to a maximum of $15,000.

    Require the tax credit to be repaid in certain instances--
        The borrower should repay the tax credit if the residence is 
        sold within 3 years (with an exception for employment-related 
        moves) or in the event of a taxpayer default on any other 
        mortgage that existed at the date the tax credit is claimed. 
        This would serve to discourage ``buy and bail'' behavior, where 
        a borrower uses the tax credit for his or her advantage and 
        then walks away from an existing mortgage obligation.

    Allow taxpayers to claim and receive the tax credit 
        immediately, and facilitate the IRS sending funds claimed by 
        the taxpayer directly to the settlement agent for use in the 
        purchase mortgage transaction.

    Any enhancements to the program should be effective on the 
        date of enactment.
Warehouse Lending Capacity Issues
    Warehouse lending is a critical conduit that brings the funds from 
the secondary market to the closing table. In past years, independent, 
nondepository mortgage bankers that rely on warehouse lines to fund 
loans sold to Fannie Mae, Freddie Mac, and Ginnie Mae were responsible 
for upwards of 40 percent of all residential mortgages originated in 
the United States and originated nearly 55 percent of all FHA loans.
    Over the last 18 months, warehouse lending has been reduced as some 
warehouse lenders were bought or went out of business and others 
terminated or added restrictions to their warehouse lines of credit. 
Recently, new entrants to the warehouse lending business and a new 
Freddie Mac warehouse lending pilot program have helped ease the credit 
crisis for a small number of the largest independent mortgage bankers. 
However, for the small to midsized mortgage banker, the unavailability 
of credit is still an issue.
    These small businesses have been faithfully serving their 
communities for decades and provide unparalleled customer service. MBA 
urges you to continue to support all independent mortgage bankers, and 
the mortgage industry at-large, by encouraging the Department of the 
Treasury, Fannie Mae, Freddie Mac, and Ginnie Mae to support 
initiatives that help restore the flow of mortgage credit through 
warehouse lines of credit.
Commercial Market Concerns
    For much of the year, the commercial mortgage-backed securities 
(CMBS) market has been virtually frozen, and we expect to see continued 
challenges in the commercial area. In June 2009, the Federal Reserve 
expanded the term asset-backed securities loan facility (TALF) to 
include legacy and recently issued CMBS. The market reacted positively, 
as spreads for highly rated CMBS began to narrow. Unfortunately, the 
challenges facing the commercial real estate finance market will extend 
past the current TALF expiration dates for legacy CMBS (March 31, 2010) 
and newly issues CMBS (June 20, 2010).
    In order to provide certainty to all market participants, MBA 
recommends that Congress encourage the Treasury Department and the 
Federal Reserve to extend the program to December 31, 2011. This 
extension period will allow market participants to include 
consideration of the TALF CMBS program in their short-term and midterm 
finance strategies. This 2-year timeframe will end rampant speculation 
and market disruption when extensions are announced several weeks or 
months before a program is set to expire. With a typical CMBS taking 4 
to 6 months from the start of the loan aggregation process until the 
CMBS is issued, providing a 2-year window will allow for an orderly 
CMBS aggregation and execution process and a bridge for new private 
sector lending structures to emerge.
Conclusion
    While our economy is showing signs of recovery, and a number of 
local housing markets appear to be reaching the bottom, our long term 
recovery will be dependent on the creation of jobs. As we begin to see 
new employment opportunities, consumer confidence and spending will 
also return, and a new wave of homebuyers will begin to absorb the 
oversupply of homes. MBA looks forward to continuing to work with the 
Committee as it examines additional policy initiatives to help 
stabilize our economy and improve our Nation's housing market.
Attachment
MBA's Recommendations for the Future Government Role in the Core 
Secondary Mortgage Market



                   PREPARED STATEMENT OF DAVID CROWE
         Chief Economist, National Association of Home Builders
                            October 20, 2009
    The National Association of Home Builders (NAHB) appreciates the 
opportunity to submit this statement to the Senate Committee on 
Banking, Housing, and Urban Affairs on the current state of the 
Nation's housing market, prospects for the future and what else can be 
done by the Federal Government to address these challenges.
Downturn in the Housing Market and Overall Economy
    Leading into this year, the markets for new and existing homes were 
in a state of free fall. Between January of 2006 and January of 2009, 
sales of existing homes fell by one-third, from 6.72 million (at 
seasonally adjusted annual rate) to 4.49 million. Over the same period, 
total housing starts fell 79 percent, from 2.27 million (seasonally 
adjusted annual rate) to 488,000. The decline was even more precipitous 
for single family housing starts, which fell by more than 80 percent, 
from a peak of 1.82 million at the start of 2006 down to 357,000 in the 
first 2 months of 2009. The inventory of new unsold homes on the market 
increased to a record high of more than 12 months supply.
    Meanwhile, the repeat home sales index published by the Federal 
Housing Finance Agency showed house prices declining every quarter 
since the beginning of 2008. One positive impact of the decline in 
house prices is that is has, in combination with historically low 
interest rates on fixed rate mortgages, improved housing affordability 
for many Americans--especially for first-time home buyers who do not 
suffer a loss in equity from selling a previously owned residence. 
NAHB's Housing Opportunity Index (HOI), which measures the share of 
homes sold that a median-income family can afford, increased to over 72 
percent in the first two quarters of 2009. This marks the first time 
the national HOI has been over 70 percent since NAHB began reporting 
the index in 1992.
    However, this improvement in affordability has not translated into 
housing sales and starts as strongly as it would have in the past. At 
present, in order to obtain a mortgage, buyers need exceptionally good 
credit and access to timely and accurate appraisals, which are often 
not available. These factors reduce the pool of eligible buyers well 
below the level we would otherwise expect.
    In addition to problems in the housing market, by the start of 2009 
the overall U.S. economy was in a state of recession. Real GDP 
contracted at a rate of over 6 percent in the first quarter, one of the 
worst performances in the entire post-war period. Labor markets 
softened, and the unemployment rate rose above 9 percent. The decline 
in the housing market and the overall economy were related, as the drop 
in single family construction alone resulted in more than 3 million 
lost jobs in construction and the related industries supplying 
materials and services to home builders and buyers.
Positive Impacts of the First-Time Homebuyer Tax Credit
    The American Recovery and Reinvestment Act (ARRA) improved upon the 
homebuyer tax incentive enacted in 2008 by establishing an up to $8,000 
refundable tax credit for first-time buyers of a principal residence in 
2009. The law defines a first-time home buyer as a buyer who has not 
held an ownership stake in a principal residence in the 3 years prior 
to the sale. To claim the tax credit, the taxpayer must complete the 
sale of the home before December 1, 2009. The credit is subject to an 
income phase-out that begins at $75,000 modified adjusted gross income 
for single taxpayers and $150,000 for married taxpayers. Partial 
credits are available for some taxpayers with incomes above those 
amounts.
    Overall, there is strong evidence that the Federal first-time home 
buyer credit is working to stabilize housing markets in the United 
States. Since the credit has been in effect, existing home sales, which 
were in sharp decline, have stabilized and started to edge up 
gradually, from a low of 4.49 million to 5.10 million in August. 
Similarly, housing starts stabilized and started to edge up from a low 
point of 479,000 to 587,000 in that same month. Single family starts, 
in particular, improved steadily, from the low point of 357,000 in 
January and February up to 494,000 by July of this year. Incomes of 
buyers who can claim the Federal credit are limited, and sales of new 
homes have increased most in the affordable range--homes priced under 
$200,000.
    NAHB estimates conservatively that approximately 200,000 additional 
home sales are attributable to the tax credit. Of these, 121,000 are 
first-time buyers induced to buy homes because the credit makes the 
purchase more affordable. As well, 71,000 of these additional home 
sales are a ripple effect of repeat buyers who were able to sell their 
existing homes because of the credit. NAHB further estimates that the 
increase in sales stimulated by the credit has resulted in the 
absorption of about 50,000 vacant and rental units. Recent data from 
the National Association of Realtors indicates that 40 to 50 percent of 
recent home sales are due to first-time buyers, and this increase in 
demand is in part responsible for recent declines in housing 
inventories.
    The modest improvement in new home construction has not produced an 
inventory of unsalable homes, as the inventory of new homes on the 
market has continued to decline from a peak of 572,000 in July 2006 
down to 261,000 in August of 2009--the lowest this measure has been 
since 1992. The decline has reduced the month's supply of unsold homes, 
but not as dramatically because sales continue at a very slow pace. The 
NAHB Housing Market Index (HMI) languished at a single digit rate for 5 
straight months from late 2008 through the first quarter 2009, but has 
improved steadily since then, up to 19 in September. Although still 
very low by historical standards (and values less than 50 indicate 
negative conditions), this is the highest the HMI has been since the 
middle of 2008.
A Fragile and Uncertain Recovery in Housing
    These recent positive prospects notwithstanding, a number of 
housing-specific headwinds will continue to buffet any significant 
housing recovery:

    A large inventory of vacant homes and apartments on the 
        market.

    A pipeline of foreclosures feeding the inventory.

    Continuous downward price pressures from too much supply 
        and not enough demand.

    Tight mortgage underwriting and low appraisals making it 
        difficult for a willing buyer to complete the sale.

    Extremely difficult financing terms and availability for 
        builder Acquisition Development & Construction (AD&C) loans.

    After several months of gradual improvement, the rate of single-
family production declined in August, from 494,000 down to 479,000, 
suggesting that upward momentum is being lost as builders anticipate 
the depressing effect that expiration of the home buyer tax credit may 
have on demand. NAHB survey data also indicate a loss of momentum that 
underscores the fragile nature of the recovery in the housing sector. 
The NAHB HMI for October 2009 has fallen from 19 to 18, the first 
decline in the index following 5 months of increases, due in part to 
the tax credit program. In particular, all the components of the index 
(present sales, expected sales over 6 months, and prospective buyer 
traffic) fell in October.
    Indeed, there continue to be reasons why prospective home buyers 
are reluctant to purchase a home. In a September 2009 NAHB survey, 81 
percent of home builders reported prospective buyers holding back 
because they cannot sell their existing homes at favorable prices. As 
well, 73 percent reported prospective buyers waiting on a purchase 
because they think their employment/economic situations are 
deteriorating.
    Since September 2008, the Nation has lost a total of 5.8 million 
jobs, including 443,000 residential construction jobs. The national 
unemployment rate for September was 9.8 percent--up from 9.7 percent in 
August. The construction unemployment rate increased in September, 
jumping to 17.1 percent from 16.5 percent the month before. It is worth 
noting that the construction sector has registered the highest 
unemployment rate among the major sectors of the economy, with durable 
goods manufacturing registering the next highest unemployment rate at 
13.1 percent. While it is normal for employment to lag the rest of the 
economy, job growth could prove to be sluggish in this recovery, 
putting a drag on the general economy and the housing sector, in 
particular.
    With respect to overall consumer confidence, the University of 
Michigan's consumer sentiment index rose to 73.5 in September from 65.7 
in August, while the Conference Board's Confidence Index slipped from 
54.5 in August to 53.1 in September. On housing in particular, 
consumers' views of the marketplace held steady in the Michigan survey, 
but there was, consistent with NAHB builder survey data, declines in 
the Conference Board's assessment of consumer plans to buy a house over 
the next 6 months.
    And despite the positive impacts of the $8,000 tax credit, NAHB 
survey data of home builders reveal that only 27 percent of builders 
recorded any new home sales to a move-up buyer who was able to sell 
their existing home to a first-time homebuyer tax credit qualified 
buyer. Only 2 percent of builders indicated that half of their single-
family sales were to such move-up buyers. This seems to suggest a great 
value in expanding the tax credit to all buyers of principal 
residences.
    These survey data are consistent with Census New Home Sales data, 
which indicate limited positive impacts of the tax credit for homes 
priced $300,000 or less (typical markets for first-time homebuyers), 
but continued weakness in sales of homes priced higher than $300,000. 
In whole, these data indicate a languishing market for the move-up 
buyer sector.
    And, as discussed in more detail below, NAHB survey data indicate 
difficulty in financing development. More than 70 percent of surveyed 
builders reported worse conditions for obtaining new loans for the 
purposes of land acquisition and development or multifamily 
construction (rental and owner-occupied), while nearly 60 percent 
reported worse conditions for single-family construction loan 
availability.
    Moreover, despite the modest improvements in some measures, 
production of new housing remains far below sustainable levels. NAHB is 
forecasting 568,000 in 2009 and 716,000 in 2010. Given the size of the 
U.S. population and projections the forecast for household formations, 
the long-run sustainable rate of production should be between 1.8 
million and 1.9 million per year.
    The considerable gap between the amount of housing being produced 
and the amount needed, coupled with signs that the small amount of 
upward momentum in housing markets is being lost, indicates that buyers 
are now especially in need of a stimulus to help them overcome the 
obstacles of a tight credit market and problem appraisals, and keep 
production on the track toward a long-run sustainable path.
The Economic Benefits of Extending and Expanding the Homebuyer Tax 
        Credit
    As the deadline for the homebuyer tax credit program approaches, 
NAHB supports extending and enhancing this important housing demand 
stimulus program. In particular, NAHB recommends extending the sunset 
date until December 1, 2010, and expanding the eligible buyer 
definition to include all purchasers of a principal residence.
    We estimate that these enhancements would increase home purchases 
by 383,000 in the next year; increase housing starts by 82,000; create 
more than 347,000 jobs; generate $16.1 billion in wages and salaries; 
$12.1 billion in business income and tax income of $8.4 billion for the 
Federal Government; and $3.2 billion for State and local governments.
    The increased home purchase generated by these enhancements will 
help soak up the excess supply and push house prices back in a positive 
direction. The economic stimulus created by established households 
moving into new homes and the added construction necessary to answer 
demand where there is no excess supply generates jobs, wages, salaries, 
business income, and tax revenues. As well, these economic impact 
estimates do not include the larger macroeconomic benefits that would 
result from the stabilization of housing prices and the housing market 
in general.
Other Housing Finance Challenges
    In addition to the approaching expiration of the first-time 
homebuyer tax credit, there are other challenges that prevent the 
housing sector from contributing to a vigorous economic recovery.
AD&C Lending
    As noted earlier, another persistent problem in the home building 
industry that is blunting the recovery of the housing market is the 
availability of credit for Acquisition, Development and Construction 
(AD&C) loans. Banks are increasingly refusing to extend new AD&C credit 
or to modify outstanding AD&C loans in order to provide builders more 
time to complete their projects and pay off these loans. Often this is 
being forced by examiners demanding that banks shrink their AD&C loan 
portfolios.
    On outstanding loans, examiners are requiring banks to obtain new 
appraisals on properties for fully performing loans, which can result 
in the banks having to downgrade those loans, turning them into 
troubled ``nonperforming performing loans.'' Once a loan is classified 
as such, the institution must hold more capital against the loan. As a 
result, an increasing number of builders are being required to put up 
additional equity or collateral due to reappraisal of collateral or 
revaluation of their loan. Since most home building companies are small 
businesses and do not have the capacity to meet significant equity 
calls, the result is often foreclosure on a loan that had been 
performing.
    NAHB is proposing that members of Congress urge the Federal banking 
regulators to put a halt to these shortsighted practices that are 
adversely affecting the financial condition of the banking industry as 
well as having devastating impacts on home building companies. Instead, 
financial institutions should be encouraged to fund viable new projects 
and to take steps to avoid foreclosure on AD&C loans by accommodating 
loan modifications and workouts. This would provide relief for a major 
sector of the economy that has suffered because of regulatory excess 
and the inability of banks to provide the necessary funding and 
flexibility that would otherwise keep loans performing as scheduled.
    Banks that have received funds from the Troubled Asset Relief 
Program (TARP) should be required to account for how these funds are 
being used in financing and/or working out loans on acquisition, 
development and construction (AD&C) projects. In many instances, banks 
that have received TARP funds are letting projects fail rather than 
pursuing workouts with the original developer and builders. This 
questionable action, which imposes serious hardship on home builders, 
often putting them out of business, should not be condoned or 
subsidized by the Federal Government.
    Congress should direct the banking regulators to require banks that 
have received TARP funds to account for how these funds are being used 
in lending on new projects. Further, they must demonstrate how the 
institution is working out the restructuring of existing loans and 
providing more flexible terms to facilitate continued funding and 
eventual repayment of performing AD&C loans.
Real Estate Appraisals
    There are increasing complaints of real estate appraisers using 
foreclosure or other distressed sales as comparables in determining 
values of single family homes without properly adjusting the comparable 
property values to reflect the relative condition of the properties. If 
foreclosed and/or distressed property sales are used as comparables, 
appropriate adjustments must be made to reflect the condition of such 
properties as compared to the subject property. Improper or 
insufficient adjustments to the comparable values of foreclosed and/or 
distressed homes results in the undervaluation of new sales 
transactions. Such practices contribute to a continuing downward spiral 
in home prices and forestall economic recovery.
    Often, properties that have been subject to foreclosure or 
distressed sales have issues relating to deferred maintenance or 
internal damage that an external inspection simply cannot reveal. A 
prospective purchaser would most assuredly recognize the differences in 
the value proposition between a well-kept home and a distressed 
property that is damaged or not properly maintained and the same should 
be true of an appraiser.
    NAHB believes the Federal agencies and organizations that establish 
appraisal requirements for home mortgages should immediately issue and 
enforce guidance requiring appraisers to obtain sufficient information 
and make appropriate adjustments in the prices of comparable sales 
(``comps'') in order to bring those comps to the level that represents 
a reasonable alternative to the home they are appraising.
    Further, NAHB recommends the establishment of a required appeals 
process for Fannie Mae, Freddie Mac, and the Federal Housing 
Administration similar to that used for appeals of appraisals that are 
performed with the Department of Veterans Affairs (VA) Loan Guaranty 
Program. The VA instituted a policy in 2003 to reduce the number of 
requests for reconsideration of property values by facilitating 
improved communication between appraisers and lenders before appraisal 
assignments are completed.
    Appraisal problems have been exacerbated due to unintended 
consequences that resulted from the implementation of the Home 
Valuation Code of Conduct (HVCC) earlier this year. The HVCC was put in 
place by Fannie Mae and Freddie Mac, as the result of a settlement with 
New York State Attorney General Andrew Cuomo, to insulate appraisers 
from inappropriate influence from parties at interest in a home sales 
transaction.
    NAHB strongly supports the intent of the Home Valuation Code of 
Conduct and we are not among the groups calling for a repeal or 
suspension of the HVCC. However, NAHB also strongly believes that 
additional clarifications and implementation reforms are needed in 
order for the HVCC to work effectively without causing serious market 
disruptions. NAHB recently convened an Appraisal Summit involving 
representatives of major housing and financial institution 
stakeholders, appraisal organizations, and Federal housing and banking 
regulators to discuss appraisal problems and solutions. There was 
strong sentiment at the Summit that clearer information on what the 
HVCC allows, requires and prohibits should be widely disseminated. 
There also were calls for reforms to establish a system where 
participants can be confident that appraisers have the training and 
experience needed to make valuations in complex markets and that 
appraisers are required (and are given enough time) to collect the 
information needed to make the appropriate adjustments to distressed 
sales used as comparables. NAHB urges members of Congress to reinforce 
the need for such changes.
Conclusion
    NAHB appreciates the opportunity to share our views on the current 
state of the Nation's housing markets and policy options to enable an 
effective and viable long-term renewal of this critical sector of the 
economy. There are significant challenges to overcome, but they are not 
insurmountable. We are ready to work with the Committee and the 
Congress to meet these challenges and ensure sustainable economic 
recovery.
         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                       FROM SHAUN DONOVAN

Q.1. What factors have contributed to the delay in launching 
the foreclosure alternatives program?

A.1. The Administration implemented and published guidance on 
the Home Affordable Foreclosure Alternatives program (HAFA) as 
quickly as possible given the complexities surrounding the 
program.

Q.2. When will the program be launched, and what systems will 
be put in place to ensure that homeowners who meet the 
program's criteria can get assistance as quickly as possible?

A.2. On November 30, 2009, the Administration published 
Supplemental Directive 09-09 to provide guidance to servicers 
for adoption and implementation HAFA. In short, borrowers who 
meet the eligibility criteria for HAMP but do not successfully 
complete a Trial Period Plan, or default on a HAMP modification 
are eligible for relocation assistance of $1,500 and servicers 
will receive a $1,000 incentive for completing a short sale or 
deed-in-lieu.
    The effective date for the Supplemental Directive is April 
5, 2010. However, servicers are permitted to implement HAFA 
prior to that date provided they are able to collect and report 
all information required. Homeowners can participate in HAFA 
provided that their Short Sales Agreement or Deed-in-Lieu (DIL) 
agreement is fully executed and received by the servicer by 
December 31, 2012.
    By establishing standard timeframes, documents, processes 
and deadlines to be used between a borrower, servicer and 
purchaser in these transactions, HAFA will make these 
transactions more transparent and accessible to borrowers as an 
alternative to foreclosure. The standardized and streamlined 
process will help to facilitate clear communication between the 
parties to the listing and sale transaction.

Q.3. What specific changes, if any, have been made to the 
program since it was first announced in May? To the extent that 
changes have been made, what were the criteria for the changes 
and how will they speed short sales?

A.3. One important change involves the time period servicers 
will allow borrowers to market and sell the property. The 
initial announcement provided borrowers with at least 90 days 
with the possibility of more time based on local market 
conditions. The Supplemental Directive gives borrowers at least 
120 days to sell that home unless the servicer extends the 
agreement. The extended time should increase the chances that 
the borrower may be able to sell the home.
    Another important change involves the incentive payment 
structure. Under the Supplemental Directive, first lien 
investors will be paid up to $1,000 for allowing a total of up 
to $3,000 in short sale proceeds to be distributed to 
subordinate lien holders (on a one-for-three matching basis) 
who release their lien. In the initial May announcement, it was 
intended that Treasury would share the cost of paying junior 
lien holders to release their claims on a one-for-two basis. 
Treasury would match $1 for every $2 paid by the investors, up 
to a total contribution of $1,000 by Treasury.

Q.4. What minimum performance timeframes do you anticipate 
participating servicers will be required to meet in responding 
to homeowner requests for short sales?

A.4. Under the Supplemental Directive, servicers must consider 
all HAMP eligible borrowers for HAFA in accordance with their 
policies within 30 days of the date the borrower: does not 
qualify for HAMP, does not successfully complete a HAMP trial 
modification period, is delinquent on a HAMP modification by 
missing at least two payments, or requests a short sale or 
Deed-in-Lieu (DIL). Servicers must contact borrower in writing 
of the availability of the short sale and DIL option and allow 
borrowers 14 days to notify the servicer and request 
consideration under HAFA. Moreover, within 10 days of receipt 
of the Request for Approval of a Short Sale (RASS) and all 
required attachments, the servicer must indicate its approval 
or disapproval of the proposed sale by signing the appropriate 
section and mailing it to the borrower.

Q.5. How many homeowners does HUD estimate will benefit from 
the program once it is launched, and how was this estimate 
determined?

A.5. This data is currently not available. We will to get the 
estimate to you as soon as possible. We do have estimates for 
FHA foreclosure alternative program participation. FHA 
borrowers who are not served by HAFA will benefit from FHAs 
preforeclosure sale and deed-in lieu programs. Based on 
straight line projections of Q1data, in FY2010, approximately 
12,400 borrowers will benefit from the agency's preforeclosure 
sale and deed-in-lieu programs.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHUMER
                       FROM SHAUN DONOVAN

Q.1. The current state of the housing market sheds light on the 
increasing need for accessible and decent rental housing stock. 
What actions is HUD taking place to ensure that multifamily 
housing units are available nationwide. How do you address 
regional disparities and diversity in the housing market?

A.1. HUD is aware that in this fragile economy, the need for 
affordable rental housing is acute. Our programs of rental 
assistance, public housing, project-based rental assistance, 
Section 202/811, and others address these needs within our 
budgetary constraints. HUD makes a concerted effort to ensure 
distribution or resources relative to need in a number of ways. 
For example, Section 8 voucher payments are based on Fair 
Market Rents, that take into consideration some of the 
variation in costs in different regions.
    HUD has programs to provide mortgage insurance to provide 
credit enhancement to finance the construction or substantial 
rehabilitation of apartment projects, as well as a program to 
insure mortgages for the purchase or refinancing of existing 
projects. There were 510 Firm Commitments issued in FY2009 for 
68,778 units of apartment housing, totaling approximately 4.24 
billion dollars. This is an increase of 10 percent over the 
previous year in terms of units, and almost 50 percent by 
dollar volume.
    Most of our programs limit the mortgage by statutory limits 
that are updated annually. The Department publishes high cost 
factors to account for regional disparities and diversity in 
the housing market.

Q.2. According to HUD's most recent data, how many multifamily 
properties located in high cost housing markets are currently 
insured by FHA? If FHA mortgage loan limits are exceeded what 
is the estimated take up rate for these loans. By increasing 
the mortgage loan limit for this program, will it be easier for 
a development to receive a loan? Will this result in increased 
cost to taxpayers?

A.2. Of the 510 apartment projects insured by FHA in FY2009, 
approximately 95 (19 percent) were located in high cost housing 
markets. In cases where the FHA statutory limits are going to 
be exceeded based on the projected project cost, the lender 
will not even bother to submit an application. Therefore a 
``take-up rate'' cannot be determined. Increasing statutory 
limits will make it possible for some additional projects in 
high cost areas to obtain FHA-insured financing. It is 
important to note, that the FHA higher loan limits would only 
be a benefit in high cost and high rent areas. In some areas, 
even though costs are high, the rental income will not support 
a higher mortgage.

Q.3. There have been rising concerns regarding FHA due to an 
increasing assumption of risk in its single family portfolio. 
Does the single family portfolio delinquency rate act as an 
indicator for the delinquency rate of FHA's multifamily 
portfolio?

A.3. 60 day default rates for MF properties have been flat 
since April 2007, ranging from \1/2\ to 1 percent. The claims 
rate has ranged from 0.3 percent to 0.9 percent from FY2001-
2008, and has generally trended downward. Consequently, it does 
not appear that these factors from the single family portfolio 
can be relied upon as indicators for the multifamily portfolio. 
There is growing distress in multifamily and commercial real 
estate and this would be a better indicator of future problems 
for the FHA multifamily portfolio. FHA will not be immune to 
these challenges. However, the fact that FHA does only long-
term fixed rate financing should lessen the impact.

Q.4. How is FHA's single-family mortgage loan program different 
from FHA's multifamily loan program? What steps does FHA take 
to ensure that a loan for the multifamily loan program does not 
create risk for the taxpayer?

A.4. Virtually all single-family FHA mortgage lending is done 
through Direct Endorsement (DE), which enables an FHA-insured 
mortgage to be processed as rapidly as conventional mortgages. 
DE is not a separate program; rather, it is the mechanism that 
enables HUD/ FHA-approved lenders to consider single-family 
mortgage applications without first submitting paperwork to 
HUD. With DE, the lender actually closes the loan and then 
submits the loan package to HUD for insuring.
    The typical multifamily loan is processed under HUD's 
Multifamily Accelerated Processing (MAP) program. MAP-approved 
lenders perform all the underwriting including the procurement 
of third party reports such as the appraisal and environmental 
site assessment. They submit the package to HUD for review. If 
HUD is satisfied that the lender's underwriting meets the 
Department's requirements, a Firm Commitment is issued. The 
lender then prepares loan closing documents and submits them 
for review by HUD's local office counsel and technical staff.
    Multifamily Housing Development mitigates risk by 
monitoring MAP-approved lenders through its Lender Quality 
Management Division (LQMD). LQMD employs traveling field 
personnel who are experts in the fields of architectural/
engineering, appraisal and mortgage credit, who visit selected 
projects and lender's offices to ascertain the level of 
compliance with the Department's underwriting requirements. 
Various levels of sanctions, including loss of MAP-approved 
status, can be applied to lenders who are not meeting HUD's 
standards.

Q.5. FHA has helped stabilize the housing market since the 
1930s by insuring mortgages that meet certain criteria. 
However, this program has had limited success in promoting the 
construction of new rental housing units since the maximum loan 
size for this category is so small compared to the average 
construction costs in urban areas. In New York City, for 
example, the average construction costs for a high-rise 
building (defined as a building that is 16 stories or taller) 
is $419,000, or more than double the current FHA limit. This 
makes it harder to secure affordable financing for multifamily 
rental development and rehabilitation.
    Given that the housing market is currently experiencing 
difficulties with credit illiquidity and a lack of private 
financing for large housing developments, existing programs 
must serve the purpose for which they are intended. What 
additional measures can Congress take to assist HUD in 
providing multifamily loans that accurately address 
construction costs in high cost areas but do not add increased 
risk to taxpayer money?

A.5. There are several actions that Congress could take that 
might promote greater use of HUD programs in high cost areas:
    A. Congress could raise the statutory exceptions, currently 
at 170 percent for any geographic area, and 215 percent on a 
project-by-project basis for high cost areas.
    B. Congress could amend those sections of the National 
Housing Act that contain statutory limits per family unit by 
repealing the portions of those sections that refer to the 
statutory limits. The insurance fund is protected by the 
objective mortgage limitations of cost, value or debt service, 
although these criteria do not insure that FHA mortgage 
insurance exclusively promotes low and moderate income housing. 
FHA could then implement regulations that would prohibit 
amenities that were considered luxury and atypical for 
comparable affordable properties in the market place.
    Further analysis is needed with respect to the likely 
effectiveness and cost implications of these potential changes.

Q.6. How do construction costs compare for multifamily 
buildings that include elevator-like structures and multifamily 
buildings that do not? Should loan limits for the construction 
or rehabilitation of high-rise buildings with elevators reflect 
this discrepancy? If this is so, what is an accurate cost 
differential between multifamily buildings that include 
elevator-like structures and those buildings that do not?

A.6. Construction costs for elevator-type buildings, mostly 
steel or reinforced concrete frame buildings, are generally 
somewhat higher than an equally large walk-up wood frame 
building, but these buildings are also generally bigger and 
construction efficiencies create an economy of scale. FHA uses 
the Marshall & Swift Valuation Service cost estimating guide 
for calculation of the high cost percentage factors to be 
applied to the basic statutory family unit limits. These 
factors account for the differences in construction costs based 
on location. We have also studied the difference in 
construction costs (not including land acquisition) between 
steel/concrete, and wood frame construction using the Marshall 
and Swift online Commercial Estimator. Depending on quality of 
construction and building height, steel/concrete construction 
can be about 7 percent to 25 percent higher than wood frame. 
This is consistent with interviews conducted with field staff.
    One of the biggest differences is the cost of land in high 
cost areas that is not fully reflected in the calculation of 
the per-unit limits or the high cost percentage adjustments. 
Expensive high density zoned land is needed for elevator 
buildings. In addition there may be significant impact fees 
associated with the construction of large elevator projects.
    In general, we have found that the mortgages that we have 
insured on elevator buildings for the past 7 years run about 30 
percent per unit higher than on nonelevator projects. This is a 
useful statistic since the cost of land is included. However, 
it also assumes the statutory limits in effect at the time the 
project was mortgaged and projects that were too expensive to 
meet the statutory limits would not be included in the 
calculation; which suggests that the average differential 
between elevator and nonelevator buildings could potentially be 
higher than 30 percent per unit if the statutory limits did not 
exist. This is not consistent with the average differential in 
the currently published statutory limits which is about 9 
percent.
    Determining an accurate differential for Statutory Limits 
between elevator and nonelevator construction is hampered by 
the fact that Statutory Limits are based on unit type (i.e., 
one bedroom, two bedroom), while construction costs are 
estimated by structure size in square feet. Consequently, 
variations in unit mix can result in differences in a 
statutory-limited mortgage amount in buildings that are the 
exact same size.

Q.7. FHA-insured mortgage amount limits for buildings with 
elevator-type structures under the Section 220 program are 
useful tools for urban renewal and revitalization efforts. 
Because this program is typically utilized in high cost housing 
market(s) for the construction of mixed-use developments, do 
construction costs for these developments compare with other 
multifamily properties with elevator-type structures?

A.7. Should loan limits for the construction of developments 
under Section 220 reflect a discrepancy in cost? If this is so, 
what is an accurate cost differential between multifamily 
buildings with elevator type structures insured under Section 
220 versus multifamily buildings with elevator type structures 
that are not insured under the Section 220 program?
    There is no reason that a building for a Section 220 
project should cost more to build (exclusive of land) than a 
Section 221 project at the same location. Cost data on Section 
220 projects is limited since there have only been 10 projects 
insured in the past 5 years and not all of them were new 
construction. However, due to their mostly urban locations 
Section 220 projects may require expensive high density zoned 
land which is why the current statutory limits are slightly 
higher for Section 220 than for Section 221(d)(4).
    An accurate cost differential between elevator and 
nonelevator projects for Section 220 would need to be the same 
as for any other program.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                       FROM SHAUN DONOVAN

Q.1. Secretary Donovan, following up on our conversation 
regarding the Home Valuation Code of Conduct (HVCC), it is my 
understanding that FHA's clarifying appraisal requirements from 
September 18, 2009, will go into effect on January 1, 2010. 
Specifically, it states, ``FHA does not require the use of 
Appraisal Management Companies or other third party providers, 
but does require that lenders take responsibility to assure 
appraiser independence.'' While I appreciate attempts you have 
made to tone down the impact of the HVCC, it is my 
understanding that there is still a very large segment of the 
market--all GSE backed loans--that were not covered by FHA's 
announcement that is operating under an agreement between a 
State Attorney General and the two GSEs. Do you believe 
Congress should act to ensure full consideration is given to 
the HVCC's impacts and challenges?

A.1. FHA published Mortgagee Letter 2009-28, Appraiser 
Independence, to restate and expand FHA's existing policy and 
more closely align the language to that which became commonly 
used in the industry as a result of the Home Valuation Code of 
Conduct (HVCC). In areas in which FHA's existing policies 
regarding appraiser independence were consistent with the HVCC, 
FHA adopted language from the Code to ensure full alignment of 
FHA and GSE standards and prevent confusion in the marketplace. 
The HVCC became effective at a time of significant change in 
the housing market and mortgage lending practices. With so many 
changes in the residential marketplace, some specific to 
geographic areas, property types and selling practices (short 
sales and bankruptcies), coupled with the number of Federal 
recovery initiatives, it is very difficult to gauge the impact 
HVCC has had on the valuation of residential housing and if a 
quantifiable impact is due to HVCC or some other condition or 
event.
    However, we can be reasonably certain that the use of 
Appraisal Management Companies (AMC) increased as a result of 
HVCC. It is important to note that FHA has never prohibited the 
use of AMCs or other appraisal management services and believes 
that reputable, well run companies provide great benefit in 
supporting appraiser independence. Due to the growth in number 
and use of AMCs, many States are working independently to 
create and implement regulations and oversight requirements. 
Because many larger AMCs operate in multiple States, we believe 
there would be support within the industry to have one set of 
national requirements which could potentially lessen the burden 
of tracking and compliance with individual State requirements.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                       FROM SHAUN DONOVAN

Q.1. You have stated that homeowners may qualify for the Making 
Home Affordable Program in accordance with a number of 
eligibility criteria, including the value of the home, but that 
it is not clear to what extent MHA offers ``a viable mechanism 
for addressing'' this problem. Could you please explain why it 
is not clear whether MHA addresses extreme losses in value that 
owners of these homes have experienced?

A.1. This is still being assessed by the Government-wide Making 
Home Affordable Program group.

Q.2. You say that you cannot send HUD Foreclosure Rapid 
Response Teams to southeastern Virginia because clusters of 
impacted homes have not yet been identified (you have to wait 
for CPSC results, consult with HUD teams, etc.). I disagree. I 
have met with numerous constituents in southeastern Virginia 
facing foreclosure because of this drywall problem, and I think 
it could certainly qualify as an area worthy of a visit from 
HUD Rapid Response teams. Why do you have to wait before 
deciding whether to send the teams to areas that are facing 
foreclosure problems now?

A.2. After polling our largest servicers, who service over 75 
percent of the FHA loan portfolio, we have found two possibly 
impacted FHA-insured homes. We have informed our servicers of 
the information in HUD's Press Release 09-237, dated December 
22, 2009, and trained our call centers to be able to respond to 
any inquiries. For more information, servicers and homeowners 
can call HUD's National Servicing Center at 888-297-8685 for 
more information.

Q.3. You mention that the Community Development Block Grant 
program could be used to address problems caused by 
contaminated drywall. What could the money be used for--
mortgage modification? Replacement of contaminated drywall? 
What else? How can individual homeowners access CDBG funds?

A.3. On December 22, 2009, HUD issued Press Release 09-237, 
announcing that HUD's CDBG Program is another resource to help 
States and local communities address the rehabilitation 
expenses associated with problem drywall. Historically, CDBG 
has helped to support local efforts to rehabilitate homes 
through grants, loans, loan guarantees, and other means. In 
addition, CDBG may also support code enforcement, acquisition, 
clearance and remediation, and relocation activities.
    All CDBG-assisted activities must meet one of the program's 
three national objectives: Provide benefit to low- and 
moderate-income persons; Eliminate slums or blighting 
conditions; or address an immediate threat to the health or 
welfare of the community.
    The Consumer Product Safety Commission (CPSC) reports that 
more than 2,360 homeowners in 35 States and the District of 
Columbia (primarily in Florida, Louisiana, and Virginia) have 
filed complaints of possible drywall-related problems including 
damage to electrical wiring, plumbing, utilities, and a variety 
of health concerns. The drywall emits sulfur gases. One of 
these, hydrogen sulfide, which corrodes copper, was found at 
higher levels in homes with the drywall. Copper sulfide 
corrosion damage has been found on wiring, pipes, and household 
appliances in homes with the drywall. In addition, the Centers 
for Disease Control and Prevention (CDC) is examining possible 
health consequences related to this drywall.
    CPSC, in partnership with the CDC, the Environmental 
Protection Agency (EPA), U.S. Customs and Border Protection and 
HUD is coordinating the Federal Government's response into 
which particular drywall products pose a risk to human safety 
and health and structural integrity. All related reports and 
findings are available online at the CSPC Drywall Information 
Center (http://www.cpsc.gov/info/drywall/index.html).
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BENNETT
                       FROM SHAUN DONOVAN

Q.1. The decrease in the credit available for conventional low-
downpayment financing has led to a significant increase in FHA-
backed loans, especially for first-time, low-income and entry 
level homebuyers. Where it once insured only one in 50 loans, 
it now insures about one in four loans. However, when the new 
policy takes effect, FHA-backed loans will be limited to only 
30 percent of all condo loans within a property. What does FHA 
intend to accomplish with this limitation? Did FHA and HUD take 
into consideration the impact this will have on the housing 
market? Was the particular effect on low-income, first time 
homebuyers, and other entry level homeowners taken into 
consideration? Does FHA have any intent of monitoring the 
impact and consequences of this rule?
A.1. Since receipt of Chairman Dodd's inquiry of November 12, 
2009, the Department has issued two new Mortgagee Letters (ML), 
ML 2009-46 A and 2009-46 B. In ML 2009-46 B, the Department 
announced the new permanent baseline guidance for condominium 
project eligibility. This permanent guidance replaces the 
previously issued ML 2009-19 in its entirety.
    The temporary guidance issued in ML 2009-46 A waives five 
provisions of the permanent guidance and serves as a temporary 
directive to address current housing market conditions. This 
temporary guidance is effective for all case numbers assigned 
on or after December 7, 2009, through December 31, 2010. FHA 
recognized the concerns of various trade associations, lenders, 
and other interested parties in establishing the permanent and 
temporary policy guidance.
    One of the provisions provided for in the temporary 
guidance was an increase in the FHA Concentration percentage 
for ``new construction'' projects from 30 to 50 percent. In 
addition, FHA increased the concentration in ``established'' 
condominium units to 100 percent due to the ability to 
understand marketability of the project and performance of the 
HOA budgets. In its considerations for issuance of the new 
policy guidance, FHA carefully analyzed the impact that this 
would have on the housing market. While FHA recognizes its 
responsibility to ensure the availability of affordable, 
sustainable housing opportunities, it must also balance its 
fiduciary responsibility to protect the insurance fund. In 
fact, FHA's requirements are more lenient than those of Fannie 
Mae, Freddie Mac, and the Veteran's Administration. FHA will 
monitor the performance of condominium loans, including the 
impact of the 50 percent concentration requirement.
Q.2. FHA's proposed rule will limit the volume of FHA-insured 
loans in an approved project. Currently, the condo market 
attracts individuals and families who are first-time 
homebuyers, moving from renter to homeowner status. However, 
FHA has also altered the approval process to require that at 
least 50 percent of all units be owner-occupied. During our 
current economic situation, where FHA insures over 25 percent 
of loans, this additional restriction is expected to freeze the 
sale of condos across the country. What motivated FHA to place 
this restriction on condos? Was the increased impact on first-
time, low-income and entry-level owners considered? And does 
FHA have any intent of monitoring the impact and consequences 
of this rule?
A.2. The proposed rule is actually a decrease in the existing 
required owner occupancy percentage from 51 percent to 50 
percent. Additionally, FHA issued temporary guidance (ML 09-
46A) that excludes both vacant and tenant occupied REOs from 
owner occupancy calculations. This guidance was in response to 
the current elevated number of REOs in the marketplace, FHA's 
temporarily elevated share of the mortgage market, and in 
recognition of FHA's responsibility to assist with neighborhood 
stabilization by providing housing opportunities. FHA 
incorporated the concerns of various trade associations, 
lenders, and other interested parties in establishing the 
permanent and temporary policy guidance. FHA recognizes its 
responsibility to ensure the availability of affordable, 
sustainable housing opportunities, and must also balance its 
fiduciary responsibility to protect the insurance fund. In 
fact, FHA's requirements are more lenient than those of Fannie 
Mae and Freddie Mac.FHA will monitor the performance of 
condominium loans, including the impact of the permanent and 
temporary guidance.
Q.3. It appears that the scheduled changes have been made in 
response to increased in defaults that have hit some markets 
particularly hard. However, the Utah, and specifically in Salt 
Lake, my constituents' feel that other methods could have been 
selected to resolve the problems without such anticipated 
negative effects. What reasoning led to the selection of these 
specific factors for change? Were less Draconian changes to 
underwriting guidelines considered? Were changes based on 
default rates in different metropolitan statistical areas 
considered as a method of more carefully applying the more 
stringent standards?
A.3. FHA developed the guidance after significant on-going 
discussions with various trade associations, lenders and other 
interested parties. Given the current market conditions, 
contraction of available credit and the fact that many of the 
newly constructed condominium projects have significant numbers 
of unsold units, FHA, as an insurance agency, has a fiduciary 
responsibility to protect the insurance fund. The requirements 
established will assist in ensuring that purchasers have 
affordable and sustainable home ownership opportunities. FHA 
determined that the guidance issued is flexible, yet allows for 
mitigation and management of the associated risks. FHA cannot 
be the sole insurer in a project and take on all the associated 
risk--as previously stated, the new requirements are more 
lenient than those of Fannie Mae, Freddie Mac and the VA.
Q.4. The release of the Mortgage Letter 2009-19 was not well-
received by most of my constituents and many have complained to 
me that the new regulations don't take into consideration the 
different markets across the country, don't appear to have the 
best interests of potential homebuyers, builders, lenders of 
other involved in the condo market at heart, and the also feel 
the regulations are being thrust upon them with little or no 
time for public comment. Many of my constituents feel that 
these rules were thrown together, with little insight or 
consideration of the likely negative consequences. What public 
input was considered? What responders led the changes, both in 
terms of implementation date and the loosening of some of the 
restrictions? At this point, does it appear that further 
loosening of the regulations may come in response to public 
opinion?
A.4. The FHA held conference calls and meetings with 
representatives from the major trade associations (Mortgage 
Bankers Association, National Association of Realtors, and 
National Association of Home Builders) and their members 
communicated that these combined changes limited opportunities 
for buyers to obtain financing, impede resale of homes and slow 
absorption of excess condominium housing stock. Based on these 
communications, on November 6, 2009, the Department of Housing 
and Urban Development issued two new Mortgagee Letters (ML), ML 
2009-46A and ML 2009-46B. In ML 2009-46B, the Department 
announced the permanent baseline guidance for condominium 
project eligibility. This permanent guidance replaces the 
previously issued ML 2009-19 in its entirety and was effective 
December 7, 2009. The temporary guidance issued in ML 2009-46A 
waives five provisions of the permanent guidance and serves as 
a temporary directive to address current housing market 
conditions. This temporary guidance is effective for all FHA 
case numbers assigned on or after December 7, 2009.
    Key provisions of the temporary policy changes are:

  1.  ``Spot Loan'' Approval Process. This process, originally 
        scheduled to be eliminated December 7, 2009, has been 
        extended through January 31, 2010 in order to prevent 
        any shock to the housing industry.

  2.  FHA Concentration. The overall limit will be increased to 
        50 percent. Additionally, in order to further increase 
        the number of eligible loans in a project, FHA will 
        allow 100 percent FHA concentration for projects that 
        meet all basic condo standards plus the following:

      The project is 100 percent complete and 
        construction has been completed for at least 1 year.

      100 percent of the units have been sold and no 
        entity owns more than 10 percent of the units in the 
        project.

      The project contributes a minimum of 10 percent 
        of the annual budget to the reserve account.

      Control of the Homeowners Association has been 
        transferred to the owners; and

      The owner-occupancy ratio is at least 50 percent.

  3.  Owner-Occupancy Requirement. The temporary waiver expands 
        the calculation to exclude vacant or tenant-occupied 
        Real Estate Owned (REO), including properties that are 
        bank-owned enabling this requirement to be obtained 
        sooner.

  4.  Presale Requirements. Presale has been reduced to 30 
        percent to increase the stability of the development by 
        allowing lenders to submit closed loans sooner for FHA 
        insurance and reduce the projects vulnerability to 
        today's market conditions.

  5.  Florida Condominium Project Approval. All requests for 
        approval of condominium projects located in Florida 
        will require submission to HUD for review. FHA 
        anticipated a more stabilized market in Florida once 
        lenders observe we are taking an active role in 
        approving projects, thereby assuring that these 
        projects are both stable and marketable.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                       FROM SHAUN DONOVAN

Q.1. Will HUD grant RESPA 19 relief from liability to those 
who are unable to comply with the unclear rule or the last-
minute FAQs? If not, why do you want to hold lenders to unknown 
rules? If yes, when? For how long?

A.1. Since the Department issued its final rule to improve the 
mortgage settlement process on November 17, 2008, the agency 
has participated in more than 60 industry forums designed to 
assist mortgage professionals in complying with the regulatory 
requirements under the Real Estate Settlement Procedures Act 
(RESPA). In addition, the Department has published more than 
250 frequently asked questions to answer many of the mortgage 
industry's specific compliance issues. Staff have also answered 
hundreds of questions directly to individual lenders, mortgage 
brokers and title insurance companies clarifying the new rule 
requirements as they relate to the their individual business 
practices.
    On November 13, 2009, the Department issued a press release 
stating that there will not be a delay on the implementation of 
the new requirements under the Real Estate Settlement 
Procedures Act (RESPA), but for the first 4 months of 2010, the 
staff of the Mortgagee Review Board will exercise restraint in 
enforcing the new regulatory requirements.
    The Department is sensitive to the concerns of the industry 
as it integrates these new rules into their day-to-day business 
practices and we will continue to work with those who are 
making an honest effort to work with us as we implement these 
important new consumer protections.

Q.2. In this time of high foreclosures, when families need to 
refinance rather than get foreclosed, why are you driving 
honest lenders out of business?

A.2. Buying a home in America should be the fulfillment of a 
dream. Instead, millions of families go to the settlement table 
each year without clearly understanding the loan product or 
associated charges. In many respects, it's clear that the way 
people bought and financed their homes did not serve consumers 
very well and contributed to the current housing crisis.
    Further, many Americans cannot refinance because they 
unknowingly entered into negative amortization mortgages. This 
has led them to a situation where their principal balance 
increased and they are likely to owe more for their home than 
the home is currently worth.
    Finally, the Department does not believe that the new RESPA 
rule requirements will drive honest lenders or mortgage brokers 
out of business. The new requirements provide consumers with 
accurate and binding disclosure about charges and loan terms. 
The Department believes that if consumers had received the 
critical information contained in the new Good Faith Estimate, 
many borrowers may not be facing the prospect of losing their 
homes today.

Q.3. Where do you suppose the families will go?

A.3. The Department firmly believes that the first line of 
defense is an informed consumer. The Department is working with 
our State and local partners on the ground, particularly 
housing counselors, to increase consumer awareness and give 
homeowners and homebuyers a trusted place to turn for 
assistance. HUD sponsors counseling agencies throughout the 
country that give advice on buying a home, renting, 
foreclosure, credit issues and reverse mortgages.
    On May 20, 2009, the President signed the ``Helping 
Families Save Their Homes Act of 2009.'' This law provides the 
Federal Housing Administration (FHA) with additional loss 
mitigation authority to assist FHA mortgagors under the Making 
Home Affordable Program (MHA). The MHA Program is designed to 
help homeowners retain their homes and to prevent the 
destructive impact of foreclosures on families and communities.
    One key component of MHA provides homeowners the 
opportunity to reduce their mortgage payments through the use 
of a loan modification through the Home Affordable Modification 
Program.

Q.4. What good are new loan disclosures when there are no 
lenders?

A.4. The Department firmly believes that the new regulations 
promote the borrower's ability to shop for the best loan for 
them which serves to enhance and stabilize a competitive market 
and that the new RESPA rule requirements will not drive honest 
lenders or mortgage brokers out of business.

Q.5. The final rule does not prohibit a lender from issuing a 
good faith estimate (GFE) that differs from a GFE a broker gave 
a consumer. The FAQs take the opposite position. Which is the 
true story?

A.5. The final rule and FAQs are consistent. The final rule 
permits any loan originator (mortgage broker or lender) to 
issue the GFE. The FAQs state that loan originators are bound 
to the terms of that GFE unless a revised GFE is permitted to 
be issued pursuant to the new rule, specifically section 
3500.7(f).

Q.6. If lenders want to comply with the new FAQs, they don't 
have time. They have to stop letting consumers use brokers. 
Isn't that absolutely the wrong thing to do to consumers? 
Shouldn't HUD be doing everything it can to promote consumer 
choice?

A.6. The Department firmly believes that the new regulations 
are a big step forward for restoring trust and transparency 
between the industry and the homeowner. The regulations promote 
consumer choice through accurate information disclosed early in 
the process and binding settlement service providers to the 
charges and loan terms in the GFE.
    The Department is working with industry associations and 
individual settlement service providers to clarify the new rule 
requirements. The Department worked diligently to avoid bias 
for or against mortgage brokers and believes that the new rule, 
by allowing consumers to accurately compare loan offers from 
lenders and mortgage brokers, will allow lenders and brokers to 
compete on a level playing field based upon rates and services.

Q.7. Which do you want lenders to choose, violating your rule 
or taking away families' tax deductions?

A.7. Loan originators can comply with the rule while preserving 
consumer's available tax deductions. The FAQs offer two options 
for disclosing deductible origination points. Both of these 
disclosure methods were reviewed and approved by the IRS to 
ensure that the availability of tax deductions was preserved.

Q.8. The Truth in Lending Act (TILA) requires disclosures that 
overlap the RESPA disclosures. I think it makes sense for the 
disclosures to work together so people can understand them. But 
they don't. The RESPA rule requires different disclosures than 
the Truth in Lending Act disclosures. RESPA prohibits putting 
the APR in the RESPA forms. Your new FAQs are making the 
differences bigger, not smaller. The FAQs define the initial 
interest rate differently. The FAQs disclose settlement charges 
differently. The FAQs disclose changed circumstances 
differently. The FAQs disclose semi-monthly payments 
differently. The FAQs even can identify the lender differently. 
This is backwards. Why are we going backwards but calling it 
forewords?

A.8. RESPA and TILA are separate statutes that have separate 
disclosure requirements. The Department remains committed to 
coordination and communication in creation of complementary 
disclosures with the Federal Reserve.

Q.9. Will you commit to sitting down with the Federal Reserve, 
come up with one integrated disclosure, and use that instead of 
what is a seemingly incoherent and erratic process for 
developing this RESPA reform set in place by the previous 
Administration?

A.9. The Department remains committed to coordination and 
communication in creation of complementary disclosures with the 
Federal Reserve.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHUMER
                    FROM EMILE J. BRINKMANN

Q.1. FHA has helped stabilize the housing market since the 
1930s by insuring mortgages that meet certain criteria. 
However, this program has had limited success in promoting the 
construction of new rental housing units since the maximum loan 
size for this category is so small compared to the average 
construction costs in urban areas. In New York City, for 
example, the average construction costs for a high-rise 
building (defined as a building that is 16 stories or taller) 
is $419,000, or more than double the current FHA limit. This 
makes it harder to secure affordable financing for multifamily 
rental development and rehabilitation.
    Given that the housing market is currently experiencing 
difficulties with credit illiquidity and a lack of private 
financing for large housing developments, existing programs 
must serve the purpose for which they are intended. What 
additional measures can Congress take to assist HUD in 
providing multifamily loans that accurately address 
construction costs in high cost areas but do not add increased 
risk to taxpayer money?

A.1. The current FHA multifamily loan limits are severely 
restricting the ability to use FHA insurance programs to 
finance rental housing in many urban areas. While the base loan 
limits and high-cost factors have been raised over the past 8 
years to address issues in most parts of the country, the 
problems are now concentrated in major cities where high-rise 
construction is involved. HUD data shows that, over the past 7 
years, there have been 478 Section 221(d)(4) new construction 
projects (without Federal assistance) finally endorsed for HUD 
insurance. Of those 478 projects, only 31 involved elevator 
structures. Most recently, in fiscal years 2007 and 2008, only 
three elevator projects nationwide have been endorsed for 
insurance with FHA. We believe this is largely due to the 
maximum loan limits imposed by statute on the FHA insurance 
programs.
    Congress can address this issue by increasing the FHA 
multifamily loan limits for elevator buildings by establishing 
a 50 percent differential between the nonelevator and elevator 
loan limits in each FHA insurance program and each unit size 
(with a slightly higher increase to serve redevelopment areas). 
The Secretary of HUD should also be given authority to increase 
the high-cost factor in extremely high-cost areas (as 
determined by the Secretary) to the same high-cost factor now 
allowed by statute for Special Limit Areas (i.e., Alaska, 
Hawaii, Guam, and the U.S. Virgin Islands). The House of 
Representatives recently passed H.R. 3527, the FHA Multifamily 
Loan Limit Adjustment Act, on a bipartisan voice vote. MBA 
strongly supports this legislation, which would achieve the 
above policy goals.
    Increasing the loan limits will not add increased risk to 
the FHA multifamily insurance fund or taxpayers, as each loan 
is not only fully underwritten by approved lenders but also 
reviewed by HUD staff. The underwriting and review are 
comprehensive, involving a market study, appraisal, cost and 
architectural reviews, and extensive examination of the owner/
developer, to assure that the rental units being developed are 
needed in the community, will be affordable to the prospective 
tenants and will be developed according to appropriate building 
standards. The multifamily insurance programs charge a mortgage 
insurance premium that is reviewed each year to ensure that it 
is sufficient to cover the costs of the program. To date, FHA's 
delinquencies and claims in the multifamily programs have been 
modest and well within expected ranges.

Q.2. How do construction costs compare for multifamily 
buildings that include elevator-like structures and multifamily 
buildings that do not?
    Should loan limits for the construction or rehabilitation 
of high-rise buildings with elevators reflect this discrepancy? 
If this is so, what is an accurate cost differential between 
multifamily buildings that include elevator-like structures and 
those buildings that do not?

A.2. In order to estimate the difference in total cost between 
a garden style apartment and a high rise (and thus the 
difference that should exist between elevator and nonelevator 
loan limits), MBA used the RS Means construction estimation 
system to estimate and compare costs of similar, modestly 
constructed developments in several markets. This analysis 
(copy attached) shows a 45 percent difference in per square 
foot construction cost between labor and materials for a 
nonelevator apartment and an apartment in an 8 to 24-story 
building. MBA suggests adding to that an additional 5 percent 
to provide for Davis-Bacon wage rate differentials. While the 
wage rates vary across the country, the difference can be 
substantial (e.g., in Washington, DC, the difference between 
the residential and commercial wage rate for a carpenter is 183 
percent). (Adding this 5 percent to the 45 percent difference 
in RS Means costs outlined above provides a total differential 
of 50 percent.)
    MBA has also compared per square foot costs between actual, 
proposed projects in the same market area, where this data was 
available. In the D.C./Northern Virginia market area, the per 
square foot cost differential between a high rise apartment 
building in downtown Washington and a garden apartment in 
Fairfax County, VA, is 89 percent. In the Baltimore market 
area, the cost differential between a high rise project in 
downtown Baltimore and a garden apartment in Waldorf, MD, is 66 
percent. As noted above, this substantial difference in cost is 
due largely to the combination of Davis-Bacon wage rates and 
the increased construction costs resulting from the use of 
steel, concrete, and other costly construction materials.

Q.3. FHA-insured mortgage amount limits for buildings with 
elevator-type structures under the Section 220 program are 
useful tools for urban renewal and revitalization efforts. 
Because this program is typically utilized in high cost housing 
market for the construction of mixed-use developments, do 
construction costs for these developments compare with other 
multifamily properties with elevator-type structures?
    Should loan limits for the construction of developments 
under Section 220 reflect a discrepancy in cost? If this is so, 
what is an accurate cost differential between multifamily 
buildings with elevator-type structures insured under Section 
220 versus multifamily buildings with elevator type structures 
that are not insured under the Section 220 program?

A.3. Construction costs vary primarily by type of construction 
(wood vs. steel frame, for example) and by location (to account 
for differences in land costs and wage rates), not by whether 
the development is insured under Section 220 or 221(d)(4). 
However, because the Section 220 program is used in urban 
renewal and concentrated development areas, construction costs 
are generally higher, reflecting the need for additional site 
preparation costs, on-site security costs and/or a higher 
percentage of commercial space. Loan limits for Section 220 
elevator buildings have, traditionally, been set approximately 
10 percent higher than the Section 221(d)(4) loan limits. In 
order to maintain that differential and to account for the 
higher costs often involved in urban renewal and concentrated 
development areas, MBA recommends that the differential for 
Section 220 loans be set at 60 percent, rather than the 50 
percent differential recommended for the other programs.

Q.4. Would the housing industry support legislation that would 
extend the FHA-insured mortgage loan limit for multifamily 
properties for developments in high cost areas as well as those 
with elevator like structures?

A.4. The industry would be very supportive of increasing the 
loan limits in extremely high-cost areas. In fact, MBA and 
other industry groups have endorsed H.R. 3527, the FHA 
Multifamily Loan Limit Adjustment Act, which passed the House 
of Representatives on September 15, 2009. A copy of the joint 
industry letter in support of H.R. 3527 is attached.
    MBA recommends that the Secretary of HUD be given authority 
to increase the high-cost factor in extremely high-cost areas 
(as determined by the Secretary) to the same high-cost factor 
now allowed by statute for Special Limit Areas (i.e., Alaska, 
Hawaii, Guam, and the U.S. Virgin Islands). For example, cost 
data from McGraw Hill show an average cost per unit in New York 
City of $419,000 for 16+ story buildings, which is 
significantly higher than other large cities, demonstrating a 
need for special consideration for such an extremely high-cost 
area.
              Additional Material Supplied for the Record
   PREPARED STATEMENT OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
    The Independent Community Bankers of America (ICBA) welcomes the 
opportunity to share its views with Members of the Senate Banking 
Committee on the state of the Nation's housing market.
    As reminded daily in the press, housing market woes still plague 
the U.S. economy. The sharp decline in the housing and housing finance 
sector remains at the heart of our Nation's weak economy and troubled 
credit markets. The weak housing sector continues to have a ripple 
effect throughout the entire Nation and is putting severe stress on 
households and small businesses nationwide.
    The current turmoil in our housing and financial markets is also 
jeopardizing the availability of credit for small business. Some of the 
Nation's largest lenders and money-center banks tripped up on 
aggressive subprime lending and toxic investments and are now forced to 
pull in their lending across-the-board, write down losses, and rebuild 
capital.
    However, community banks represent the other side of the financial 
story. Community banks rely on relationships in their communities, not 
on relationships with investment banks or hedge funds. Commonsense 
community bankers largely avoided the subprime debacle. Community 
bankers live and work in the communities they serve and do not put 
their customers and neighbors in loan products they could not possibly 
repay. Community banks did not cause the current turmoil in the housing 
sector but are well-positioned, well-capitalized, and willing to help. 
In fact, community banks are currently playing an important role in the 
homebuying market. We estimate that community banks closed $100 billion 
in mortgage loans in the first half of 2009.
Homebuyer Tax Credit
    Restoring confidence in the housing market is vital to restoring 
economic growth. One of the policies, introduced by Senator Johnny 
Isakson (R-GA) and cosponsored by Chairman Dodd (D-CT), is the 
extension and expansion of the highly successful homebuyer tax credit. 
In order to address a slowing economy, ICBA recommended a first-time 
homebuyer tax credit in early 2008. A first-time homebuyer tax credit 
was initially enacted in a 2008 stimulus plan and expanded in the 
Recovery Act of 2009. The National Association of Realtors reports an 
increased number of individuals are shopping for a home based on the 
homebuyer tax incentive and existing home sales have increased in the 
past several months.
    However, the housing sector remains a troubled spot for the economy 
and can use additional support. ICBA strongly supports additional 
targeted housing tax incentives to arrest the downward spiral in the 
housing market. One of the largest underlying problems preventing an 
economic recovery remains declining home prices. Housing and household 
related spending typically accounts for 20 percent of the Nation's 
Gross Domestic Product (GDP). Plunging home values are putting record 
numbers of borrowers' underwater and fueling record foreclosures. 
Millions of small businesses are suffering the fallout from the 
dramatic decline in the housing market.
    The vicious downward cycle in the housing sector must be stopped. 
The current homebuyer tax credit is working but is set to expire at the 
end of November. This is too soon and the credit may be too limited to 
boost the housing market back to robust levels. ICBA respectfully 
recommends Congress increase the first-time homebuyer tax credit to 
$15,000; allow it to be used by all homebuyers--not just first-time 
buyers, and extend it through 2010. The housing market must be 
stabilized and growing in order to achieve a sustained economic 
recovery. Stabilizing real estate prices will better allow small 
businesses to use their real estate values as collateral for credit. An 
extended and expanded homebuyer-tax credit will help.
Government Sponsored Enterprises (GSEs)
    Another important aspect of stabilizing the housing market is the 
future of the Government Sponsored Enterprises (GSEs). Fannie Mae and 
Freddie Mac have long been important partners of community banks by 
providing community banks an important source of housing finance 
funding and an impartial outlet to convey community bank mortgages to 
the secondary market. The two GSEs continue to play a vital role in 
supporting residential mortgage lending and home ownership, 
particularly in these difficult times when other sources of credit have 
dried up or offer only above market rates.
    In a recent survey of ICBA members, nearly 50 percent of the 
respondents indicated that they sell mortgages directly to the two 
GSEs, while nearly 40 percent indicated they sell indirectly to the 
secondary market (most likely because they do not generate adequate 
volume to sell directly). The volume of sales to the GSEs has increased 
recently. In 2009, ICBA members have increased the volume of loans sold 
to the GSEs by 300 percent over the prior year as they worked to fill 
the credit gap left by other lenders. Without access to a secondary 
market, most if not all of these loans would not have been made because 
community banks would not be able to keep the loans in portfolio due to 
interest rate risk. Thus, Fannie Mae and Freddie Mac have enabled 
community banks to competitively offer fixed-rate mortgages to their 
customers.
    The future of the Government sponsored enterprises must be resolved 
in a manner that ensures the continued existence of a strong, impartial 
secondary market for community bank residential mortgages so that 
community banks can continue to offer this important mortgage product 
to the communities they serve. Community banks need a strong, impartial 
secondary market for residential mortgages where they can sell 
mortgages without fear that the entity to which they sell mortgages 
will steal away their customers. As Congress looks to the future 
structure of our residential mortgage secondary market entities, we 
urge Congress to ensure a secondary market that does not directly 
compete with the private sector and that provides equitable access and 
pricing to all lenders regardless of size or volume.
    Recent market events demonstrate the important role Fannie Mae and 
Freddie Mac have played in providing liquidity and market stability. In 
that regard, the secondary market entity or entities that emerge from 
the GSE conservatorship need to have the operational flexibility to 
hold mortgages when market conditions dictate, along with their 
securitization authorities. Fannie Mae and Freddie Mac's Government 
ties have enabled them to continue to function and provide a critical 
source of housing finance during the recent market upheaval. The future 
secondary market for housing finance should continue to have some type 
of Government ties, to insure that home ownership will continue to play 
a crucial role in the financial well-being of American families and the 
American economy.
Conclusion
    ICBA appreciates the opportunity to provide a statement on these 
critical issues. ICBA looks forward to working with this Committee and 
Congress on these and other steps that will help us emerge from this 
current crisis to improve and preserve our housing market for the 
future.
    The Independent Community Bankers of America represents nearly 
5,000 community banks of all sizes and charter types throughout the 
United States and is dedicated exclusively to representing the 
interests of the community banking industry and the communities and 
customers we serve. ICBA aggregates the power of its members to provide 
a voice for community banking interests in Washington, resources to 
enhance community bank education and marketability, and profitability 
options to help community banks compete in an ever-changing 
marketplace. With nearly 5,000 members, representing more than 18,000 
locations nationwide and employing over 268,000 Americans, ICBA members 
hold more than $908 billion in assets, $726 billion in deposits, and 
more than $619 billion in loans to consumers, small businesses, and the 
agricultural community. For more information, visit ICBA's Web site at 
www.icba.org.
                                 ______
                                 
                 PREPARED STATEMENT OF LARRY H. KEENER
Chairman, Chief Executive Officer and President Palm Harbor Homes, Inc.
                            October 20, 2009
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
my name is Larry Keener, and I am the Chairman, Chief Executive 
Officer, and President of Palm Harbor Homes, Inc. (Palm Harbor). Based 
in Texas, Palm Harbor is one of the Nation's leading manufacturers and 
marketers of factory-built homes. The company markets nationwide 
through vertically integrated operations, encompassing manufactured and 
modular housing, finance, and insurance. Through its financing 
subsidiary CountryPlace Mortgage (CountryPlace), Palm Harbor offers 
conforming mortgages to purchasers of factory-built homes sold by 
company-owned retail sales centers and certain independent retail 
dealers, builders, and developers.
    Mr. Chairman, Palm Harbor strongly encourages the extension of the 
availability of the First-Time Homebuyer Tax Credit until December 1, 
2010. Retention of the tax credit, which is scheduled to expire on 
December 1, 2009, will encourage continued economic recovery and 
provide many potential first-time buyers the opportunity for affordable 
home ownership. Further, Palm Harbor believes expansion of the tax 
credit to all homebuyers would significantly increase opportunities for 
home ownership and maximize the effectiveness of the subsidy to 
generate economic activity and related job creation.
    The availability of financing remains a barrier to home ownership. 
This barrier is particularly daunting for low- and moderate-income 
buyers. Not only has the tax credit been an effective tool for creating 
more opportunities for these first-time homebuyers; it has also begun 
to assist in increasing liquidity in the housing market. As a 
manufacturer of affordable housing, the tax credit has been 
particularly impactful for Palm Harbor's customer base--in most 
instances the credit provides purchasers of manufactured homes with the 
down payment necessary to meet homeowner equity requirements for 
financing approval. Further, the overwhelming majority of new 
manufactured homes are delivered to rural areas and, therefore, the 
growth of home ownership in rural areas is dependent on the 
availability of financing for manufactured housing. While site-built 
housing can obtain economies of scale through the development of tract 
housing and large subdivisions, such opportunities are not available in 
rural areas where homes are located on scattered lots. Instead, 
manufactured housing affords the prospective rural buyer a quality, 
low-cost alternative for obtaining home ownership.
    While manufactured housing represents some of the most affordable 
housing in the market, with an average sales price of $85,600, the 
prevailing economic uncertainties and depressed housing market have 
continued to challenge even the manufactured housing industry. The 
economic crisis has materially impacted liquidity in the financial 
markets, making terms for certain financing less attractive and 
resulting in the unavailability of most types of financing. 
CountryPlace and similar manufactured housing specialty lenders have 
been effectively precluded from issuing private-label mortgage-backed 
securities for the past 2 years. Secondary markets for loan types 
traditionally used for the purchase of manufactured homes have severely 
contracted, making these loans illiquid. As a result, several major 
third-party lenders, which previously provided financing for Palm 
Harbor's customers, have exited the manufactured housing finance 
business. CountryPlace has been unable to raise sufficient capital to 
fill the void created by these lenders' departure from the industry.
    In an ongoing effort to remove regulatory impediments to homeowner 
financing, the manufactured housing sector has been working closely 
with the Department of Housing and Urban Development (HUD), Ginnie Mae, 
Fannie Mae, and the Federal Housing Finance Agency (FHFA). By extending 
and/or expanding the tax credit, the Congress can play a continued role 
in assisting families with securing affordable home ownership.
    I thank you for this opportunity to present our view on the 
importance of extending and/or expanding the First-Time Homebuyer Tax 
Credit. Palm Harbor stands ready to work with the Committee and the 
Congress to promote the strength of the housing market and the 
continued recovery of the economy.
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