[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                     OVERSIGHT OF THE DEPARTMENT OF
                  HOUSING AND URBAN DEVELOPMENT (HUD)

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 1, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-10



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 1, 2011................................................     1
Appendix:
    March 1, 2011................................................    37

                               WITNESSES
                         Tuesday, March 1, 2011

Donovan, Hon. Shaun, Secretary, U.S. Department of Housing and 
  Urban Development (HUD)........................................     7

                                APPENDIX

Prepared statements:
    Capito, Hon. Shelley Moore...................................    38
    Donovan, Hon. Shaun..........................................    40

              Additional Material Submitted for the Record

Biggert, Hon. Judy:
    Written statement of HUD Housing Counseling Intermediaries...    58
Frank, Hon. Barney:
    Written statement of Hon. Cheryl A. Causley, Chairwoman, 
      National American Indian Housing Council...................    62
Donovan, Hon. Shaun:
    Written responses to questions submitted by Chairman Bachus..    67
    Written responses to questions submitted by Representative 
      Neugebauer.................................................    79


                     OVERSIGHT OF THE DEPARTMENT OF
                  HOUSING AND URBAN DEVELOPMENT (HUD)

                              ----------                              


                         Tuesday, March 1, 2011

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:20 p.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, 
Manzullo, Biggert, Miller of California, Garrett, Neugebauer, 
McHenry, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Hayworth, 
Hurt, Dold, Schweikert, Grimm, Stivers; Frank, Waters, Maloney, 
Velazquez, Sherman, Baca, Lynch, Scott, Green, Cleaver, Moore, 
Ellison, Donnelly, Carson, and Carney.
    Chairman Bachus. Good afternoon. The committee will come to 
order.
    Secretary Donovan, we are pleased to have you here. I think 
that the committee has had a very constructive dialogue with 
you on issues for which we have jurisdiction within your 
Department. I commend you for your professionalism and welcome 
you back to the committee. In fact, I will tell members on both 
sides, there are issues that I think there is bipartisan 
agreement on, and I hope to build on that.
    I will say to the committee members, Secretary Donovan will 
be very involved in the crafting of a Fannie Mae-Freddie Mac 
solution with the Administration because FHA is obviously an 
integral part of that, and HUD.
    With that, Ms. Biggert is recognized for 2 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman, and welcome, 
Secretary Donovan. Thank you for joining us this afternoon.
    I appreciate that the Administration has submitted a budget 
request for next year. Perhaps unfortunately, rather than cut 
costs, it builds on new spending authorized during previous 
Congresses.
    For example, the largest component of HUD's request is the 
Section 8 Program, over $19 billion, and an over $1 billion 
increase over Fiscal Year 2010. However, the Administration 
offers no plan to empower individuals to gain independence from 
the program. Instead of growing the Federal budget, the Federal 
Government must prioritize its resources so that programs such 
as Section 8 don't continue to grow exponentially.
    Too much borrowing, taxing, and spending has been a drag on 
our economy. Before embarking on new spending, agencies like 
HUD first must get their fiscal house in order.
    Instead, we are presented with a budget that asks Congress 
to fund new Federal programs such as the trust fund to build 
more housing. Where is the proposal to boost private sector 
investment in single and multifamily housing?
    Throwing good money after bad is not the answer to our 
Nation's fiscal woes. We must make the tough choices and focus 
our limited resources on our most vulnerable populations: the 
homeless; children and youth; seniors; the disabled; and our 
veterans. But most importantly, the Federal Government must be 
laser-focused on creating an environment that supports private 
sector job creation. With good jobs, families can afford 
housing.
    So I look forward to working with the Administration to 
achieve these goals and I look forward to your testimony.
    I yield back.
    Chairman Bachus. Thank you.
    Mr. Sherman is recognized for 2 minutes.
    Mr. Sherman. Thank you. I am going to be focusing on the 
GSEs, which are so important to housing. I hope that we have a 
situation where access to the securitization market is not 
limited to the four largest banks in the country. We need 
someone who packages the loans of the smaller institutions, 
credit unions, and community banks and taps into the capital 
markets.
    I hope that your people have advised you just what a 
crushing effect it would have on the economy in Los Angeles and 
roughly 10 other cities if the conforming loan limit is allowed 
to drop at the end of this fiscal year. It is almost impossible 
to get a loan just above the conforming loan limit. Of course, 
if you need $20 million to buy a home in Malibu, that can be 
arranged, but those people tend to own the bank themselves.
    The theorists and the ideologues say that we should just 
abolish Fannie and Freddie and not have any Federal involvement 
in financing mortgages. I have yet to hear very many of the 
industry stakeholders or practitioners, let alone homeowners' 
groups, call for that kind of theoretical purity. I hope that 
what we see at least for the next few years is a Federal effort 
to support things at the current conforming loan limit and 
avoid the crashing economic double-dip effect it could have if 
we see another decline in housing prices.
    Thank you.
    Chairman Bachus. Mr. Hensarling is recognized for 2 
minutes.
    Mr. Hensarling. Thank you, Mr. Chairman, and welcome, Mr. 
Secretary. I have been impressed with a number of things I have 
seen you do in your Department. I am looking forward to hearing 
more about some of your plans for efficiencies and 
consolidations within the Department.
    I must admit though, as I look at the budget request and 
put it into the context of the Nation's fiscal challenges, I 
wonder when we are going to stop spending money that we do not 
have? It is still a budget request for $47.8 billion and over 
the last 15 years, according to OMB, all Federal housing 
programs--and admittedly that is somewhat out of your 
jurisdiction--have grown from $15.4 billion to $53.8 billion, 
representing a 249 percent increase, when GDP over the same 
time period increased 96 percent. In other words, the cost of 
Federal housing programs is growing at a rate that is 2\1/2\ 
times greater than the economy.
    The family budget can't afford the Federal budget. As we 
are looking at not just our Nation's first trillion dollar 
deficit, our Nation's second trillion dollar deficit, and now 
our Nation's third and largest trillion dollar-plus deficit, I 
am reminded again if we want to help foster job creation today, 
if we want to save our children from bankruptcy tomorrow, we 
have to quit spending money we don't have. And unfortunately, 
what we see from this Administration is red ink as far as the 
eye can see.
    So, I hope that through the Secretary's testimony, we will 
hear more ideas about what can be done to make this more 
efficient, to consolidate, and to help us again create jobs and 
save the next generation from bankruptcy.
    I yield back the balance of my time.
    Chairman Bachus. Thank you, Mr. Hensarling.
    I recognize Mr. Green for 1 minute, and immediately after 
that, Mr. Baca for 1 minute.
    Mr. Green. Thank you, Mr. Chairman, and I thank the 
Secretary for being here today.
    Mr. Secretary, among the questions that I will ask will be 
one that will focus on housing for persons with disabilities. I 
see that there is a cut in that, a proposed cut in that, and I 
am very concerned about it, because many of the persons with 
disabilities are persons who are returning from Iraq and 
Afghanistan, and I am hopeful that we will be able to 
accommodate persons who have served our country well and who 
will now need some service from our country.
    This is a very serious concern with me, and I will eagerly 
anticipate your response to my concerns about these veterans 
and other persons with disabilities as well.
    I yield back.
    Chairman Bachus. Mr. Baca?
    Mr. Baca. Thank you. First of all, I want to thank you, Mr. 
Chairman, and Ranking Member Frank for calling this hearing. I 
also want to thank Secretary Donovan for being here and 
offering his perspectives on HUD's budget.
    Only 2 months ago in Congress, we already had reached a 
critical point. One of the greatest challenges that our country 
faces is the need to rein in our national debt and get our 
fiscal house in order. However, in a rush to do so, some of my 
colleagues seem to have tunnel vision, blindly cutting critical 
government programs without any regard to what they do or who 
they help and the overall impact on our country.
    I state this because many of these same individuals, 
Republicans, who don't want government to intervene in housing, 
yet live right here in the Capitol and don't pay rent and don't 
invest in the private sector, and they come out and say let's 
invest in the private sector, and they are living right here in 
the Capitol. In fact, just after this Chamber passed a short-
sighted budget measure a couple of weeks ago, many Republicans 
released details on the harm those cuts would cost.
    Today, we are here to discuss the budget for the Department 
of Housing and Urban Development. I say as we do that, let's do 
it in line of what we want them to do, and not of ourselves, as 
many individuals who live right here in the Capitol aren't 
paying a cent, aren't investing, yet government is paying for 
their housing.
    With that, I yield back the balance of my time.
    Chairman Bachus. Thank you, Mr. Baca.
    At this time, I recognize Mr. Miller for 2 minutes.
    Mr. Miller of California. For the record, I live in 
Virginia. I rent an apartment over there. So I don't live free 
at the Capitol.
    Mr. Baca. You are one of the good guys.
    Mr. Miller of California. I am one of the good guys. But we 
have a tough budget year out there. There are a lot of 
difficult decisions that need to be made, and I am really 
concerned that we be cautious not to make things worse than 
they already are. There is no doubt that the housing industry 
in this country is suffering, the housing market globally is 
suffering, and I think we need to look at what went wrong, what 
we could have done to have prevented it, and what we need to do 
in the future to make sure we have the most robust housing 
market you can have in this country without putting taxpayers 
at risk.
    My concern is with FHA. Your default rates are higher than 
I think they should be, yet they are still lower than the 
private sector's. I am not saying you did everything right, 
because a lot of things were done wrong. But your default rates 
are close to 5 percent, as I put it, correct? Fannie Mae is 
about 4.2 percent, Freddie Mac is about 3.1 percent. The best 
prime market default rate out there is 5.4 percent. Subprime 
ARMs, 38.7 percent, subprime loans in general, 26.5 percent.
    So when you look at those numbers, you have to say 
something is structurally wrong with the mortgage industry at 
large in this country, and we should be looking at that, rather 
than just saying we need to deal with Freddie, Fannie, and FHA. 
Yes, we need to deal with their problems, without a doubt. 
There is not a doubt there are serious problems and we need to 
address those problems.
    But at the same time, when we are pulling out of a 
marketplace on the FHA high-cost areas, as we are pulling back, 
increasing rates, you are talking about doing the same thing 
with Freddie and Fannie, there is not a private sector entity 
out there to immediately pull in during this distressed 
marketplace.
    If we are going to protect taxpayers, 65.1 percent of the 
homeowners in this country are taxpayers, so we need to protect 
everybody. We need to make sure we do the best we can for the 
entire sector. And I think we need to ask what went wrong, how 
do we fix it and correct it, and how do we not put taxpayers at 
risk in the future? I am afraid we have not done that, gone 
back and asked, what did we do wrong in Freddie and Fannie and 
FHA, what could we have done better, and how do we move forward 
in the future? I hope you can address that.
    I yield back the balance of my time.
    Chairman Bachus. Mr. Frank is recognized for 3 minutes.
    Mr. Frank. I thank the chairman.
    First, if I could, before my time, I want to give 
encouragement to people who felt they were conscience-bound to 
read the financial reform bill, which is, as I recognize, a 
large bill. You don't have to do that. You can hold off now and 
wait for the movie version, because I have just been told that 
Senator Dodd has been named head of the Motion Picture 
Association of America. So ``Dodd-Frank, the Movie'' is 
probably on the horizon and you can skip reading it. The sequel 
will be, ``The Financial Inquiry Report'' so people can keep 
that going. I thank you for the time. I thought I would give my 
former colleague a mention.
    I welcome the Secretary, whom I think has done an excellent 
job of trying to manage his resources. Let me say I understand 
the concerns about spending in the cities, and I am inclined to 
agree that in these past few years in particular, we have 
greatly overspent in a number of cities--Baghdad, Fallujah, 
Kandahar, Kabul. We have been spending a great deal of money I 
think to no great purpose elsewhere.
    Having thought that the war in Iraq was a great mistake and 
it having cost us over $1 trillion, with more to come, I am not 
shamed by those who tell me I am spending too much if I want to 
have decent housing for poor elderly people or if I believe 
that the notion of a homeless veteran is really a shameful 
thing in this country and to the extent possible, it is not 
possible in every case, there are personal factors, we ought to 
try to diminish it.
    I in particular hope that we can work, as I said earlier 
today, on a better set of policies for affordable rental 
housing. And in particular, as you know, Mr. Secretary, over 
the years, in the beginning of the 1960s, with a Federal 
subsidy on interest, the private sector, both the profit and 
nonprofit private sector built hundreds and hundreds of 
thousands of units for people not at the very bottom of the 
spectrum generally, but in the lower- to moderate-income range, 
and it was built under a program that I think while it had good 
results in some ways, it was flawed because it allowed for 
these units to no longer be protected after a while. I think 
preserving those units is a very important thing.
    Now, people talk about the costs of housing, but one of the 
problems we have is that we have taken this policy that says if 
you moved into one of those units and it no longer is under the 
protection it was under when the subsidized loan was given, we 
will give you a Section 8, a voucher far beyond what you would 
ordinarily get to meet with those rents. So while we allow the 
units to go out of the inventory, that has the impact of 
raising the rental payments. I think by far the most efficient 
and inexpensive thing we could do would be to preserve those 
units.
    It is something we had been working on, and obviously 
things have changed here, but I would hope that it is something 
that we could continue to work on. Similarly, with regard to 
Fannie Mae and Freddie Mac, I asked Secretary Geithner about 
this and he acknowledged what I think is clearly the case, and 
I have asked him to document it, that the losses on multifamily 
housing were far smaller as a percentage of outcome because 
they were clearly smaller in general than single family. And I 
would hope as we go forward with a new set of housing finance 
rules, which we very much need, that we would be making sure 
that we preserved, in fact improved, our ability to finance 
multifamily rental housing, it doesn't have to be obviously one 
building, multifamily developments, and that we would provide 
some revenue so that the private sector could continue what we 
have done successfully in the past, take a Federal subsidy, 
private sector activity, build some rental housing, and not 
just build it for a short, limited period of time, but 
indefinitely.
    So as we go forward on the GSE issue, one of the things I 
would hope we could work together to do is to find some stream 
of revenue that would not only be small enough to have no 
negative impact on housing finance in general, but would help 
us preserve that rental housing.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Frank.
    Mr. Huizenga, for 1 minute.
    Mr. Huizenga. Thank you, Mr. Chairman, I appreciate that, 
and that actually leads in perfectly to my question.
    Earlier today, we had Secretary Geithner here talking about 
a myriad of issues, but one of the issues brought up was 
exactly what you heard about now, there was not enough of an 
emphasis on rental housing and assistance in this time. But as 
I understand, in your Fiscal Year 2012 budget summary, 72 
percent of your budget is going into 3 rental assistance 
programs, 72 percent.
    So I am curious, and I have 1 minute as we are going into 
the question period time, do you really need more emphasis on 
rental housing programs, 72 percent of your budget, which is an 
increase over what has been happening in previous years, or do 
you need to spend that money on some other programs? I will 
appreciate your addressing that a little later on.
    Thank you.
    Chairman Bachus. Mr. Scott, for 1 minute.
    Mr. Scott. Thank you very much.
    Over here, Secretary Donovan. Let me commend you on the 
work that you are doing. It was certainly a joy to have you in 
Atlanta, where we did some great work there and we are going to 
do more, and I want to thank you for working with me and 
Treasury in our upcoming home foreclosure event program that we 
have.
    Just a point: I would like to see some voices coming from 
HUD, from the Administration, to point out the dire 
consequences if some of these very drastic cuts are taking 
place, because it is not right. It is not fair as we want to 
deal with the real challenges of the debts and the deficit to 
disproportionately do it on the backs of the very people who 
can least afford it.
    And for many of our local municipalities and governments 
who are thrust into these programs, one of the most drastic 
areas has been a recent CR that we passed, I think last week or 
so, that would drastically cut the funding for the CBDGs down 
by 62 percent from $3.9 billion to $1.5 billion. The 
consequences of that is very dear to some of these communities, 
particularly in districts like mine and some other areas.
    So I am thinking I would want to see HUD fight a little bit 
and bring to the fore what these consequences are so the 
American people will know that if these cuts go through, this 
is what is going to happen. Then, we can make a rational 
judgment on it with the spirit of the American people with us.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Scott.
    There is 1 minute remaining on our side. Are there any 
members who wish to speak? Let me just use the time that we 
still have.
    Mr. Secretary, I think we do realize that our low-income 
Americans, a great percentage of them cannot afford 
homeownership. For them, renting is really the best option, and 
many of them, I think as many as 25 percent of them, spend over 
half of their income on shelter or rental income. I do believe 
there is some agreement by this committee that multifamily 
housing for low-income Americans is a concern if we prioritize 
our budget. So I would associate myself with that.
    Rental assistance is a large percentage of the budget, and 
I think most of that is Section 8. I am not sure if 
improvements couldn't be made to address where that money goes, 
as Mr. Frank said, multihousing family and many others.
    With that, Mr. Secretary, we welcome you before the 
committee and look forward to your testimony. Your written 
statement will be, with unanimous consent, entered into the 
record. We will hear your oral statement at this time.

   STATEMENT OF THE HONORABLE SHAUN DONOVAN, SECRETARY, U.S. 
       DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD)

    Secretary Donovan. Thank you, Chairman Bachus, and also 
Ranking Member Frank, as well as all the members of the 
committee, for this opportunity to testify about HUD's Fiscal 
Year 2012 budget proposal.
    This afternoon, I would like to discuss the investments it 
calls for to help America win the future by out-educating, out-
innovating, and out-building our competitors. I will also 
highlight the steps our proposal takes to improve how we 
operate HUD's programs and the tough choices it makes to ensure 
we take responsibility for our deficits.
    Mr. Chairman, in developing this proposal, we followed 
three principles. The first is to continue our support for the 
housing market while bringing private capital back. Two years 
ago, with the housing market collapsing and private capital in 
retreat, the Administration had no choice but to take action. 
The critical support FHA provided has helped over 2 million 
families buy a home since that time and nearly 1.5 million 
homeowners refinance into stable, affordable products with 
monthly savings exceeding $100.
    And while the Federal Housing Administration and Ginnie Mae 
will continue supporting the housing recovery in the year 
ahead, we must also help private capital return to the market. 
This is a process that HUD began many months ago, and I want to 
thank this committee for passing legislation in the last 
Congress to reform FHA's mortgage insurance premium structure. 
With this authority, FHA announced a premium increase of 25 
basis points last month. Because of these reforms and others, 
FHA is projected to generate approximately $9.8 billion in 
receipts for the taxpayer in Fiscal Year 2011. Indeed, the 
reforms that are generating these receipts today have set the 
stage for more private capital to return in the years to come 
while strengthening FHA's reserves and ensuring that it remains 
a vital source of financing for underserved borrowers and 
communities.
    Just as importantly, Mr. Chairman, while HUD's Fiscal Year 
2012 request is $47.8 billion in gross budget authority, 
because of FHA and Ginnie Mae receipts, the cost to the 
taxpayer for this budget is only $41.7 billion, fully 2.8 
percent below our Fiscal Year 2010 budget and more than meeting 
the President's commitment to a 5-year domestic discretionary 
spending freeze.
    The second principle we used to develop our budget was to 
protect current residents and improve the programs that serve 
them. While the median income of American families today is 
over $60,000, for families who live in HUD-assisted housing, it 
is $10,200 per year, and more than half are elderly or 
disabled.
    At the same time, having seen from 2007 to 2009 the largest 
increase in the history of HUD's worst-case housing needs 
survey, it is clear that the recession hit these families hard. 
That is why 80 percent of our proposed budget keeps these 
residents in their homes and provides basic upkeep to public 
housing while also continuing to serve our most vulnerable 
populations through our homeless programs.
    Because the cost of serving the same families grows each 
year, protecting existing families in our programs required us 
to make tough choices with the remaining 20 percent of the 
budget, including the decision to reduce funding for the 
Community Development Block Grants, HOME Investment 
Partnerships, and new construction for HUD-supported housing 
programs for the elderly and the disabled, all between 5 and 10 
percent.
    These are difficult cuts. I saw for myself as a local 
housing official the difference these funds can make, 
supporting senior housing, boys and girls clubs, YMCAs, and 
other providers of critical community services. But American 
families are tightening their belts and we need to do the same.
    At the same time, this budget makes a strong commitment to 
doing more of what works and to stop doing what doesn't. By 
including the Section 8 Voucher Reform Act in the budget, we 
will simplify and streamline the voucher program and save $1 
billion for the taxpayer over the next 5 years while supporting 
the ability of public housing authorities in small towns and 
rural areas to better serve the working poor. Indeed, thanks to 
this committee's work on the Homeless Emergency Assistance and 
Rapid Transition to Housing Act (HEARTH), the budget funds a 
new Rural Housing Stability Program that reflects the unique 
and growing needs in those communities.
    This budget also holds our partners accountable for the 
funding they receive from HUD. To fully fund the Public Housing 
Operating Fund, we require public housing authorities (PHAs) 
with excess reserves to contribute $1 billion. These resources 
were set aside so that our PHAs could continue operating during 
a rainy day, and I think would all agree that rainy day is 
here.
    These efforts point to a broader commitment expressed 
through our Transformation Initiative (TI) to improving HUD's 
programs. TI funds are replacing data systems in our largest 
program, housing choice vouchers, that date from the early 
1990s, so we can hold PHAs accountable for managing their 
budgets, just like families and businesses are doing across the 
country.
    The flexibility TI provides has also allowed us for the 
first time to offer technical assistance across all our 
community planning and development programs and launch a new 
initiative to improve the financial management and 
accountability of troubled housing authorities. And by 
supporting research, evaluation, and program demonstrations, TI 
improves HUD's own accountability by identifying what we do 
well and what we need to do better.
    These needed reforms allow us to propose increased 
investments in programs we know work, like the HUD-VASH program 
for homeless veterans. This effort is built on the solid body 
of evidence that permanent supportive housing both ends 
homelessness and saves money for the taxpayer by putting an end 
to the revolving door of emergency rooms, shelters, and jails.
    As such, this budget would increase funding for homeless 
programs by more than 29 percent over 2010 to keep the 
President's commitment to opening doors, the first Federal 
strategic plan to end homelessness which the Administration 
unveiled last June to end chronic and veterans' homelessness by 
2015 and homelessness among families and children by 2020.
    All told, this combination of tough choices and needed 
reforms would allow us to serve over 4.5 million families in 
our core rental assistance programs, 86,000 more than in 2010.
    Our third principle for developing this budget is to 
continue critical initiatives that have been part of our budget 
for the last 2 years, but in this fiscal climate to propose no 
new initiatives. The President has made clear that winning the 
future depends on America winning the race to educate our 
children. But that is not possible if we are leaving a whole 
generation of children behind in our poorest neighborhoods.
    That is why we worked with this committee last year to pass 
Choice Neighborhoods legislation that was implemented in our 
budget and have again proposed $250 million for Fiscal Year 
2012. This funding will allow communities to use the mixed-use 
and mixed-finance tools pioneered by Secretaries Jack Kemp and 
Henry Cisneros with the HOPE VI Program to transform all of the 
federally-assisted housing in the neighborhood.
    Similarly, ensuring that America out-builds our competitors 
requires us to protect and preserve public housing for the 
future. Right now, we are losing 10,000 units from our public 
housing stock every year. At the same time, there is billions 
of dollars of private capital sitting on the sidelines that 
could put tens of thousands of construction workers to work 
rebuilding this housing.
    That is why, Mr. Chairman, we have proposed a $200 million 
demonstration in our budget to preserve up to 255,000 public 
housing units using long-term, project-based rental assistance 
contracts. As we have seen in the Section 8 Program and the 
low-income housing tax credit, opening these properties to 
total private capital not only brings new funding to affordable 
housing, but also a new sense of discipline that extends from 
the way these properties are financed to the way they are 
managed.
    Lastly, Mr. Chairman, American businesses, large and small, 
cannot out-innovate their competitors when their workers spend 
52 cents of every dollar they earn on housing and 
transportation combined, and moving products on our roads costs 
5 times as much wasted fuel and time as it did 25 years ago. 
That is why we request another $150 million for our sustainable 
communities initiatives which helps regions and communities 
develop comprehensive housing and transportation plans that 
create jobs and economic growth.
    In a community like Austin, Texas, which is linking its 
long-term regional transportation plan to 37 mixed-income 
communities near transit and job centers, you can see how the 
grants it provides aren't about one-size-fits-all rules that 
tell communities what to do, but saving the taxpayer money by 
coordinating investments more effectively and efficiently. The 
demand for these kinds of innovations explains the 
extraordinary demand for this program. And it wasn't just 
coming from our largest metro areas. Indeed, over half of our 
regional grants were awarded to small regions and towns.
    So, Mr. Chairman, HUD's Fiscal Year 2012 budget proposal 
isn't just about spending less, it is also about investing 
smarter and more effectively. It is about out-educating, out-
building, and out-innovating our competitors. It is about 
making hard choices to reduce the deficit and putting in place 
much needed reforms to hold ourselves to a high standard of 
performance. But, most of all, it is about the results we 
deliver for the people and places who depend on us most.
    For HUD, winning the future starts at home, and with this 
budget, I respectfully submit, of targeted investments and 
tough choices, we aim to prove it.
    Thank you.
    [The prepared statement of Secretary Donovan can be found 
on page 40 of the appendix.]
    Chairman Bachus. Thank you, Mr. Secretary.
    At this time, I recognize Ms. Biggert, who is the Housing 
Subcommittee Chair, and after that we will recognize Ms. 
Hayworth and Mr. Schweikert, in that order, on the Republican 
side.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Secretary, this goes back a little bit to what I said 
in my opening statement: I am wondering about the long-term 
costs associated with the existing vouchers and what will be 
the impact of Section 8 funding costs, what impact they will 
have on the overall HUD budget and the other programs within 
the HUD budget.
    Do you have a plan or are you going to have a plan to 
empower individuals to gain independence from the program? The 
program seems to work, but nobody ever leaves it, and we 
certainly have long waiting lists for Section 8.
    Secretary Donovan. Madam Chairwoman, thank you for the 
question. I think it is very important that we focus in on the 
Section 8 Program.
    As I mentioned in my testimony, over half of the residents 
of public housing are either seniors or people living with 
disabilities. But beyond that, for those who are able to work, 
we estimate that around 90 percent of those living in public 
housing in Section 8 who are able to work, do work, and it is 
critical that we take additional steps to encourage them to 
take up work.
    Mrs. Biggert. Do you have data on how long the average stay 
in Section 8 housing is?
    Secretary Donovan. Typically, what we see for non-elderly 
or disabled is an average stay of 4 to 5 years in public 
housing. I think one of the programs that you have focused on 
historically, which is absolutely critical, is the Family Self-
Sufficiency Program. I know this from my own experience at the 
local level where we were expanding with our own funds family 
self-sufficiency. We are in the process, using our 
Transformation Initiative dollars, of doing the first ever full 
national study of the Family Self-Sufficiency Program because 
we believe that it provides the kind of incentives that are 
necessary to help people gain work and succeed, as well as to 
open up spaces within the programs for those who are on the 
waiting lists.
    So, with your support, certainly we would look to do more 
with the Family Self-Sufficiency Program.
    Mrs. Biggert. Thank you. Then this morning, there was an 
article published by the American Bankers Association stating a 
deal had been made among the regulators writing the QRM rule, 
and among the components reported was the 20 percent 
downpayment requirement, loan servicing standards, and loan 
modification standards.
    Particularly with the 20 percent down standard, I am 
concerned that there will be few first-time buyers who will be 
qualifying for the QRM. So won't that result make most first-
time buyers fall into the FHA program, which you are already 
trying to dampen down, too?
    Secretary Donovan. First of all, let me assure you that no 
agreement among all the regulators has been reached at this 
point. There are numerous parties, including HUD, that are part 
of those discussions, and there is no final agreement or 
proposal at this point.
    On your specific point about the effect on FHA, as you 
know, there is an exemption for Fannie Mae--for FHA and for 
Ginnie Mae from the QRM standards, and there is some risk that 
we would see additional demand for FHA that would come out of a 
standard.
    On the other hand, it is important that we ensure that 
capital is driven toward safe, stable products. And the 
proposal we will put out will be a proposed rule. There will be 
plenty of time for this committee and the public to weigh in on 
any proposal. It is possible we might even propose some 
alternatives within that rule. And this is one of the issues 
that we will be talking about, balancing safety and soundness 
with the risk of potentially driving more business to FHA under 
the rule.
    Mrs. Biggert. This morning, Secretary Geithner talked about 
the Administration recommending a joint FHA and FHFA working 
group to tighten the standards. Is this the same one, or is 
this another group?
    Secretary Donovan. I don't know exactly the question he was 
responding to, but there are a number of places where we are 
working jointly with FHFA. He may have been talking about 
servicing standards, and in particular the standards for 
compensating servicers for the servicing work that they do. We 
have undertaken with FHFA a broad look at those standards.
    It is clear that the current compensation model for 
servicing is broken: it is not working for consumers, 
homeowners; it is not working as well as it should for FHA; and 
it is not working well enough for the servicers because of the 
accounting and other complexities of the current standards. So 
we are working together on that initiative.
    Chairman Bachus. Thank you, Chairwoman Biggert.
    Ranking Member Frank.
    Mr. Frank. I want to pick up--I am struck by my colleague 
from Illinois worrying now that we are going to be too tough on 
mortgages for low-income people. I would hope we wouldn't go 
from complaining totally that they were too loose to now 
complaining they are too tough without ever passing go. And I 
disagree with her. I don't think the 20 percent is out of line. 
There are a couple of things that need to be said here.
    First of all, I would hope we would not buy into the 
argument that no mortgage loans will be made if they don't meet 
the qualified residential mortgage definition. Remember, the 
qualified residential mortgage definition gives you an 
exemption. It doesn't say you can't give or make the mortgage. 
It gives you an exemption from having to retain 5 percent of 
the loans you make in a securitization. And the notion that no 
one will make loans unless they can 100 percent securitize is 
clearly false.
    In the first place, many of the smaller institutions never 
securitized in the first place. Many of the community banks 
don't securitize. They will be unaffected by this, whatever the 
qualified residential mortgage number is that gets them out 
from under the requirement that they retain some of their 
capital.
    Now, there are some who do securitize everything. One group 
of mortgage lenders came to us during the debate and said, ``If 
you make us keep 5 percent of the loans when we securitize it, 
we won't make any loans.'' We asked, ``Why?'' We didn't think 5 
percent was excessive. They said, ``We don't have any 
capital.'' In other words, they don't have any money and they 
were resentful that we were telling them not to lend money they 
don't own. When people lend money they don't own, it doesn't 
end so well.
    So this notion that you have to weaken the qualified 
residential mortgage so people can buy homes, remember again, 
it is not a ban on mortgages. It is an exemption from having to 
keep 5 percent.
    Secondly, while you have the smaller ones, Wells Fargo has 
announced that they believe they can make loans under this 
amount or that they could keep 5 percent.
    So I think that was one of the key causes of the crisis, 
people lending money that they had no stake in when it came to 
repayment.
    And I notice, by the way, now that we have seen a concern 
about the securitization of commercial real estate. As I recall 
the bill, there is no exemption--the securitization risk 
retention does not apply only to residential mortgages, it 
applies to anybody who is lending money and securitizing it. 
And I hope the regulators, not you, because it is not housing, 
will insist on that for everybody.
    So I want to disagree with my colleague. Weakening the 
qualified residential mortgage, remembering again, it is not an 
absolute bar, it says simply that you can make these loans, but 
if you make those loans, if you made a loan with very little 
downpayment, then you ought to have to keep 5 percent of it. 
All that means is--and I know you said you are going to try the 
get the FHA to have better standards. I am all for that, and 
the FHA has done a very good job under yourself and 
Commissioner Stevens. It began at the end of the Bush 
Administration. But the best way to do that outside the FHA is 
to tell the private sector, ``Here is a good incentive for you 
not to lend money to people who won't pay it back. If they 
don't pay it back, you are going to take a loss.''
    So as I said, I would be very disappointed to see a 
substantial weakening of the qualified residential mortgage 
exemption to the risk retention, and the notion that if you 
don't give people the exemption, and, of course, the exemption 
goes to everybody, then there will be people, community banks 
will continue to make loans and not securitize, as they told 
us. They didn't get too concerned about this. Other 
institutions will make the loans at the 20 percent, and others 
will presumably make the loans and securitize them.
    Are we really being told there are so few institutions out 
there with confidence in their own judgment that they won't 
make residential mortgage loans which could be highly 
profitable unless they were able to pass off the whole loss?
    I have used up almost all my time. We have the Secretary 
here, we have other members who want to ask questions. So I am 
going to yield back and I will give my minute into the general 
fund here.
    But I would be very disappointed if we had a dilution of 
the qualified residential mortgage. Again, it is being talked 
about as if it was the absolute limit, and if you couldn't meet 
that, you couldn't make a mortgage loan. No. All it says is if 
you want to make mortgage loans that don't meet that test, then 
either you can't securitize it, people can hold the mortgages 
in their portfolios, or if you securitize it, you have to 
retain 5 percent, showing a fairly small confidence in your own 
judgment.
    I yield back.
    Chairman Bachus. Thank you.
    Ms. Hayworth?
    Dr. Hayworth. Thank you, Mr. Chairman.
    Mr. Secretary, I greatly appreciate your comments regarding 
the value of the push to make HUD more efficient and more 
effective. It is absolutely crucial at a time when we are 
spending 42 cents of every taxpayer dollar on debt service 
alone, and in which we have an over 9 percent unemployment rate 
that we are finding difficult to overcome.
    You also extol the value of private funding as instilling 
discipline in these market placing, and I think that is so 
important to recognize, that we should, I would submit to you, 
minimize Federal involvement in the housing and mortgage 
marketplace to the extent we can and keep it to the neediest.
    I have an example of why that is so important from my own 
home county, which is Westchester County, New York. We are 
struggling under the burden of a Community Development Block 
Grant agreement that was made under a previous county 
executive's administration from HUD, and it has been very, very 
difficult to try to comply with the terms of that grant because 
they simply don't make sense in our county. It was not this 
county executive's error, but we are now living with the 
consequences, which points up again the exceedingly difficult 
challenge of having the Federal Government involved in local 
marketplaces.
    But they had to hire a consultant to help, at HUD's 
discretion, if you will, to help sort out this mess. And I 
wonder if you might hazard a guess as to how much that 
consultant is charging per hour, apparently a fee, a figure set 
by HUD, what you might consider a reasonable fee. I am not 
trying to put you on the spot, but what you might consider a 
reasonable sum per hour to consult and help our county get out 
of this predicament.
    Secretary Donovan. Congresswoman, let me make sure I am 
clear. This was a court case brought against the county. There 
was a court-appointed master essentially who was put in place 
to implement the decision of the court.
    Dr. Hayworth. It is very difficult, yes.
    Secretary Donovan. I would have to say I am not sure what 
the court-appointed monitor was charging.
    Dr. Hayworth. It is over $900 an hour that the taxpayers of 
Westchester County, New York, are now paying, the sorely 
pressed taxpayers. We are losing businesses, unfortunately, to 
neighboring States and other States because the tax structure 
in Westchester County, although it is a wonderful county in so 
many ways, is so difficult to cope with.
    So I wonder if you might as our Secretary see if you could 
possibly help mitigate some of that burden, if that sounds at 
all like that might be a rather exorbitant amount for the 
county to be disbursing merely to have some sort of regulator, 
if you will, in place. I would be most grateful on behalf of 
Westchester County, New York.
    Secretary Donovan. Congresswoman, this is an issue that I 
know has been a lot of focus in the county. Under the prior 
county executive, there was this court case brought 
independently against the county for not complying with their 
required fair housing obligations. The court did make a 
determination.
    I will say that we have been somewhat concerned that under 
the new county executive, for example, he vetoed a piece of 
legislation that the county legislature passed and was required 
by the settlement. There are a number of other steps that have 
been taken that I think have caused this to go on longer than 
anyone would have liked. Certainly, we are very interested in 
trying to resolve it.
    We have offered technical assistance from the agency so 
that we could minimize any costs to the taxpayer there, to the 
local taxpayers in terms of working this through, but, 
unfortunately, we haven't been able to get compliance with the 
ruling at this point.
    Again, this is not HUD's decision. It was the court that 
imposed this decision, and we would like nothing more than to 
get to a resolution, which is, frankly, to build a certain 
number of units in the county on sites that I think we have 
been able to work with the county effectively to try to 
identify. We will do everything we can to accelerate it and 
make sure it gets resolved as soon as possible.
    Dr. Hayworth. That would be much appreciated. There has 
been a tremendous amount of difficulty finding appropriate 
sites within the county and sites that would make sense 
actually for those who would indeed inhabit these new homes. It 
is very difficult to connect them with job opportunities. This 
is almost part of a spiral in which we have a heavy tax 
structure. Federal taxes certainly play into that. HUD is part 
of our Federal tax burden, and because of that, we don't have 
the jobs climate that we should. And, of course, the best way 
to afford a home and to afford a private rental or mortgage is 
to have a job.
    So, again, I laud your emphasis on streamlining what HUD 
does so that we can relieve these burdens from places like 
Westchester County, where it is starkly in evidence that a 
Federal mechanism can be very difficult to layer on top of a 
local community.
    I yield back my time.
    Chairman Bachus. Thank you.
    By prior agreement of Mr. Green and Mr. Carney on this 
side, Mr. Green on this side, and Mr. Schweikert on our side, 
will be the next two speakers. Mr. Green?
    Mr. Green. Thank you very much, Mr. Chairman, and I thank 
the persons who agreed.
    Mr. Secretary, at first glance it does appear that there is 
a $104 million decrease. However, there was a transfer, and as 
a result of the transfer, there is actually a $10 million 
increase when compared to the 2010 budget, and we are talking 
about now for the 811 program, persons with disabilities. So I 
compliment you for looking out for persons with disabilities, 
many of whom are veterans. It is very important to me and 
people in my district. I happen to have a VA hospital in my 
district.
    However, the CR that was passed by my friends on the other 
side would cut approximately $210 million, and that would be a 
70 percent cut, which could lead to approximately 14,000 
households, and these are persons with disabilities either 
losing their assistance or being displaced.
    Now, my assumption is that this was a gross oversight and 
my friends on the other side would not cut 70 percent from a 
program that will have some significant impact on persons with 
disabilities, many of whom are veterans. There is no question 
that veterans are returning from these wars and they are 
disabled. So I am going to assume that this is an oversight and 
give my friends the benefit of the doubt.
    But I would like you to comment briefly on what this cut of 
$210 million, which is 70 percent from the 811 program, what 
would the impact be, if you would, on persons with 
disabilities? And when the yellow light comes on, if you could 
wrap it up, I have one more question. Thank you.
    Secretary Donovan. Congressman, the 202 and 811 programs, 
the programs for the elderly and people with disabilities, are 
our primary tool for construction of new units at HUD for 
seniors and people with disabilities. And as I said in my 
testimony, we did have to make difficult decisions in our 
budget this year to cut by between 5 and 10 percent those 
programs so that we would have fewer new units.
    Obviously, a much deeper cut in those programs would have a 
far more serious effect on limiting the number of seniors and 
people with disabilities who would be able to get access. We 
see typically many year-long waiting lists for these properties 
around the country, and that is why we made difficult decisions 
but felt we needed to maintain a significant level of funding 
for new units in those programs.
    Mr. Green. And do you find that a good many of the persons 
with disabilities are veterans?
    Secretary Donovan. We do. Also, one of the reasons why we 
continued to propose an investment of $75 million in 10,000 new 
HUD-VASH vouchers in the budget is because we have seen great 
success in housing veterans who are at risk of homelessness or 
are already homeless through that effort as well.
    Chairman Biggert asked about the rising costs of Section 8. 
A significant part of that has been the renewal of these HUD-
VASH vouchers as they have come into the Section 8 budget for 
the first time. When we came into office, the President did, 
there were only about 1,200 veterans around the country who 
were being housed by VASH. We are now up to over 20,000 
veterans who are housed under VASH, and it has put us a good 
way down the road toward keeping the President's commitment to 
end veterans' homelessness by 2015.
    Mr. Green. Thank you. I compliment you and the President 
for that commitment. It means a lot to many people in my 
district and probably people around the country.
    One additional question. There is a contemplation of 
terminating HAP, FHA, NSP, which, of course, is the 
Neighborhood Stabilization Program, the Emergency Mortgage 
Relief Program. If these programs are terminated, my suspicion 
is there will be an impact on housing of persons. Many persons 
who might benefit from these programs and stay in their current 
housing circumstance will now be pushed into other 
circumstances.
    Can you give a comment, please, on the impact of 
terminating these programs in terms of how it will impact your 
budget and what you are trying to accomplish? Again, I thank 
the President for what he has done.
    Secretary Donovan. I know you have a hearing on that 
tomorrow morning. Commissioner Stevens will be testifying along 
with Assistant Secretary Marquez on the programs. But let me 
just quickly frame some of the issues there.
    There would be a substantial risk not only to the families 
who benefit from those programs and the neighborhoods that 
benefit from those programs, but also to the broader housing 
market. When the housing recovery is still fragile, we need to 
continue to do more.
    Every month, we have tens of thousands of new homeowners 
who are at risk who benefit from modifications under the HAMP 
Program. Our data shows that the redefault rates have been 
dramatically lower than in other programs, so they are 
successful. We have seen average reductions in payment of over 
$500 a month under that.
    The FHA refinance program, which is an effort to get banks 
and owners of loans to write down principal on their own 
nickel, so these are not taxpayer costs for writing down those 
mortgages, these are private costs to those who hold the 
mortgages. We have had three major servicers sign up just 
within the last few weeks for that effort. And just as it is 
beginning to expand, to cut it off now and stop the reduction 
in negative equity, which we think is one of the most 
significant barriers to housing recovery now, would be a real 
problem.
    In addition, the Emergency Homeowner Loan Program targets 
borrowers who are unemployed through no fault of their own. The 
primary reason we see new foreclosures and new defaults today 
is because of unemployment. Yet the tens of thousands of 
borrowers who would benefit from the Emergency Homeowner Loan 
Program would be--we would not be able to help them without 
that funding.
    So, all of those are important.
    The last thing I would say is the Neighborhood 
Stabilization Program is one that has invested in communities 
that have been devastated by foreclosures. What we have seen 
already, where the program has been invested, we see reductions 
of as much as 50 or 75 percent in the vacancy rates in those 
neighborhoods. That means not only do we help families get into 
those homes, but their neighbors who have paid their mortgages, 
have done everything right, when they saw their property values 
declining precipitously because they had 5 or 10 foreclosures 
on their block, those families would not be helped as well to 
help those neighborhoods recover.
    We have seen lots of private capital come in. When we start 
to fix up homes through the Neighborhood Stabilization Program, 
it sends ripple effects into the surrounding community with 
homes that get renovated with private capital as well. So all 
of those are effects that would be significant from the 
termination of these programs.
    Mr. Green. Thank you, Mr. Chairman.
    I owe you some time, and, of course, I am grateful.
    Chairman Bachus. Thank you. I did want the Secretary to 
give you a comprehensive answer to that, because I know that 
there is a concern about that issue. I probably wouldn't allow 
that much time again, but now the Secretary has answered, and I 
didn't want to chop it up. I have to applaud that answer. It 
was the most comprehensive answer that we have heard in a long 
time.
    Secretary Donovan. I apologize.
    Chairman Bachus. No. I don't know whether you had that 
written and you read it, but it was, very, very comprehensive.
    Mr. Schweikert?
    Mr. Schweikert. Thank you, Mr. Chairman.
    Mr. Secretary, you don't have to be that comprehensive on 
these.
    What do you think the total liabilities, if we look at the 
FHA loan portfolio right now, where are we at?
    Secretary Donovan. On a net balance sheet basis, the FHA 
fund, if we were to value it in a traditional way we would 
value a company or insurance fund, the latest estimates are 
that the value is just north of $30 billion. So that would mean 
our assets outweigh our liabilities by in the range of $32 
billion.
    Mr. Schweikert. Mr. Chairman, Mr. Secretary, internally 
when your team sets up the actuarial standards of what you 
should have set aside, what range should you be in?
    Secretary Donovan. By Congress' standards, we are required 
to have a standard where we should be above 2 percent of our 
outstanding portfolio in the fund. So that is the standard that 
is set. And that is significantly higher than you would see in 
the private sector typically for what the standards are for 
capital with similar kinds of loans.
    Mr. Schweikert. Mr. Secretary, is that 2 percent, or 2.5 
percent?
    Secretary Donovan. Two percent.
    Mr. Schweikert. Two percent would be how much?
    Secretary Donovan. I don't have it in front of me, the 
total assets.
    Mr. Schweikert. But it would be dramatically greater?
    Secretary Donovan. It would be higher than we currently 
hold in what we call our excess reserves. The $32 billion that 
I referred to is our total reserves. The portion that is so-
called excess reserves above and beyond what we need to meet 
our predicted liabilities is in the range of about $7 billion 
today, and that is below the 2 percent standard at this point.
    Mr. Schweikert. Mr. Chairman, Mr. Secretary, in that, let's 
call it the $32 billion in reserves, is that also encumbered by 
the number of units that have been foreclosed on that HUD is 
holding title to?
    Secretary Donovan. That includes all the potential 
liabilities, not just current liabilities, but also expected 
projected losses on every loan that we have made to date.
    Mr. Schweikert. You beat me to where we are going. You take 
all the fun out of it. How many units do you think you hold 
right now, Mr. Secretary?
    Secretary Donovan. How many units of foreclosed?
    Mr. Schweikert. Yes.
    Secretary Donovan. It is in the tens of thousands. I bet if 
the smart folks behind me--give me 2 minutes, and I could get 
you the exact figure.
    Mr. Schweikert. If anyone has a guess, just yell it out.
    Secretary Donovan. I think it is in the 70,000 to 80,000 
range.
    Mr. Schweikert. Okay. As we keep talking about housing 
policy and some of the mechanics, let's just say it is 70,000 
single-family or condo units that you are holding right now 
that you are marketing, that you are selling. How does that fit 
into some of your other housing policies? Is it just you are 
going to sell them and refund, put the capital back in? What 
are you doing with those?
    Secretary Donovan. Typically, what we do is market those 
and sell them at market price. There are targeted neighborhoods 
that are particularly distressed where the prices that we would 
get typically don't support rehabilitating and keeping those 
properties in decent condition. So there are targeted examples 
where we would discount those prices in order to get a 
commitment from, whether it is a private sector group or a 
public sector group, a nonprofit group to fix up that house and 
to sell it say maybe to a first-time home buyer or in a way 
that contributes to a revitalization of that neighborhood.
    Mr. Schweikert. Mr. Secretary, in that context, I would 
also encourage you to consider even just a speculator or a 
family who gets together and is willing to spend money and fix 
it up because it provides cash at the local Home Depot and jobs 
and those things but also fix up that vacant house that sits 
next door to you for sometimes months and months, sometimes a 
year. If you are holding 70,000 housing units, one of my great 
concerns, being from the Phoenix area--and I know that is one 
of the areas you hold a lot of product in--is as long as those 
houses are on the market, my market never comes back. We have 
to consume a big portion of this inventory.
    Does that at least fit into your policy of pushing this 
dead inventory through?
    Secretary Donovan. Yes, it does. And particularly in 
targeted neighborhoods, as I talked about, where there have 
been a significant number of foreclosures. I will say that we 
actually don't hold a great deal of property through FHA in 
Arizona because frankly we continued to lend 30-year fixed-rate 
safe mortgage products during the housing bubble and our market 
share shrank to almost zero in States like Arizona, California, 
Nevada, and Florida. But this is where I think the Neighborhood 
Stabilization Program that we talked about before is so 
important.
    The discussion tomorrow is about the third round of 
Neighborhood Stabilization funding. We have already obligated 
100 percent of the first $6 billion that we had. We have the 
additional $1 billion which should be fully obligated by the 
end of the month, this month. That funding can go to help buy 
up and renovate vacant properties, foreclosed properties. And 
we particularly targeted it in the third round to communities 
like Arizona where they have been particularly hard hit by the 
crisis.
    Mr. Schweikert. Thank you, Mr. Chairman. Sorry to go over 
the time.
    Chairman Bachus. Thank you, Mr. Schweikert. Mr. Secretary, 
we have several very talented members in the freshman class on 
both sides of the aisle. Mr. Schweikert, Ms. Hayworth, you have 
heard from them; they are very thoughtful. And Mr. Carney on 
the other side is now recognized, another one of our thoughtful 
distinguished freshmen.
    Mr. Carney. Thank you, Mr. Chairman. And thank you for your 
agreement to yield me some time. Mr. Secretary, thanks for 
coming up today. Thanks for your leadership there at HUD. I 
have been very impressed by your work, great work, trying to do 
a very difficult job in meeting the President's budget cuts.
    I have two questions. First, you gave a very comprehensive 
answer to Mr. Green on foreclosure mitigation efforts. Is there 
anything that you left out? And second, can you characterize 
that, the homeowners you are able to touch in terms of the 
total universe of people affected and at risk?
    Secretary Donovan. Let me be honest, Congressman. I think 
it is fair to say that we have not reached as many people as we 
would have liked to with those efforts. We have reached more 
than I think we get credit for, to be frank, but not as many as 
we would have liked. We have about almost 600,000 permanent 
modifications in the HAMP program at this point. One thing that 
is often missed is that is only one piece of the overall 
efforts. And in addition to that, we have about 700,000 
homeowners who have been able to stay in their homes thanks to 
loss mitigation work we do at FHA, which is separate from the 
HAMP program.
    Mr. Carney. Is there something you would do differently?
    Secretary Donovan. One more thing I would add. One of the 
things that I think HAMP did effectively was we targeted a 
fairly narrow group of homeowners in the sense that we said, 
you have to have a mortgage payment that is more than you can 
afford on your current budget. And we only limit it to those 
who live in their homes, other steps like that. But we did 
encourage private modifications with no tax cost to the 
taxpayer that now total over 2 million modifications. Before 
the HAMP program, on average, those were actually increasing 
payments to homeowners, not decreasing them. Increasing them on 
average. And now that has changed dramatically where we have 
really standardized the process through HAMP where we see a 
significant reduction in payments to the average private 
modification.
    We have made a lot of the changes that I think have begun 
to help this. We now see 75 percent of those who come into 
trial modifications under HAMP actually get a permanent 
modification because of the changes we have made. So there are 
significant improvements. I think we are still concerned with 
the servicers, the level of service they are providing, the 
number of people they have doing this. Is it enough? There have 
been improvements, but we have to go farther on that and demand 
more from them.
    Mr. Carney. This may be an unfair question. We had your 
colleague, the Treasury Secretary, in this morning talking 
about Fannie Mae and Freddie Mac. Were you part of the 
discussions to develop that?
    Secretary Donovan. Very much so. It was a joint HUD-
Treasury effort.
    Mr. Carney. What is your view? We had a lot of angst about 
the effect on low- and moderate-income homeowners; what is your 
view of the various options? Full privatization is Option No. 
3, which I guess creates an explicit guarantee with a limited 
government role. Any of them have a more limited government 
role, but HUD is going to have a big role. What is your view of 
that and does your budget anticipate that role?
    Secretary Donovan. Certainly, there are two critical things 
I would say there. One is, we need to have reform. I think we 
can all agree that the prior system was fundamentally broken 
and that it needs to be fixed. The second thing I would say 
that is important--more directly to your question--is that 
under all of the three options that we propose, we believe FHA 
should continue to be an important part of the market, and that 
in that sense, an explicit targeted guarantee from the Federal 
Government must be part of the new system through FHA.
    Mr. Carney. So that would be Option 3?
    Secretary Donovan. Actually even under Option 1, we are 
saying FHA should continue. So HUD should continue to have a 
role in the market. And then the question really is in the 
three options beyond FHA, what additional guarantee should we 
have?
    But we also believe that FHA's role needs to step back. 
Traditionally, we have been in the range of 10 to 15 percent of 
the market. We are now over 20 percent. And if you add in VA 
and USDA, we are close to 30 percent of the market. So one of 
the things that we have done in the budget that is critical is 
to increase the mortgage insurance premium by 25 basis points 
for FHA. Not only will that bring in an additional $2 billion 
of revenue next year that helps to strengthen our reserves, to 
go to the Congressman's question before, to build up our 
reserves again to the level they need to be, but it also will 
help to allow us to start to step back as private capital comes 
back in with mortgage insurers and others that can provide the 
kind of protection that FHA does currently.
    Mr. Carney. Thank you, Mr. Secretary. Keep up the good 
work. Thank you, Madam Chairwoman.
    Mrs. Biggert. [presiding] The gentleman from Ohio, Mr. 
Stivers, is recognized for 5 minutes.
    Mr. Stivers. Thank you very much. I would like to follow up 
on the HAMP program a little bit if we could. I have read some 
statistics from the Federal Reserve, some research that said 30 
percent of seriously delinquent loans were eligible for the 
HAMP program. And of those, only 24 percent went on trial or 
permanent. So that is about call it 7, 7.5 percent of the 
eligible loans ultimately went through the HAMP program. And 
then of those, about 10 percent were on a serious delinquency 
within about 6 months.
    What is wrong here? Why isn't the program working? And what 
did you do to fix it? You said earlier that you have done some 
things to fix it. Can you help me understand? Walk me through 
that.
    Secretary Donovan. As I said before, I think there is no 
question that we haven't been satisfied that we have reached as 
many people as we would have liked. And so that is part of the 
equation here. I would point out that it is a different thing 
to say we haven't reached as many people as we would have liked 
to, as opposed to, we should end the program. Because there 
still are tens of thousands of homeowners who get modifications 
each month under the program. The primary reasons why people 
have not qualified for HAMP have been, first of all, that we 
don't allow investor owners. You have to have an unaffordable 
mortgage payment. In other words, your current payment has to 
be more than 31 percent of your income. Those are two key 
things that have--
    Mr. Stivers. Yes. I guess I am concerned about the ones 
that have gone through. A lot of them are continuing to become 
delinquent afterwards. So is the program really working?
    Secretary Donovan. On that point, just to be clear, over 50 
percent of those who didn't qualify in the first place for a 
trial modification get private modifications or become current 
on their mortgages. Only 10 or 15 percent actually end up in 
foreclosure.
    Mr. Stivers. That is where I was going to go next.
    Secretary Donovan. I don't think it is accurate to assume 
that those folks aren't getting help. And then again, over 50 
percent of those who get a trial modification but don't qualify 
for a permanent modification get some other form of 
modification or become current. And those who do qualify for a 
permanent modification, our numbers right now are that 85 
percent of them are successful after a year. And so we would 
like to reach more people. We are trying to do that. But those 
who do get help are quite successful and we have set a standard 
that means, even if you don't qualify for a HAMP mod, you often 
can get help--on average, people do get help with other kinds 
of modifications.
    Mr. Stivers. Sure. And I guess that gets to my next 
question. Because if 2 million homeowners got help without the 
HAMP program and 600,000 got help with the HAMP program, how 
many of those 600,000 would have gotten help without the HAMP 
program in addition to the 2 million who received the help but 
didn't qualify for the HAMP program? I guess I am trying to 
understand the difference between what would happen with or 
without the program.
    Secretary Donovan. Each time we have a modification, we run 
a net present value kind of model for them. And so what we have 
seen is that the servicers are clearly willing with the 
incentives that we have provided in HAMP to reach a set of 
borrowers that they wouldn't reach otherwise. I don't think 
there is any data that we could provide that would show that 
every single one of those would not have been helped, but it is 
clear that there are a significant number of those who would 
not have gotten assistance otherwise. And I think most 
importantly, that they got a modification that makes it much 
more likely that they succeed in the long run because of the 
standards that would be set.
    Mr. Stivers. That is where I want to go next, and I am 
running out of time, so I want to try to run through this.
    So of the 2 million modifications that have happened in the 
private market without the HAMP program, what is the success 
rate there versus--you say you have an 85 percent success rate 
after a year?
    Secretary Donovan. We see a typically 20 percent or higher 
increase in the failure rate in those modifications. So the 
data is changing over time. Success rates are getting better as 
the private sector is modeling more on HAMP. But typically what 
we see is lifetime default rates now of 50 to 60 percent. The 
default rate I talk about is a 12-month default rate. So we are 
presuming that continues to go up somewhat over the lifetime of 
those loans but we still expect it to be 20, 30 percent higher 
over time.
    Mrs. Biggert. The gentleman's time has expired. The 
gentlelady from California, Ms. Waters.
    Ms. Waters. Thank you very much. Mr. Secretary, I would 
like to thank you for coming. I really had intended to talk 
about the Community Development Block Grants and the public 
housing capital fund that is going to be cut by my friends on 
the opposite side of the aisle, and I wanted to talk about how 
it is going to impact communities all over this country. But 
once you start talking about servicers, I have a lot of 
thoughts about that and the HAMP program. Let me just say that 
I really respect the work that you do.
    Secretary Donovan. Thank you.
    Ms. Waters. And the experience that you brought to the job. 
I know that left on your own, you probably could do a lot more 
things. But I know a lot of things come into play as you try 
and solve these difficult problems. And this whole role of 
servicers is one of those areas that we should all continue to 
be concerned about. Now I understand that some of you--meaning 
some people in the Administration and perhaps you--have been 
involved in some negotiations with the servicers. Is that still 
going on?
    Secretary Donovan. That is correct. And that is still going 
on.
    Ms. Waters. And I guess if it is still going on, it is not 
like you can tell me while you are in negotiations, is that 
right?
    Secretary Donovan. These are enforcement actions that we 
are undertaking, 11 different Federal agencies along with the 
50 State attorneys general. So I am not at liberty to discuss 
the details. That is correct.
    Ms. Waters. Let me just mention that the movie, ``Inside 
Job'' that received an Academy Award on Sunday, one of the 
things that the director said was that nobody has gone to jail 
after all of the fraud that has been uncovered. I am really 
worried about the servicers. And I believe that if there are 
weaknesses in the HAMP program--and there are, really, it is a 
voluntary program, and they don't have to comply. They do what 
they want to do. And it seems to me that there has been no way 
to enforce what the Administration would like to enforce in the 
HAMP program. That is why the weaknesses are now being 
identified as reasons to get rid of HAMP.
    Now, I don't agree with my colleagues on the opposite side 
of the aisle that we should get rid of HAMP and NSP and the 
Unemployed Homeowners Assistance Program. We worked very hard 
for these programs and they service people all over America in 
our small towns, our cities, our suburban areas, all of that. 
And one reason I disagree with them on these cuts is that they 
don't have anything better. They don't have anything to replace 
it. And I know they are not saying they don't give a darn, that 
they don't care about these homeowners who are losing their 
homes, they don't care about these communities where people are 
losing value because you have boarded-up properties that are 
not getting renovated except for what we are doing with NSP.
    So I guess what I really want to know is this, leaving 
aside whatever you are negotiating with the servicers, when are 
we going to set some standards? When are we going to talk about 
principal write-down? We are not going to get loan 
modifications really working in the way that we want until we 
start to talk about principal write-down and some other kinds 
of things. So I guess without going into the negotiations, tell 
me where you think we could be tougher, where we would be more 
effective.
    Secretary Donovan. Given that I don't have criminal 
authority, I won't go into a part of your question. Let me say 
this just on the settlement, on the discussions that we are 
having around the enforcement that I talked about. What I can 
say is this, it is clear that servicers expect homeowners to 
live up to their responsibilities in paying their mortgages.
    Ms. Waters. Excuse me.
    Secretary Donovan. We should demand exactly the same thing 
from the servicers, that they live up to their responsibilities 
in providing homeowners alternatives to keep them in their 
homes and to meeting the requirements they have under servicing 
those--
    Ms. Waters. Mr. Secretary, I hate to interrupt you. But 
when you say the servicers expect the homeowners to live up to 
their responsibilities, I have to remind everybody that these 
millions of homeowners who are faced with foreclosures didn't 
all of a sudden just become bad people in America who don't pay 
their bills. Something happened. And the something that 
happened was, the products that were put on the market that we, 
in our oversight responsibility, failed to do anything about. 
These no-doc loans, these resets of people who were lured into 
loans that they could not afford and did not understand, on and 
on and on. So many people cannot live up to the 
responsibilities of the mortgage that they signed on to because 
it was fraudulent to begin with. And so I get really upset when 
I hear that.
    Secretary Donovan. Congresswoman, I thought I was agreeing 
with you that the servicers need to live up to their 
responsibilities. And that was my fundamental point. I 
completely agree that we had mortgage products in this country 
that nobody should ever have been able to provide.
    Mrs. Biggert. The gentlelady's time has expired. The 
gentleman from North Carolina, Mr. McHenry.
    Mr. McHenry. I thank the Chair. Thank you, Mr. Secretary, 
for your testimony.
    I am reading numerous press reports and getting word from 
various folks around town about the ongoing settlement 
discussions that my colleague referenced in her questions. In 
light of the robo-signing and the servicers issues, can you 
shed any light on these discussions?
    Secretary Donovan. What I can say at this point, given the 
nature of the discussions, is that our aim in these discussions 
is to hold servicers accountable for mistakes that they have 
made and to ensure that they live up to their responsibilities 
under Federal requirements, whether it is in the FHA lending 
program or the regulatory responsibilities that they have.
    Mr. McHenry. When you say ``our,'' is that HUD or is that 
FHA?
    Secretary Donovan. There are 11 different Federal agencies 
involved. Because FHA is a part of HUD, HUD is directly 
involved. But there are 10 other Federal agencies along with 50 
State attorneys general who have authority.
    Mr. McHenry. Who is taking the lead within the 
Administration?
    Secretary Donovan. We are working very closely with the 
Department of Justice and with Treasury to jointly lead the 
Administration's efforts. We are coordinating with the banking 
regulators that are independent.
    Mr. McHenry. Okay. Is there a lead institution here?
    Secretary Donovan. In the direct discussions with the 
servicers, I would say the Department of Justice has that lead 
authority, and in coordinating with the State attorneys 
general.
    Mr. McHenry. Okay. There are also reports that Elizabeth 
Warren, who is apparently, whatever her title is, now with the 
Consumer Financial Protection Bureau (CFPB), I guess advisor--
that she is taking a lead. That is not your understanding?
    Secretary Donovan. That is not correct.
    Mr. McHenry. That is not correct. Okay. But the CFPB is 
engaged in these discussions as well? As one of the 11 
regulatory bodies?
    Secretary Donovan. At this point, CFPB is part of Treasury. 
As I said, Treasury is involved in the discussions.
    Mr. McHenry. So is that CFPB or is it others in Treasury?
    Secretary Donovan. There are a number of people from 
Treasury who are involved in the discussions.
    Mr. McHenry. Okay. We are just trying to get an 
understanding of it. There are 435 of us in the House and 100 
in the Senate who are elected to represent the people and we 
have ongoing settlements. Some have talked in the $30 billion 
range. And so we want to have some understanding of what the 
ramifications are.
    Have there been discussions about what that settlement 
money would be put towards?
    Secretary Donovan. There have been discussions. As I said 
earlier, given the nature of the discussions, enforcement 
actions that are pending, I am not at liberty to discuss the 
details of it.
    Mr. McHenry. No, no, no. All the press reports we have seen 
and the reports that I have gotten, what you use the money 
towards, this isn't something secret. We have heard that it is 
principal reduction. Is that not true?
    Secretary Donovan. Congressman, given the nature of the 
enforcement actions that are at issue here, I am not prepared 
to discuss the details of it today.
    Mr. McHenry. Two weeks ago before this very committee, Mr. 
Stevens, who heads the FHA, I asked him exactly this same set 
of questions about this, and he was far more forthcoming with 
this committee about that, those settlements and even the 
discussion about the range of options about what they would use 
the money for. Could you at least discuss the range of options 
that this settlement money would be used for?
    Secretary Donovan. Commissioner Stevens has been involved 
in those discussions. There have been a number of possible 
options discussed. I don't want to give you the impression 
somehow that we have settled on a particular course at this 
point, particularly given that the State attorneys general are 
involved as well and we have not settled on or decided any of 
those direct--
    Mr. McHenry. Do you foresee coming back to Congress for 
authorization to spend these funds? Yes or no?
    Secretary Donovan. These are enforcement actions that are 
done under existing statutory authority.
    Mr. McHenry. So that would be ``no?''
    Secretary Donovan. There is no requirement that I know of 
that we get approval for these discussions.
    Mr. McHenry. Even if you created a $20 billion to $30 
billion fund, which is multiple times larger than the HAMP 
program, you don't foresee coming back to Congress in order to 
have for mortgage write-downs? Interesting.
    Secretary Donovan. A large part of the authority here is 
State authority that the State attorneys general have. I think 
that is an important component of this, that the Federal 
authorities are only a piece of this and there is a significant 
share that is held by the State attorneys general.
    Mr. McHenry. Okay. I appreciate your testimony. I know it 
is difficult to answer these questions. But my final question 
is, do you think the HAMP program has been a success or 
failure?
    Mrs. Biggert. The gentleman's time has expired.
    Mr. McHenry. If he can just answer, success or failure.
    Mrs. Biggert. We are facing a vote, so we are really trying 
to limit the time.
    The gentlewoman from New York, Ms. Velazquez.
    Ms. Velazquez. Thank you, Madam Chairwoman. Thank you, Mr. 
Secretary, for being here and thank you for your leadership and 
your service.
    This morning, Secretary Geithner spoke about the role of 
the GSEs in promoting affordable multifamily housing. The 
multifamily portfolio has been profitable compared to the 
single family portfolio. So what are some of the lessons 
learned from the GSEs on this matter that you can tell us? And 
what features of their multifamily model could we apply to any 
housing system?
    Secretary Donovan. Congresswoman, it is a very important 
question because I think one of the things we often miss in the 
discussion about the GSEs is that there is a significant 
difference between single family finance and multifamily 
finance. And in fact not only, as Congressman Frank said 
earlier, has the multifamily been profitable, and as you said 
as well, but there is also oftentimes more need for involvement 
in multifamily because the types of transactions are so much 
more varied, there is less standardization. So if we are going 
to access securitization as a way of improving interest rates 
and increasing the affordability of housing, oftentimes a 
guarantee is more necessary there.
    I think one of the things that has been particularly 
important in the model that the GSEs have developed that could 
be applied going forward is a risk-sharing model. One of the 
things that I think is important in this debate is that FHA's 
model has traditionally been a 100 percent insurance model. So 
in some ways, taxpayers can be put at risk in ways that they 
are not under the model that the GSEs pursued on the 
multifamily side. And I think it is worth--and certainly in the 
White Paper, we lay this out--that we look at risk sharing as a 
potential alternative, whether for FHA or for some other 
guarantee in the future.
    Ms. Velazquez. Very good. Thank you. Secretary, your 
agency's Fiscal Year 2012 budget proposes taking $1 billion of 
public housing authority's reserve fund from the housing 
operating account. Will our housing authorities have sufficient 
funds for any contingency with the reserves reduced so much? 
And would you tell us what will be an appropriate level?
    Secretary Donovan. Thank you for asking the question. This 
was one of the difficult choices that we had to make in putting 
the budget together this year. We have seen reserves at housing 
authorities for their operating funds increase substantially 
over the last couple of years by over $1 billion. And the 
proposal would be to draw down on excess reserves in a targeted 
way--not at every housing authority but at housing authorities 
that have excess reserves, but to leave them with an adequate 
level of reserves to be able to continue operating. We 
obviously would need to work with them to understand whether 
there are commitments that they have made in those reserves to 
ensure that we are doing this in the right way. And we realize 
this is a new proposal. But given the fiscal realities, we felt 
that this was a better, more targeted way to fully fund the 
needs of operating public housing this year. And it is similar 
to what we have done in the past with the voucher program where 
we have drawn excess reserves to fund new vouchers.
    Ms. Velazquez. So are you telling us that this does not 
represent a shift in public policy?
    Secretary Donovan. It is a shift. It is something that we 
are proposing for the first time this year. We do have a model 
from the voucher side where we have used excess reserves before 
to fund the needs of the program. And it is something 
obviously, given that it is new, we would need to have a 
significant discussion with the committee about along with the 
Appropriations Committee and to make decisions as we formulate 
the 2012 budget.
    Ms. Velazquez. Is it expected that the foreclosure rates 
will rise in the coming months as foreclosure moratoriums come 
to an end?
    Secretary Donovan. I think it is likely that we will see 
the number of completed foreclosures rise again. Just to be 
clear, the number of people entering foreclosure was down about 
20 to 30 percent year over year before the robo-signing problem 
emerged and there was an even further reduction, another 20 
percent reduction in the number of foreclosures that were being 
completed at that point and the number of people entering 
foreclosure. So I think while we may see it rise somewhat in 
the coming months, the overall trend has been down. And I think 
that is a significant part because of the more than 4 million 
modifications we have seen relative to just 1.7 million 
completed foreclosures.
    Mrs. Biggert. The gentlelady's time has expired.
    We have time for one more question before we go vote. We 
have three votes. How many people would like to come back?
    Mr. Scott. I would like to, but I don't want to be the only 
one.
    Mrs. Biggert. The gentleman from Pennsylvania.
    Mr. Fitzpatrick. Thank you, Madam Chairwoman. Mr. 
Secretary, are the administrators of the Section 8 vouchers 
held accountable through annual performance evaluations, 
performance measures? And if so, and I hope so, what happens 
when an administrator fails to meet the objectives? I have a a 
quick follow-up question that has to do with the City of 
Philadelphia Housing Authority.
    Secretary Donovan. We do have performance standards that 
housing authorities are required to meet under the voucher 
program as well as the public housing program. More than 95 
percent of all housing authorities meet those standards. We do 
have a subset--Philadelphia as an example--where we designate 
them as what we call troubled housing authorities. But 
absolutely, there are performance standards. In addition to 
that, we have implemented a new set of standards and data that 
we collect. I run every month HUD stat meetings at HUD where we 
look at realtime data on the performance of housing 
authorities. We are also, through this budget proposal, 
increasing investment in technology through our Transformation 
Initiative which will allow us to hold housing authorities 
better accountable in realtime because of enhanced data.
    So we do have those in place, but I think we can agree that 
we should strengthen them and that we are strengthening them.
    Mr. Fitzpatrick. In connection with the Philadelphia 
Housing Authority, since the former executive director Carl 
Green was fired in September, a lot of questionable spending 
has come to light, including Karaoke, yodelers, belly dancers, 
thousands in outside lobbying and outside legal fees. Now just 
this past weekend, I realize that you have called on the PHA 
board to resign. The problems with the Philadelphia Housing 
Authority seem to have been systemic for some time. The city 
controller of Philadelphia said on Saturday that HUD failed to 
catch the spending in its audits. Senator Grassley is also 
following this issue closely and also said this weekend that he 
hopes that HUD is finally paying attention to the situation in 
Philadelphia. Even your agency admitted this weekend that 
everyone could have done a better job.
    So my question is, why were these problems at the 
Philadelphia Housing Authority not caught sooner by HUD? And 
what measures are you putting in place to make sure that 
doesn't happen again?
    Secretary Donovan. Clearly, there are things that we can do 
to step up our focus on troubled housing authorities and to 
make sure not just that we are taking substantial actions when 
these issues come to light, which we have done here. We have 
cut off their excessive spending on outside legal counsel. We 
brought in a very experienced executive director to take over 
the housing authority and, as you rightly point out, did call 
for the board to step down. We will be working with the 
inspector general and a forensic auditor that we brought in who 
came to Philadelphia on Friday to make sure we get to the 
bottom of this. But we also have to catch these problems more 
before they happen, and that is why enhancing our data systems 
is important.
    The other thing that we are doing is setting up a dedicated 
team using Transformation Initiative funding that we got in our 
budget last year and that we are proposing to continue next 
year that would allow us to target people to these problems, 
look at the financial data more systematically from the systems 
that we are building, and to send in those teams earlier on the 
ground where we have early signs of financial or other 
management problems on the ground.
    So those are issues I would be happy to detail more to you 
in specifics, but that is an outline of a number of things we 
are doing to step up our oversight.
    Mr. Fitzpatrick. Thank you.
    Mrs. Biggert. Thank you. The gentleman yields back. We will 
recess for a time to go vote. We have three votes, so if 
members would come back as soon as possible to respect the 
Secretary's time. He has graciously said he will stay.
    Secretary Donovan. Thank you.
    Mrs. Biggert. We stand in recess.
    [recess]
    Mrs. Biggert. The committee will be in order. We will 
resume. And the gentleman from Georgia, Mr. Scott, is 
recognized for 5 minutes.
    Mr. Scott. Thank you very much. Mr. Secretary, thank you so 
much for coming again. I just want to take a moment to thank 
you for your participation with our upcoming event in Atlanta 
to deal with these home foreclosures--as you know, it is just 
huge in the Georgia area--and the work that you have done in 
working with us. As I spoke with to the Secretary of the 
Treasury, Mr. Geithner, this morning, I am very worried in this 
rush for what we truly need to do in a more deliberative manner 
in cutting the Federal budget and moving, where we have to do 
it. I have no problem with that. But I think that we are 
creating some unintended consequences in many of the programs 
that I think are disproportionately being examined.
    Last week, we passed a CR. And in that CR, there was a 62 
percent cut in the Community Development Block Grants. I think 
that one of the things, as I said in my opening remarks, is 
that I think there needs to be more of a cry, more of an 
outpouring of what these programs are doing. And many people 
who feel they have come up here just to cut out government. 
There are people who don't want any government. But there is a 
reason for government. Just saying, get it out of the way and 
let the private sector come in, is not going to solve this. The 
private sector is not out there finding homes and housing for 
the elderly, for those who are disabled, for those on fixed 
incomes, for those with low incomes, for those who are 
unemployed, for the very people that the Department of Housing 
and Urban Development was created for. There is a reason for 
all of this. And unless we are going to find something that can 
help to fill in this gap, I think we are doing the American 
people a disservice.
    I am reminded of the evolving appreciation now for the 
labor unions and collective bargaining in terms of what is 
happening in Wisconsin, for example. Once the American people 
are educated and understand that there is some hurt here, 
unintended consequences, we become aware.
    So now that I made that point, my State of Georgia is 
number five in home foreclosures. It is number four in 
homelessness. It is number three in unemployment at 10.2 
percent. And when you look particularly into the African-
American male community, it is hovering at 22 percent. Many of 
these programs that you are working with, the Affordable Rental 
Program, the HOME Program, the CDBGs, all of these that are 
being cut are basically designed to kind of serve these. Now we 
have veterans coming in, many of whom fought in Iraq and in 
Afghanistan, and they are homeless.
    So my point is, there is a need for government here, and 
there is a need for us to, as we are examining the Federal 
budget and looking at it, let's not be so hasty to rush to cut 
some very vital programs that could put the very vulnerable out 
there. And I believe that HUD has a great responsibility here 
to help sound the alarm and maybe say, whoa, do you know what 
you are doing here? Do you know what a 62 percent reduction in 
the Community Development Block Grants will do? And I wanted to 
ask you to react to that. Just that one fact alone.
    You all have offered a 7.5 percent reduction. That is a big 
drop from what was passed by this Congress last year. What 
would that do? How devastating would that be to your programs?
    Secretary Donovan. Congressman, first of all, let me make a 
point broadly about this budget. I said in my testimony that we 
had difficult decisions that we had to make, cuts that, as the 
President himself has said, that he would not have made if we 
were in different fiscal times. But what we have proposed in 
the 2012 budget is the lowest level of non-security 
discretionary spending since President Eisenhower. When you 
look at it as a percentage of the overall economy, the lowest 
level since President Eisenhower. So we think we have proposed 
a responsible budget and to do that had to propose cuts that 
were painful. Going beyond that, as the President said in the 
State of the Union trying to balance the budget on the backs of 
the most vulnerable is not something that we could support. And 
that is something that I think we do risk if we go too far with 
some of these cuts.
    One of the things that many people don't recognize, they 
think we have had a lot of foreclosures in the country. They 
have seen vacancy rates increase in rental housing, rents go 
down at the top of the rental market. But in fact, we just 
released the worst-case housing needs study for 2007 through 
2009. It showed the single largest increase in worst-case 
housing needs in the history of the study, a 20 percent 
increase in worst-case housing needs among the low income. So 
the need for these programs has only increased during the 
recession. And that is why we focused on ensuring we continue 
to provide assistance to the most needy in the budget.
    Mr. Scott. And that is why, if I may just now conclude, 
Madam Chairwoman, that is why I think that there needs to be a 
clarion call to help educate the American people on the 
consequences. There are some unintended consequences. Do we 
mean to put the elderly out? Those on fixed incomes. Those that 
we are to serve? Veterans who have come back from the war and 
have no home and they are homeless? These programs, 
particularly your HOME Program, have you made an assessment on 
just how many people will be eliminated from this program? Will 
we be exacerbating the homeless rate by some of these drastic 
matters?
    Secretary Donovan. We do have information. I see that the 
time is up. I would be happy to follow up with you directly on 
those specific impacts.
    Mr. Scott. Thank you, sir.
    Chairman Bachus. The gentleman from California, Mr. Miller, 
is recognized for 5 minutes.
    Mr. Miller of California. Welcome, Secretary Donovan. There 
has been talk about basically rolling the GSEs and FHA back out 
of the marketplace, specifically in high-cost areas, which in 
California and other States is going to have a huge, huge 
negative hit. I guess my question is, from all the studies I 
have seen, it seems like those loans are performing very well, 
the new loans we are making out there today. Yet, I don't see a 
private sector capable or ready to move in and backfill the 
place of the GSEs or FHA if you do pull back out of the market. 
And based on everything I have seen, they are filling the gap 
that they were intended to fill, and you are too. Do you think 
now is the appropriate time to start rolling back when there is 
no evidence that the loans you are making are not high-quality 
loans?
    Secretary Donovan. Congressman, as you know, unless 
Congress takes other action, on October 1st, the loan limits 
would step back from a high--at least in the highest-cost 
communities of about $729,000 down to $625,000. So in our 
housing finance reform proposal, we did say that we think 
Congress ought to let that expire as it would under current 
law.
    Mr. Miller of California. Why would you say that? If they 
are performing well, why would you say that?
    Secretary Donovan. We do believe that it is important--and 
specifically speaking about FHA here--that we start to step 
back to our more traditional role of serving a smaller segment 
of the market. And from what we have seen--and I agree with you 
that the market is fragile, it is why we need to take all these 
steps carefully. We do see capital increasingly returning to 
the jumbo market. We have seen particularly, for example, as we 
have announced the premium increase that we did for FHA, 
increasing interest from the private mortgage insurers. So we 
do believe that we can do this carefully and responsibly in a 
way that private capital will step back up. We have seen 
indications of that in the securitization market and elsewhere 
in the jumbo market.
    But I agree with you, we have to watch this very carefully 
to ensure that we are not taking steps that could hurt what is 
a very fragile market at this point. So we believe that the 
step down of the loan limits is something that the market can 
absorb, and particularly in FHA, where those loans, the loans 
above the $625,000 and below the $729,000, make up a very small 
share of our overall business that we are doing today.
    Mr. Miller of California. But you are going to take your 
portion out and the recommendations to get the GSEs out of the 
high-cost areas also. You are talking about the capital 
marketplace. I am not finding anybody else seeing it. The 
REALTORS aren't seeing it. Builders aren't seeing it. 
Homeowners we are talking to aren't seeing it. The only loans 
that are available out there, based on everything we are seeing 
between the GSEs and FHA, you are 92 percent of the 
marketplace. So if there is a private sector backfill, you 
wouldn't be 92 percent of the marketplace. It would be 
significantly less than that. You would see a decreasing number 
as the private sector rolled into the marketplace. We don't see 
that number decreasing, I guess is the problem. And you are 
sending a message to Congress from FHA and the comments of 
Freddie and Fannie that they can be rolled back.
    But the problem I have always had with a system, for 
example is, let's take the GSE for example. You might have a 
limit of $429,000, yet in an area where the median home price 
is $150,000, they can borrow $429,000. Yet nobody in our 
districts can borrow a dime because that is so far below the 
median. From 2000 to 2005, FHA loans went from 99 to 1. So in 
2005, one in our area. And you go back to the old traditional 
marketplace you are in, there will be no FHA loans in the 
marketplace. My concern is--I am not borrowing from FHA so it 
doesn't matter--but you are looking at a marketplace that is 
very stressed at this point in time. I don't think it would 
take a lot to have it start going in the other direction. And I 
am afraid that we are moving too proactively in the vein of 
pulling back and not considering the consequences that might 
occur if the private sector marketplace is not back there to 
fill the backfill of it. And if we let you move back, we don't 
authorize the dollar amount, you are out of it. There is 
nothing you can do. What will you do then?
    Secretary Donovan. Again, Congressman, the step that we are 
talking about is not to go back to the old FHA limits October 
1st. It is simply to go to the HERA limits down to the 
$625,000. And within FHA, the portion of our lending that is 
between $625,000 and $729,000, even in California, it makes up 
a very small share of the lending that we are doing. But again, 
we are very cognizant, and I know Secretary Geithner was this 
morning when he testified, that we have to take these steps 
carefully. We need to see how the market develops, and we need 
to ensure that we are not taking steps that hurt them more or 
less.
    Mr. Miller of California. And I want to encourage you to 
send that message to Congress because it is not getting 
through, that you are not talking about pulling out, you are 
talking about phasing down slowly from $729,000 to $625,000, 
test the market and then go from there. I don't have a problem 
with that. But the debate is occurring around pulling out 
completely, getting GSEs out completely, completely getting out 
of high-cost areas, and that would devastate some of the States 
that need it.
    Mrs. Biggert. The gentleman's time has expired. The 
gentleman from California, Mr. Sherman, is recognized for 5 
minutes.
    Mr. Sherman. Thank you. I will pick up where the wise 
gentleman from California left off.
    When you say your position is to let it drop to $625,000, 
is that a position with regard only to FHA or Fannie and 
Freddie as well?
    Secretary Donovan. Under current law--
    Mr. Sherman. I know what current law does.
    Secretary Donovan. --step back for the GSEs as well as FHA, 
and we support allowing that to step down across-the-board.
    Mr. Sherman. That would have an absolutely devastating 
effect not only on the $900,000 and $800,000 homes in the Los 
Angeles area, but the $400,000 and $500,000 homes that are more 
in parts of my district than Gary's because if you see a 
$100,000 drop, as you would in home sale prices south of 
Ventura Boulevard, then those north of Ventura Boulevard are 
going to drop commensurately and those a little further north 
are going to drop as well.
    It is perhaps a good thing that the Administration doesn't 
have a vote in the decision that Congress needs to make between 
now and September 30th. As you point out, there is no real 
savings for the Federal Government that you can quantify in 
response to the gentleman from California's question. You seem 
to agree with him that these were low-risk, high-quality 
mortgages that FHA was guaranteeing or Fannie and Freddie were 
making and that it was a very small percentage of your overall 
portfolio. Do you have any proof that the Federal Government--
do you have a score that says by letting this drop we decrease 
the Federal deficit?
    Secretary Donovan. The primary reason we are focused on 
bringing FHA back to a more normal market share for FHA is the 
risk that we take on in the next potential recession.
    Mr. Sherman. You can calculate that, but CBO is the referee 
on not only costs but risks; whether we are guaranteeing loans 
to Zimbabwe or to residents of Gary's district or we have a 
flood insurance program, we have CBO determining that. Is there 
any CBO score that says that dropping this and seeing a double-
dip recession in Los Angeles and New York, if not the country 
as a whole, reduces the Federal deficit?
    Secretary Donovan. If anything, for next year, it would 
likely shrink our market share somewhat and therefore result in 
fewer receipts in the short run.
    Mr. Sherman. Again, the CBO scores things long term and 
short term. They are not the best referee, but they are the 
only referee we have here.
    Mr. Miller of California. Will the gentleman yield?
    Mr. Sherman. Yes, I will.
    Mr. Miller of California. I want to clarify, my comments 
were specifically to a distressed market today. When the market 
starts to recover, none of us have a problem with the system 
modifying.
    Mr. Sherman. I don't want to see a double-dip recession in 
the community we both represent.
    Mr. Miller of California. I don't either.
    Mr. Sherman. But let me go on to the issue of private 
mortgage insurance. I don't want to see a world in which if you 
don't have 20 percent down, you can't buy a house. That means a 
third of Americans will never buy a house, and it also has the 
effect that I am concerned about, a depressing effect on home 
prices in the middle of a recession. And don't let the 
economists tell you that we are not in the middle of a 
recession.
    So I think that private mortgage insurance has a role to 
play. When FHA insures the loan, then the taxpayers are 100 
percent at risk. It is my understanding, typically with private 
mortgage insurance, I would say a 5 percent down or 10 percent 
down, you have the downpayment and then you have another 25 or 
30 percent of private risk.
    You are going to be defining the qualified residential 
mortgage, and the statute says that you need to look at data 
that indicates there is a lower risk of default if there is 
mortgage guarantee, and I hope in the next few minutes to give 
you some ideas as to how you and your fellow regulators would 
deal with that.
    First, lower risk of default should mean lower risk of 
foreclosure, not lower risk of being 1 month behind on your 
payments. We have all been 1 month behind on our payments. And 
if you catch up, neither the lender nor the community is 
adversely affected in any way. In fact, the lender makes an 
extra couple hundred bucks. What we are trying to deal with 
here, the risks that we are trying to deal with, the risk 
retention idea is focused on default.
    Mrs. Biggert. The gentleman's time has expired.
    Mr. Sherman. I ask for another 30 seconds.
    Mrs. Biggert. Thirty seconds.
    Mr. Sherman. So I hope that you would do that.
    And second, the overall purpose of this section is to make 
sure that the private sector has skin in the game because we 
really think the private sector is smarter, especially when 
they have skin in the game. When you have private mortgage 
insurance, the lender may not retain 5 percent of the risk but 
the private mortgage insurer, also a private sector entity with 
expertise, has 30 percent risk. So I hope you would help us 
make sure that we have private sector eyes with skin in the 
game but don't have to see 20 percent downpayments.
    I yield back.
    Secretary Donovan. Thanks for your comments.
    Mrs. Biggert. Thank you. The vice chairman of the Insurance 
and Housing Subcommittee, Mr. Hurt, is recognized.
    Mr. Hurt. Thank you, Madam Chairwoman. Thank you, Mr. 
Secretary, for being here. I have some comments. And I hope you 
didn't cover these already in your statement. I apologize for 
not being here earlier. But I was just wondering about the 
total spending that is going to be spent on your program. It 
looks like to me from your remarks that the actual spending 
will be $47.8 billion but there is a credit of $6 billion that 
is deducted from that. So the total claim is $41.7 billion. And 
I am wondering, I think it is important to us who have to make 
the funding decisions, how much are we talking about actually 
spending? How much will your Department spend, not how much 
does it have coming in, in terms of the offsets and credits and 
that sort of thing? I would like to know how much you are 
actually going to spend.
    Secretary Donovan. The $41.7 billion figure is the actual 
appropriated funds that would be from the taxpayer. And that is 
a 2.8 percent reduction from the appropriated amount that we 
used in 2010. So from a taxpayer point of view, that is the 
number to focus on and it is a 2.8 percent reduction.
    Mr. Hurt. Is that comparing apples to apples? Is that the 
same analysis or framework within which we would look at the 
2010 spending levels?
    Secretary Donovan. That is right.
    Mr. Hurt. All right. And my other question, and I just have 
one more related to the Housing Choice Voucher Program. Is it 
my understanding that the President has proposed a $1 billion 
increase in that program?
    Secretary Donovan. That is correct. The reasons for that 
increase are primarily, we have a set of vouchers that were 
appropriated in earlier budgets, for example, VASH vouchers 
that serve veterans who are at risk or have fallen into 
homelessness. There were 10,000 new vouchers in 2010. Those 
then, to be renewed, come into the Section 8 account for the 
first time. So there is a set of new vouchers that have never 
been renewed before. There are also some vouchers that are new 
because we lose public housing units, we lose project-based 
Section 8 units and they are replaced by vouchers. So some of 
them, when there is an increase in a Section 8 account, there 
is an offsetting decrease in other accounts. And then the third 
reason is that costs go up to serve the same number of people 
each year because of inflation but also in the recession, as 
families' incomes have either stayed level or even declined, 
that causes the cost per person to increase over time.
    So those are the three primary factors that lead to the 
increase. And again, our priority in this budget was to 
continue to serve the most vulnerable 54 percent of the 
residents of Section 8 who are either elderly or disabled. And 
so we made cuts in other parts of the budget to accommodate 
that billion dollar increase.
    Mr. Hurt. Are you able to report as to the net? Is it 
ultimately going to be more that is going to be spent?
    Secretary Donovan. It is an increase.
    Mr. Hurt. Across the secretariat, as a consequence?
    Secretary Donovan. It is an increase because we are 
proposing, for example, another 10,000 vouchers in VASH. There 
are other vouchers that we believe we should prioritize to 
continue to spend but have taken cuts in other areas to offset 
that.
    Mr. Hurt. Okay. So there will be expanded programs as a 
consequence and an expanded number of people who will be 
served?
    Secretary Donovan. For example, 10,000 additional veterans 
that we would serve, yes.
    Mr. Hurt. That is all the questions I have. I yield back. 
Thank you.
    Mrs. Biggert. I thank the gentleman. Without objection, I 
would ask unanimous consent to place the statements of the 
following organizations in the record: the National American 
Indian Housing Council; and HUD Housing Counseling 
Intermediaries.
    I would like to thank the Secretary for being here and 
spending time with us so that everybody who was here got to ask 
their questions.
    The Chair notes that some members may have additional 
questions for this witness which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to this 
witness and to place his responses in the record.
    Again, thank you so much for your testimony, and we look 
forward to hearing from you again.
    Secretary Donovan. I thank you, Chairwoman Biggert. I 
appreciate your hospitality here today. Thank you.
    Mrs. Biggert. This hearing is adjourned.
    [Whereupon, at 4:50 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 1, 2011


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