during the hearing in the housing and transportation subcommittee two weeks ago, senator menendez outlined legislation and senator boxer are working on to expand refinancing opportunity for the borrowers. i look forward te further discussion of that legislation and anio proposals today? >> as stated during our state of the housing market hearings on this topic, i share the concern that ongoing challenges and the housing market are acting as a drag on economic recovery. as we have heard many times in this committee, there isn't a silver bullet solution that will save the housing plarkt, but several options implemented together would provide stability to the market.

i hope that this committee can work in a bipartisan fashion to find practical solutions to help overcome the barriers that are weighing down our housing recovery. with that, i'll turn to senator shelby. >> thank you, mr. chairman. welcome again, secretary donovan. you've been up here a lot and we appreciate it. today the committee will consider ways to aid our troubled housing market by expanding refinancing opportunities. and while this topic is timely, i think it's di pointing that four years, four years after the burst og it have housing bubble the committee has still not produced comprehensive housing legislation. and as a result little has been done to address the serious problems in our housing markets. fha, for example, still needs to be reformed. foreclosures remain as the chairman mentioned at record levels. millions of mortgages are

underwater and fannie and freddie continue to lose money at the expension of the american taxpayer. in fact, while the taxpayers will spend almost $190 billion bailing out the gses, they only work product we've received from the administration is a brief discussion piece that lists three policy options. but does not mr. secretary, make noi recommendations. meanwhile millions of dollars have been spent on piecemeal programs like hamp and the so-called hardest hit fund. but as repeatedly noted none of these programs have achieved their expected results. admittedly the problems facing our housing markets are very complex as you reminded us. and there are no easy solutions. finding answers will require careful study and legislation based on facts and rigorous

analysis. unfortunately rather than doing the hard work required to solve problems. some have chosen to create scapegoats. blaming certain regulators for not undertaking massive principal reductions may make for a good one day news story. but it's not an effective means for solving the problems plaguing our housing market. plus paying banks billions of taxpayer dollars to write down mortgages is just another bailout of wall street. given how the administration now praises tarp, maybe another wall street bailout is just what it wants, the american people however are tired of bailouts. it's time to take a more serious approach to fixing the housing market. as i stated before my republican colleagues and i are willing to work with the committee to produce and to craft effective bipartisan legislation. the committee is the best forum i believe to facilitate careful

deliberations and the needed compromises. in contrast, by bypassing the committee and proceeding directly to the floor with any legislation will almost certainly rul in partisan gridlock. accordingly the majority's decision about how it will proceed with any housing legislation will likely reveal whether such a legislation is a serious effort to solve problems or just another effort to highlight differences at the expense of real compromise. i believe the american people have already waited four years for housing reform legislation. and i welcome this hearing, mr. secretary. only time will tell whether the american people will be made to wait even longer. thank you, mr. chairman. >> thank you, senator shelby. any other members who wish to make a brief opening statement. >> thank you mr. chairman, for holding the hearing.

i have to go to the floor as part of the debate on the fre vengs of increase on student loan interest rates. i wanted to first commend the secretary for all of his efforts. we have tried over the last several years to do many things to support and revitalize the housing market. i don't think there's one magic solution. it's many things. and that context i'm very pleased that the administration has finally taken initiative on the rental. i also understand there will be the discussion of project rebuild. i'm pleased to work with you in this regard. i think it's important to with

the tools available as quickly as possible deploy them to keep people in their homes. minimize foreclosures. and to provide a floor for the housing market and then hopefully begin to see it appreciate in a measured way. mr. secretary, thank you for all of your efforts and your commitment. thank you, mr. chairman. >> anything else. senator menendez? >> thank you, mr. chairman for this important hearing. mr. secretary, thank you for joining us again. i appreciate it when you came before the subcommittee just recently. as i said many times we need to fix the housing market to get the brorder economy moving again in creating jobs. fixing the housing market must involve using multiple strategies to attack the problem from different angles and refinancing should be one of those strategies particularly for borrowers who are making their payments but whose interest rates on their mortgages are above today's interest rates of 4% to 5%.

that's why within the next few days i'll be introducing with senator boxer an important and widely supported bill called the responsible home opener refinancing act of 2012. it is supported by borrower groups such adds americans for the financial reform. our bill would help 17.5 million borrowers who have fannie mae and freddie mac loans but who have traed paying interest rates above 5%. a bill would make it easier for home honers to refinance and lower their mortgage payments chchl is a popular and common sense way to help the housing market. allowing a homeowner to refinance from a loan that's 6% interest to a loan that's 4% interest would save them hundreds of dollars a month putting more money in their pockets, reducing defaults and

foreslow sures. theirs of the bill are available for the press at the back of the room. i'd like to thank senator franken for working with me on the put back risk provision on the draft similar to another provision in the bill. our bill does not include the administration's proposal to refinance private loans through the fha or the administration's proposal to pay closing costs of borrowers who agree to shorter loan terms. finally, some but not all of the refinancing provisions were addressed in the loan affordable refinance program expansion also called harp two. for example harp two removed loan to value cap for underwater homeowne homeowners. fa scaled back lender liability, which lenders cite as an

obstacle to encouraging them to extend refinance loans in harp two. but fha -- fa did not squal back representations and warranties, liability for cases when a different servicer was refinancing the loan which has led to a lack of competition among lenders that has resulted in much higher interest rates for borrowers. we need to inject competition and market forces into this market where services have arn unfair monopoly on refinancing certain borrowers who effectively have no choice but to use their original lender. some obstacles at the hearing, my statement will flush it out. one of the last aspects of the sakt that according to preliminary estimates it will stop bailouts and save tax payers money because fewer homeowners will default. and we've been told that we don't node to consider some of

the points that we were going to add. i think this is a slam dunk for both homeowners and the tax payers and i look forward to working with the chair as we move forward. >> are there any other members? thank you all. the record will be open for the next seven days for opening statements and any other materials you would like to submit. now i would like to briefly introduce a witness who is no stranger to this committee. secretary sean donovan is a 15th secretary of the department of housing and urban development. skektary donovan has served in this capacity since january 2009. secretary donovan you may proceed with your testimony. >> thank you, chairman johnson. ranking smeb shelby. members of the committee. thank you for this opportunity to testify about the administration's initiatives to

help american homeowners rebuild equity in their homes. mr. chairman, this hearing comes at a moment in which our housing market appears to have turned a corner following the best winner of home sales since the crisis began. with interest rates at historic lows more than 4 million homeowners have refinanced their mortgages pulling $27 billion a year in real savings into the hands of american families and into our economy. because we provided responsible families opportunities to stay in their homes more than 5.9 million modifications have been started many the last three years and the number of families falling into foreclosure is half of what it was in early 2009. because we helped communities struggling with concentrated foreclosures placed with targeted stablsization investments have seen vacancies fall. most importantly of all our economy has added private sector jobs for 26 straight months. this represents important progress.

but to create the economy -- an economy built to last we need to do more. indeed as i discussed before this committee in february a range of barriers keep struggling borrowers from getting the relief they need and our economy needs at this pivotal moment. in particular, mr. chairman, barriers to refinancing are prevebting millions of responsible homeowners from taking advantage of interest rates at their lowest levels since the 30-year mortgage was created. for instance, consider skudy from tucson. she can't refinance not because she's been late in a mortgage payment but because her home is ubd water. not being able to refinance not only prevents homeowners like judy who are current on their mortgages have saving thousands of dollars each year. it prechts our economy from receiving the lift that low interest rates will provide. that's why the president called for us to take more aggressive steps last fall. within six weeks we identified barriers that were holding

people with loaned backed by the gses from refinancing. by the end of the year servicers were ramping up their operations for harp 2.0. just four of the largest servicers report that they're processing applications as we speak from 750,000 homeowners who stand to save an average of $25b 00 per year. the egive leapt of a good sized tax cut. indeed nationwide refinancings were up to 100% in march. in arizona and nevada they had more than tripled. we expect these numbers to continue to rise when we dramcally cut fees if for fha refinancing next month. mr. chairman, that is still not enough. today i want to discuss four legislative proposals spored by the administration to ensure every responsible borrower has the opportunity to refinance and rebuild equitity. the first would provide borrowers whose loans are not guaranteed access to simple low

cost refinancing. as long as they are current on their mortgage, meet a minimum credit score. have a loan within con tomorrowing loan limbs and are currently employed. the program includes features to minimize program costs including establishing loan to value limits. lenters interested in refinancing deeply underwater loans would need to write down the balance of the loan before they qualify relive leaving the strain on the borrower. while this program would be run by fha it would be financed from a completely separate account from the fund. further, by financing this proposal through a dedicated funding source, we would eliminate any expected cost to the tax bier. i'm pleased that senator feinstein tlaz joined with us. the second proposal would allow us to clear the remanding barriers for refinancing to borrowers with ge ensured loans. while harp 2.0 has given many

borrowers an opportunity to reopinions. there are many responsible borrowers who need our help including those with equity in their homes. we support extending streamline refinancing for all borrowers irrespective of their home to value ratio. to the proposal removes potential hurdles like unnecessary pay praisals which will help responsible borrowers. clearing the barrier wills go a long way towards strengthening the portfolios and saving taxpayer money. while refinancing is critical to reducing costs to home owners, we need to ensure borrowers have an opportunity to rebuild equity. savings in our homes is a single biggest source of how we send people to college. it's how most people get capital for a small business and how people save for their retirements. the first of the two equity building proposals introduced today would give all underwater

homeowners who choose to participate in these programs the opportunity to apply the savings from refinancing to rebuild equity in their homes. as an incentive we're proposing to closing costs about $,000 on average be paid by the gses and to be eligible borrowers must agree to refinance into a loan with a term of no more than 20 years providing a path for all borrowers to get their heads above water faster. the second proposal is the project rebuild act which would further stabilize places where prices have dropped the most and create 200,000 jobs. mr. chairman, we know that the second a foreclosure sign goes up on your block, your home value drops by as much as $10,000. homeowners in the hardest hit places often live near a dozen or more homes be those signs. as the neighborhood stablization program has proven we can halt the slide in home values in these hard hit places.

according to data hot off the presses 3/4 of neighborhoods that receive targeted investments through the first two rounds showed increased home prices. largely as a result of improved vacancy rates. that's the kind of success project rebuild would build on and it's why we believe project rebuild is not only an investment in jobs to rebuild vacant or abandoned homes but also for the neighbors. that's who these proposals are about. the millions of families playing by the rules and doing their fair share. in many cases more than their fair share. these families haven't walked away from their obligations. we couldn't walk away from ours. ensuring we don't starts with making sure every responsible family in america regardless of what kind of loan they have has the opportunity to refinance and rebill kweelt not only in their homes but in the american dream. that's what these proposals are about. that is what it's going to take to create an economy built to last. it's why i look forward for

boricing with this committee and congress to enact them. >> thank you for your testimony. as we begin questions, i will ask the clerk to put five minutes on the clock for each member. mr. secretary, pertaining to harp 2.0. some changes to the harp program last fall including expanding the loans eligible for refinancing and encouraging refinancing into shorter term mortgages. do those changes go far enough, if not, what barriers still remain for borrowers? >> are critical and have made an important difference. as i said about 750,000 applications just from four of the largest lenders that are being processed right now. but the three key remaining

barriers that we see, one is that we have many families who are above water on their first liens. they're 80% or below, but because they have second liens, because they have other debt, or for other reasons they're being stopped from refinancing. so extending harp 2.0 to include above water borrowers those with equity in their homes we think is a critical piece. second, there were a number of important steps to increase competition among borrowers, that's one of the key barriers we have is that servicers who don't currently have that loan or service that loan are being discouraged from competing to refinance those loans. there are a number of changes that we can make there. underwriting changes and others that would help create more competition and lower the ko of refinancing. then the third is that because there are certain markets where automated appraisals are hard to

do, they're about 20% of borrowers even those that are would otherwise be eligible for harp 2.0 that have increased costs because they have increased costs because they have to do a manual appraisal. we want to extend those appraisals to the remaining roughly 20% of gse borrowers who are locked out because they happen to be a market where there are fewer sales to be able to construct those. given the risk is already there on the gse's balance sheet, we think these are prudent steps that both help families, help the economy more broadly, but also help the taxpayer by lowering the risk of redefault for those loans. >> what are the most important steps that can be taken by federal agencies and regulators to facilitate refinancing under current administrative authority? >> i think we have taken most of those steps. we believe that many of the steps that i've just described

could actually be taken under existing authority. and we would urge that fhfa implement a number of them even without the legislation being passed. but we do think there are some critical pieces where the legislative authority is required because of legal uncertainty, so the legislation remains critical to pass as quickly as possible. >> i have heard from constituents and many groups across the mortgage industry that the put-back risk, the risk that the gses would return the loan to a bank's balance sheet for cost servicer financing, is stifling competition between lenders and creating barriers for community banks. what impact is this having on consumers, and how can this be addressed to encourage

competition in the mortgage market? >> this is a very important piece. essentially what's happening is that the original servicer who may have made that loan, if there were mistakes made in originating that loan, a new servicer is concerned about taking on what we call those reps and warranties even though they weren't responsible for the original loan when it was made. and so what we've done through harp 2.0 is removed many of those barriers. however, there continue to be differences between the way fannie and freddie are implem t implementing that, also differences between how abovewater loans and underwater loans are treated. frankly, we think it doesn't make a lot of common sense that a homeowner who actually has more equity in their home and is, if anything, a lower risk

borrower, would have to pay more or be locked out of refinancing relative to those borrowers who may be underwater in their loans. so we think this is both a matter of good -- a good economic case for doing this, but also it's a question of fairness to be able to make sure these refinancing opportunities are available across the board. >> you have previously stated that the best way to protect the taxpayer has ensured that loans currently on fha's books continue to perform. how would expanding refinancing opportunities accomplish this? >> well, this is a critical point. and this is something that economists across a broad spectrum, i know you had testimony from chris mayer, laurie goodman, and many others here recently to this committee about the importance of refinancing overall. the fed has spoken very clearly

about the ways that reductions in payments that average $2,500 to $3,000 a year boosts consumer spending and are a net plus to the economy in terms of the ripple effects that that spending has. so i think the broad case has been made very clearly this is good for the economy. what i would add to that is that for every point, additional point, of increase that we see in home prices, as the economy improves, as the number of foreclosures is reduced, we see a substantial benefit to fha and to the gses, because not just defaults go down, but as home values rise, the recoveries that we make on any foreclosures that do go forward are significantly lower. the estimates just to the benefits for the gses i think chris mayer when he was here estimated a more than $20 billion benefit to the gses from

lower default rates. those -- depending on the takeup, those may be at the high end of the range, but clearly there are very significant benefits that come not just to the economy more broadly but directly to fha and the gses as the housing market has improved overall. >> one last question. the administration's housing plan would also expand fhe refinancing to nongse borrowers who are still paying their mortgages. during our previous hearing you mentioned several ways to protect the taxpayers from the potential risk associated with these loans. as part of that protection, do you have more specific recommendations for standards these loans would need to meet? >> absolutely. and just -- i would start, mr. chairman, by reiterating that

these are homeowners that are currently paying. they must be current on their loan and have made every payment for the past six months, missed no more than one payment in the last 12 months. and so they are already relatively low-risk loans. and by lowering their payments, they're even lower risk. in addition, we have a number of criteria in terms of credit scores, employment, and others that we would put on top of that that would help to protect taxpayers. and then i think two other things that are absolutely critical. one would be to create a completely separate fund different from the mmi fund with a dedicated revenue source to offset any expected costs. and then perhaps most importantly, a requirement that the deeply underwater loans which all the data show would be -- would have the most risk of these loans because of the greater likelihood of default

over time, those loans would have to be written down to a loan to value of 140% or lower in order to be refinanced. so our numbers would show that those loans below 140 are likely -- much more likely to be sustained over time and that by writing down any loans at the higher ltv to 140%, we are mitigating a substantial apportion of any redefault risk on those loans that are higher ltv. >> senator shelby. >> thank you, mr. chairman. secretary donovan, following your testimony before this committee in february, i submitted a committee for the record requesting additional data on the president's proposal to allow borrowers with private sector loans to refinance into fha-backed loans. yesterday i received a written response to this request stating, and i'll quote, that hud does not have official

estimates of default rates, participation rates, or other performance parameters. since the administration admittedly did not have the key data, it seems to me, for evaluating the proposal, what is the basis for your support of this proposal? and without this data, how do you know if it presents any risk to taxpayers? that's our concern. >> absolutely, senator. and i think one of the issues here, as i think we've talked about before, is that these are voluntary programs where takeup, we have a broad range of estimates of potential takeup. what i will say is that -- and we'd be happy to share, to meet with you and share more detail or anybody in the committee on the specifics. our estimate is that there would be with some of the restrictions that we proposed the upper end of potential cost is about $5 billion and we proposed an

offset that would meet that. we would also, though, be willing to work with the committee on refining, for example, the 140 loan to value criteria. the lower that is set, the lower the takeup would likely be. and certainly lower the costs. so we've -- that $5 billion is an estimate based on that 140 ltv. but many of these criteria we're working with senator feinstein, we'd be happy to work with the committee on refining in terms of potential eligibility, therefore the takeup in the cost. >> do you share my overall concern about the solvency of fha, which is under your jurisdiction? >> i certainly continue to focus very heavily, as we talked about at the last hearing, on a whole series of steps we can take to strengthen the fund. we recently announced substantial premium increases on a range of loans. as well as published a new rule on lender in