most deeply underwater states -- california, nevada -- those principal reductions are exceeding $100,000 per homeowner. in a state like north carolina, we'd expect to see it more in the range of $50,000 to $100,000 on average. but these are substantial changes for these families. and just to be clear, the requirement in the settlement is that not just the principal reduction happens, but that there's demonstrated ability for that family to pay and to remain in that home for at least 90 y days. what's critical is not just the amount of principal reduction but it gets the family to a sustainable level that will keep them in their home long-term. >> following up in a conversation that started in pen when you were last here in front of the committee we want to be supportive of what the department and fha are doing to ensure the long-term viability of the federal insurance program. to that end we've spoken about

how to strengthen the enforcement authorities available to the fha. can you talk about some of the changes that the fha would like to see in order to help it manage the risk posed by the noncompliance on the part of fha-approved lenders? >> this is critical, and there are two major changes that we have been seeking in legislation. we're working actively with your colleagues in the house to be able to get this legislation through. we came very close last year as part of our budget but didn't quite get there. one is to clarify our ability to hold our lenders accountable through indemnification. we've just issued a rule that expands and makes clear the standards that we have for indemnification. but there are certain types of loans and lenders that we can't -- we don't have clear authority to do that on. that's a critical piece. the second is we have a somewhat perverse provision in the way

that we can enforce that allows us to go after lenders only for regional or local violations based on their track records compared to other lenders in those areas. we can't actually disqualify an entire company nationally through our current standards and that's something that simply doesn't make any sense and is something that we'd like to have clarified. there are other smaller provisions but those are the two things. the other thing i would just add and i think this is particularly relevant for north carolina is that we have smaller lenders that today can't originate loans under their own name unless they have the full ability to issue jen ginny mae securities and other steps. we've heard concerns in the dakotas and other areas where we have smaller lend there's they want that ability. that's something we think makes perfect sense. and that would be included in

the legislation as well. and so i think that's an important one. it's not directly connected to enforcement but it is something that i think you would be interested in and is an important piece. >> thank you. thank you, mr. chairman. >> we'll go to a brief second round. is there a time frame within which any changes would need to happen? are we losing the opportunity to improve the market if these changes are when are delayed? >> mr. chairman, this is such an important piece of this. and this is why i think you perhaps heard the president mention the importance of this issue as one of his top legislative priorities. he's going to be in nevada on friday and will talk specifically about the importance of expanding refinancing. there's a real urgency here because interest rates today are at the lowest level they've of

been for a 30-year mortgage. but as the economy continues to improve, i think all expectations are that this window of record-low interest rates may not last a sick period of time -- significant period of time. therefore, it is particularly urgent that we take advantage of this. as i said earlier, low interest rates like this are typically one of the most beneficial things on a macro economic level to boost the economy. and yet we're simply not seeing today the full benefit of these record-low interest rates that we should be seeing. and the quickest, most effective, and i think the most bipartisan way that we can increase the boost to the economy of these record low interest rates is to quickly get these proposals enacted. and that's something that i think hopefully we can all agree

on and move with real speed in getting these done. >> senator shelby. >> mr. secretary, you and senator corker got in a dialogue about first liens, first mortgages, second mortgages, and the impact on that. dealing with fha, dealing with gses, fannie mae and freddie mac, there have been a lot of proposals by the administration to deal with that. write-downs. the basic property laws, you've got a first lien which is the first priority. you've got a second lien, right? which is the second. if you -- if the value of the first lien goes down, or you pay it down or negotiate it down or whatever, then the value -- it would logically follow the value of the second lien would go up. is that correct? generally. generally speaking.

>> generally speaking, yes. >> assuming the property values were there. if you had a $250,000 mortgage on a piece of property, first lien, and fannie and freddie or fha, whoever, government-sponsored enterprise, government-run, had a first mortgage, and you ladhad a $50, second mortgage, and if you, by negotiations or something, lowered the $250,000 lien to, say, $180,000, just throw that out, wouldn't it follow that the value -- assuming the property was worth so-and-so -- the value of the second lien would be enhanced, perhaps? >> if there's no requirement that you write it down or -- >> you mean write down the second lien? >> yes. >> do you know of any

requirement that -- >> we've actually implemented that requirement in our hamp program and the settlement -- >> explain what you mean. you mean if you deal with the first mortgage you're going to deal with the second at the same time? >> exactly. >> otherwise you're not going to do it? >> exactly. here's the problem, senator -- >> so that's the -- >> this is a real issue. and frankly, it is -- i think we've learned our lesson, that as we think about what the housing finance system looks like going forward, these are the kinds of things we have to have clear rules on. if you're writing down a first, you have to write down the second significantly more. those kinds of things need to be implemented. we have done so in the various programs that we have the ability to control that second lien. or force that on the second lien. but the problem is, there were no rules on this except when you get to foreclosure.

in a foreclosure you have to write off at all the second lien before you touch the first -- >> otherwise the second goes to the first, right? >> that's right. but the problem is, we didn't have rules of the road for what happens in a modification or particularly in a world where the second lien is current. and you don't have the ability on the first -- the good news here is, for about half of all the underwater loans, there is no second. so this is only an issue for a portion of them. and where you only have a first lien, the issue is clear. right? but on the second lien -- >> basic property law, isn't it? >> it is a basic property law in foreclosure. the problem is, what we should have done is had rules of the road, and the investors will tell you this now, you know -- we shouldn't get fooled again, we should have, as loans are made going forward -- >> don't get fooled three types. >> that's right. i would even prefer not to get fooled twice. but yes, exactly. and i do think it's important that we have clear rules of the

road going forward. on the other hand, what i don't think we can do is throw up our hands and say, we can't do anything. >> agreed. >> because were weren't rules of the road. we're continuing to find ways to improve them. but we have made this a real priority to say -- and the settlement is an example. you have to write off the second lien at least as much as the first, and if it's seriously delinquent, you have to write it off 100% before you touch the first. >> well, i can see the rationale of negotiating with the lender that's got a house, got a mortgage on a house, that's probably precarious, probably could be foreclosed, and renegotiating it because they'll take a bath if they foreclose it. and they want to avoid -- a lender generally, a law of banking, they're not in the housing business, in the

money-loaning business. i can see them do that. a lot of our concern, and i think senator corker has enunciated this too up here, we don't want the taxpayer to take the hit. in other words, if -- we could see that a lot of the owners of second mortgage securities could be -- it could be a back door bailout to them. we don't want to do that and i don't think you want to do that. >> we don't. here's the -- >> you understand where i'm coming from. >> absolutely. i think we should work on provisions that we could include in the legislation that would focus on second liens. here's where -- >> for example, how would you do that? >> as we did in the settlement, we could require any servicer that was coming in to refinance a loan, they would have to take write-downs on the second lien -- on the first lien to 140 ltv.

we could also require if they control the second, which a lot of them do -- >> otherwise you don't do it. >> they would have to write down the second as well. we could do something like that. similar to what we did in the settlement. here's the issue, though -- >> you wouldn't want to make them do it if they don't want to do it? you want to make it mandatory? >> we're not proposing -- this is a voluntary program. absolutely. here's theish on, though. what you have oftentimes is a first lienholder with a servicer and a second is controlled by a completely third party. and the question is, even if a write-down on the first is beneficial to the person who holds the first, are you going to cut off your nose to spite your face? are you going to refuse to do a write-down because the second lien is refusing? that's the problem with not having these rules is that there is the ability of a second lienholder to basically block whether it's a refinancing or a principal reduction, even if that principal reduction is good

for the first lienholder. it may be good for the second lienholder as well. that's the dilemma we're in in this situation by not having clear rules on what you do here. and so we've tried to break that by putting in place rules, and we could certainly do that on the -- in the case that we're talking about here with the refinance -- the universal refinancing proposal. >> i want to go back to the gses a minute. we've talked about this and your administration's made some proposals in this area. what would concern some of us up here on the gse write-downs, that the gses would take the hit ultimately the taxpayer now, since the taxpayer is holding the gses. >> well -- >> you see what i'm getting at? >> yeah. so to be clear, because any write-downs the gses would do would be done through the hamp program, the requirements for

the second liens to be written down would apply to that. in other words, any institution that was choosing to write down a first where they controlled the second, they would have to write down the second as well. so i think we have a way to deal with that particular issue. the second thing i would say, though, there's more and more evidence that for deeply underwater loans, those principal reductions actually benefit the take pair. and so we think it is important to move forward where there is evidence that these are, you know -- the technical term would be net present value positive, where they actually benefit the -- not just the homeowner but the taxpayer as well, because there is more likelihood to repay. >> do you believe this year, maybe next year, we'll have at least a million foreclosures as some people predict? >> the number of foreclosures is down substantially.

the current expectation -- last year there were less than a million actual foreclosures. certainly we're on track so far this year to be lower than that. we've seen some evidence of a slight increase following the servicing settlement. in foreclosures. but not a substantial jump. and i think it's likely at this point that we're less than a million. >> the states california, nevada, florida, i'm sure you have some of it everywhere. those are the -- >> we've actually seen significant improvements in california and arizona. some improvement in nevada. an 80% reduction in foreclosures in nevada, actually. >> what about florida? >> florida, because it's a judicial state, we haven't seen as much improvement because the timeline -- >> judicially you go to court to do the foreclosure? >> the timeline for foreclosures is much longer in florida. and that has meant that it's tended to be -- the effects of these foreclosures have lasted

longer. it also means that more families now, hopefully with the settlement, have the ability to stay in their homes. >> i have one last question then shift over to the menendez and boxer legislation we've been talking about. given that a lot of the menendez-boxer proposal has been adopted or addressed through h.a.r.p. 2.0, how many additional homeowners fun, mr. secretary, how many additional homeowners do you estimate would be helped by the menendez-boxer legislation that aren't already being helped by h.a.r.p. 2.0? >> so these kind of predictions where you have a voluntary program as we just talked about are particularly hard to make. and so i'm not going to give you a specific number. what i will tell you is a range. at the very high end, christopher mayer who was here testifying before the committee

thought that it would increase refinances by close to 12 million. our expectations are significantly lower than that. there's some who would estimate that it's as low as 1 million. we think that's probably too low. but somewhere in that range, i think it's fair to say millions of homeowners would be able to benefit through refinancing. there are 11 million homeowners who are what we call in the money, could benefit from a refinance with gse loans that haven't refinanced. we don't think all of them under the criteria that were laid out in the bill, we don't think all of them will -- >> how do you get them to do that? you know, interest rates are low, very low, historic low, you mentioned that earlier. the best thing anybody could do is lower a house payment, say, 5.5 to 3.7, whatever, 3.6, think about that. put money in their pocket every

month. stabilize the housing market some. under most loans they can refinance without penalty, can't they? >> so here are the two key things that are stopping them. one is they're not allowed at all to refinance. they may be, for example, above-water on their first lien but have a second lien that puts them -- makes it impossible for them to refinance. >> so it doesn't do any good. >> so in that case, this would allow that family to be able to refinance. a second is that they may be able to refinance but the costs are very high. so they may need an appraisal. they may -- what we're seeing in a lot of the cases is that because there's essentially a monopoly on refinancing, whoever holds their current loan, whoever's the servicer, they can charge them, and we're seeing this, very high fees. laurie goodman estimated it was as much as $15,000 in additional costs that were being charged because there wasn't competition between servicers. so what we're trying to do with

this legislation is remove those barriers to competition and that will take a family who may be eligible today, but they're going to look at the costs and say, it just doesn't make sense for they to spend as much as $15,000 extra to refinance. or they may not have it. >> give me an example, what would the $15,000 be for? >> so it would be not just the costs of refinancing -- closing costs, appraisals. appraisals frankly that aren't necessary given that the risk is already at the gse. then it would be additional fees that are being charged by that servicer for the refinancing. and there's a range of those kinds of fees. we can detail them for you. but that's the issue. >> senator merkley, do you have any questions? >> thank you, mr. chair, yes, i do. first i wanted to just note that you -- your comment about the window of opportunity that exists right now with the low interest rate, i want to accentuate that. the term, the fierce urgency of

now, was coming to me as you were speaking. and i recall many years ago in the early '90s, i was involved in a project to help -- it was called project down payment. it was an effort to try to put together a down payment, matching down payment fund, to help stabilize a very low-income area in portland. and over the two years it took us to raise the funds for that down payment matching grant to help renters become stabilized in this community, home prices went from $60,000 to over $100100,000 and we missed the window of opportunity. and i'm afraid that that is going to happen here and so i really applaud your stressing that point. i want to turn back to the issue we lated to how to help ho homeowners who do not have gse-guaranteed loans. one reason i keep coming back to this is so many families come in

to talk to my case work team about the challenges they're facing. i feel like it's a lottery. we look up whether or not their loan happens to have been purchased by the gses and sometimes it has, and sometimes it hasn't. the family rarely knows and we wouldn't know until we look it up in the computer data base. this is your lucky day. you're eligible for harp, or i'm sorry, you're stuck with no program. so addressing an opportunity for families whose homes were not purchased seems such an important part of this effort. in the proposal as outlined by the administration, and it doesn't really have a name, but this additional fha program, i don't think you put a name on the program. >> we have not. >> in this additional strategy for non-fha borrowers, do you envision this in terms of refinancing first mortgages or first and second together in terms of the 140% loan to value

and how the write downs would occur? >> first of all, senator, let me just echo your point, which is this isn't just an issue of the economic benefits that broader based refinancing would have for families, for neighborhoods, for the economy overall and for the taxpayer through improvement in the performance of loans. this is about fundamental fairness. the idea that is it exactly as you say. any time you talk to a homeowner, it's very rare they would know what type of loan they have. and it just seems inherently unfair to the president, this is a point he made in the state of the union address, a family who is doing all the right things, paying their loan, despite whatever challenges they may have, can't benefit simply because they have a different kind of loan from somebody else. so one of the important points

to us is this issue of fairness that you raise. in terms of the question that you asked in addition to that, i'm sorry, can you remind me? >> the first and second, whether it would cover. >> i was just discussing with senator shelby. that's an area where i think we would be very open to working with the committee to specifically add some language to the legislation on that. we have done that in the other efforts that we have had. and i do think it's important, particularly where a servicer has control over a second lien and is coming in for a refinancing like this that there would be a requirement, not just that they write down the first lien, but that there be a requirement on the second lien as well. >> thank you.

and i know it's the first and second lien problem has bedevilled us. we're looking at it backwards, but we ought to fix it looking forward as well. >> absolutely. i would also add it's not a reason to not move forward here because half of all the loans that are under water don't have that second lien. and so it is -- there's a huge opportunity outside of the second lien problem to make progress here. and i think there are ways to deal with the second lien issue that could be productive. >> turning to another point of this. in the modelling that i and my team have laid out to try to understand whether a fund would remain solid or not and what the risk factors are, a huge issue is is the percent of families that in the first couple years while they are substantially under water default. default strategically, or default financially. because at that point, we have

extended the federal guarantee. so the federal government is picking up those losses. it's offsetting them through insurance, through a risk transfer fee or some other fund. but the asumss about that are critical. that leads to a conversation about what type of restrictions there are on a family in the first few years after the government picks up this guarantee. do you basically put in place a rule as part of the mortgage says, first you cannot basically walk away from this, and so a legal requirement, if you will. it's kind of an inherent mortgage to begin with. but normally the issue of recourse is determined at a state level. some states have recourse. some don't. but recourse is a fact that may

reduce the number of folks who say, well, our circumstances have changed. we want to move across town to a better school district and we're going to walk away from this house and we're going to rent. has there been a discussion of rules related to recourse on this? >> what i would say is those are particular issues where we would have families who may be delinquent or where there is significant principle reduction happening. and that's, i think, the right focus in those types of situations. to be clear, what we're talking about here is families who one, are current, and where they are not get iting principle reducti through the refinancing itself. there may be a decision by the

lender to reduce the balance to loan value, but they still have a significant payment. and again, these are families that are paying, that are current on their loans. so we didn't see a need to go beyond that given that these families are responsible, have been doing the right thing and paying, and are not getting substantial principle reduction at least below the 140 ltv to be able to stay. i think it's very appropriate in those cases what you have proposed, which is to give them an incentive to be responsible on reducing their principle balance. as you know, but i think for members of the committee, the power of these low interest rates is such that anyone who is, or just about anyone, who is below 125 loan to value can get

back above water within just a couple years. so what this is doing if they are choosing to use those savings instead of lowering their payment to shorten their term and be able to reduce principle faster, they are really giving themselves a light at the end of the tunnel that makes it less likely that they will default in future years. so i think you're right in your legislation. the last thing i would say is on the investor side, there is some concern that these families coming down to a low interest rate, are the loans going to be in place for a significant period of time? what investors are concerned about is they have been generally supportive of harp. what they are concerned about is will we see a continuous refinancing cycle of these? once you refinance to this record-low level, you're not going to see a refinance in that loan quickly. that's a protection for inves r investors that we think is

important in harp and that we have certainly been open to doing in this broader based refinancing effort. >> and i absolutely take your point about families being current. many of the families bought these homes in 2006, 2007, before the bubble was at its height, but the crash has taken them below where they started. they have been making payments from four to ten years or sometimes a little longer. and yet they are still under water. so they have shouldered this through the deepest point of this recession. and because of that, they have good credit. so walking away does have a cost in terms of impairing their credit. and this has lead to this conversation that i have had with a number of housing experts and financial analysts about the asupgs sumptions about how manys would default per year in that

situation. there's wide ly-ranging variations on that. since it's a key risk in the first couple years, that's why i'm trying to get my hands around that as we wrestle with the exposure of the u.s. government. but this issue over recourse was one of the ideas that had been raised. thank you very much, again, for your testimony. i join you in considering this as something we should be working on day and night until we can put it in place for the families, for our economy. thank you. >> thank you. >> i would like to thank secretary donovan for sharing his perspective with us today. this committee will continue to explore ways to improve the housing market immediately and in the long-term. this will require a multifacetted approach and i look forward to working with my colleagues to continue that effort. with that, this hearing is adjourned.