also do these differences create barriers that prevent you from competing with loan originators that also service the loans they are refinancing? how would menendez boxer bill remove those barriers? >> appreciate the question. so i can't speak to what the fha denies or doesn't deny. from a practicality perspective we have conversations with gs. on a regular basis. we've looked at the guidelines and understand how they operate. if i'm originating a loan, i have to fully underwrite income, assets, everything associated with it as i would with a normal loan. a servicer does not have to do that. there is no verification of income, no verification of assets. it's a very streamlined process. so it's faster for the servicer but there's also less risk. at the end of the day if we originate a loan and document income and assets and for some reason there's a mistake in that

origination process the gse will put that loan back to us. when you take a look at the ltd -- gse on the risk. when you start looking at increasing loan risk to values above 25% you're going to see those loans, somebody under water will have a prior propensity to default. when that happens a person that has more risk such as a new originator today they will buy more loans back than the same servicer will there's no way to quantify that dollar risk. by getting rid of that piece of it, you reduce risk. you bring originators into risk, help homeowners. that's what they do full time for a living. a lot of players have multiple things they serve. a lot of originators that's what they focus on, just the homeowner, helping that homeowner out. by eliminating that barrier, you really do open up a much larger landscape, bring in competition.

it allows pricing levels to be competitive and really at the end of the day i believe facilitates the opportunity to help more homeowners than will be helped if you do nothing -- if we leave harp 2.0 the way it is today. i'm not sure if that clearly answers your question. >> as a realtor in florida, you see firsthand the barriers that homeowners and the housing market are trying to overcome. in your opinion, how will the responsible homeowners refinance that, homeowners that ultimately the housing market. >> i want to restate it so i'm sure i understand the question. how would it affect the existing housing market? >> how will the responsible homeowners, ultimately the

housing market. >> okay. i think it offers an opportunity for those people who have assumed their obligations like the ones i made as an example to you. i think there will be a lot of folks across the country that will take advantage of this especially today, the opportunity to get into a mortgage at rates of 3.875 to 4.5% versus 5 or 6% that they might be paying ultimately. i think there are two opportunities that exist when somebody does that. we've indicated that there's an opportunity to save about on average $2800 bucks a year. i'll bet you a dollar to a doughnut that most of those people will take the majority of that and we've seen over a period of time people are becoming more savers than before. but i'll bet you also there will be an excess of some of that that will go back into the marketplace to stimulate the economy in those communities

that are most hard hit like miami, like las vegas, like southern california, like phoenix, scottsdale. >> dr. zani, will you describe for the committee how affected when a mortgage is refinanced and what the menendez boxer legislation to start the market reaction to the current historically low interest rates. >> well, investors would lose the interest income that they would collect if the homeowner was paying the higher interest rate. if we refinanced the homeowner down to a lower interest rate, the lower income means less to the investor. or they get their money back. some investors get their money back in a lower rate environment and they can invest it and get the same return. so this is a problem that

mortgage investors have been dealing with from the beginning of time, prepayment risk. they understand it very well. they have models they use to determine what the prepayment risk is in investing these securities and they price accordingly. the surprise many investors have received in this recent environment is a lot of these mortgages haven't prepaid as fast as they thought they would because of marketplace, house prices are down, negative equity positions because of all the problems in the housing and mortgage market. a lot of loans that would normally get refinanced out prepaid at these incredibly low rates haven't happened. they have actually enjoyed more interest income over a longer period of time than they would have expected. but nonetheless, they are enjoying this higher income and these higher interest rates. this bill facilitates more finance activity, more interest

to investors and would suffer as a result. my own view, as i suppressexpre my oral testimony, they have considered, already priced. i don't think it will have material impact on market pricing going forward. i think it's already embedded in market pricing. >> senator shelby, thank you. i hope i pronounce it right, correct us all. is it -- >> correct. >> mr. -- in some regions of the country, a major problem facing the housing market is the number of underwater borrowers we talked about. according to data from the fhfa, the vast majority of borrowers eligible for refinancing under the menendez boxer bill would not only be above water but have 20% equity in their home. if that's true, this is coming from fhfa is the menendez boxer

bill likely to reduce the number of underwater boriers. >> that's an excellent question. there's a couple of numbers to keep in mind. generally, 10 to 11 million people in the u.s. under water. gses are responsible or own somewhere between $3 and $4 million of those mortgages. when you think about harp, harp helped people refinance that have lgts of 80. since established the gses have financed more than 9 million borrowers with ltds above 80. your question is spot on there

are already refinancing solutions for borrowers who have equity in their home. >> would most of the participants likely to be borrowers who could already refinance in today's market with low interest rates if their properties were above water and they are making their payments? >> if the borrower is current and has equity in their home, there are refinancing programs that the gse have that have been rerobust. there is a pricing differential. but again, those borrowers have equity. what we're talking about here with regards to moving potentially to harp 3.0 program is to lower the cost. but really i think it's wise for the committee to think about whether we're really reaching truly underwater borrowers as opposed to those borrowers with equity. >> dr. zandi, in your testimony, among other things, you state that the menendez boxer bill should be amend to remove

provisions that would kboegs monetary penalty on second len holders and mortgage insurance companies that do not permit refinances. why do you think that's necessary? >> that's a good question. my sense is that second liens mmis are not the problem with respect to harp refinancing. the largest mortgage servicers agree that if they have the second lien they are going to resubordinate and i haven't heard anything to suggest they aren't doing that. >> what you mean by this, i understa understand. so you have a first mortgage lien, a second mortgage lien, refinance the pay down, that makes the second mortgage worth more. >> it does. >> when you resubordinate tell us what you mean. >> second lien has to agree to refinancing on the first.

resubordinate is fancy words, i agree, go ahead. you would think they have some economic reason for doing, ags you say, you're lowering the monthly payment on the first, so that makes it more likely they will pay on the second. there have been cases for various reasons seconds have impeded refinancing but mortgage financers, big ones participating have agreed under harp 2.0 rules they will not do that. most of the second liens are on their balance sheet, they are going to resubordinate. >> if you had a $300,000 first lien on a nice home, and you had $100,000 second lien and you refinance and pay down, you know, either somebody takes a haircut or they pay it down them self, you pay down the first mortgage, then the second mortgage obviously goes up in value, does it not? >> all those being equal, yes, because the probability of default declines.

>> mr. papagi, anis, what's your recommendation? >> i agree. i think sub ordination of second liens, sub ordination of mortgage insurance, i believe that problem has largely been addressed. i think through harp 2.0, i do think fhfa did an admirable job of working with industry to wash away that issue. there may be a few remaining miscellaneous holdouts in the area but i think the question addresses itself. >> one more question, i'll direct to you. the federal housing administration as we all know continues to face a severe capital shortfall making it, a lot of us believe, likely that fha will eventually need a taxpayer bailout. we hope not, but the numbers

indicate that. this is a problem that fha has been seeing coming, been seeing coming for years but nothing has been done to sufficiently address that. considering the overall importance of having a stable housing market or economic recovery, how critical is it we reform fha? and the sooner, the better. >> i think it's very critical, senator. if not for the ag settlement, and specifically the award that was directed to fha, fha would be insolvent this year and would require a bailout. i define a bailout accepting a loan from treasury to continue its operations. i think -- >> a loan that might not ever be paid back. >> that's correct. >> i think there's a consensus in the market that fha does

struggle to manage risk. and i think moving forward greater attention should be placed on the agency to ensure taxpayers are protected and that they are appropriately pricing for the risk they take on. >> mr. chairman, i have one, if i could, one quick last question to any of you, probably mr. zandi. skpan for the record quickly how the default rate on home ownership is much higher than the multifamily. is it because people have to put more money down on multifamily loans or what? mr. zandi, are you familiar with the question? >> i know -- >> we've had testimony here foreclosure rate on freddie mac and fannie mae on multifamily properties is very low whereas foreclosure rate on single families pretty high.

>> in the current environment, that's very true. the multifamily market is being driven by strong absorption demand because of the foreclosure crisis, demographics. in a normalized market on average over time historically single family mortgages have performed better than. >> have any comment? thank you, mr. chairman. >> senator menendez was absent on the floor during other business. because he has a leading role in the menendez bill, i would afford him an extra opportunity to begin an opening statement followed up by questions. >> mr. chairman thank you for your courtesy and those of the members as well. i was on the floor for something incredibly important, fda authorization as we are the medicine chest to the world. i appreciate your courtesy and i

appreciate you and the ranking member holding this hearing specifically on the menendez-boxer legislation, which i think is incredibly important. as i said many times we need to fix the housing market to get the economy moving and create jobs. fixing the housing market has to have multiple strategies to attack the problem from different agencies. to me 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 senator boxer and i introduce the responsible homeowner financing act of 2012. the goal of the bill is simple. any homeowner with a fannie or freddie loan should be able to get a preapproved package in the mail from the lender, sign on the bottom line and automatically put into a refinance loan that saves them hundreds of dollars a month. no more lending beaurocracy, no more red tape.

it should be simple for any homeowner to do this. that's why the bill is supported by borrower groups, national association of realtors, national association of home builders, many builders, morning investors and small business owners. our bill will help borrowers with fannie mae and freddie mac who are trapped because of the barriers to refinancing. most estimates it is likely to help 3 million borrowers to refinance but that depends how many take advantage. our bill will make it easier for homeowners to refinance and lower mortgage payments, which is a popular and common sense way to help the housing market.

discussion about what already happened in fha's harp expansion called harp 2, not all of the barriers to refinancing were addressed there. for example harp 2 removed loan to value caps for underwater homeowners but doesn't apply to borrowers under 80% ratio who theoretically should refinance. my office heard from new jersey homeowners who are exactly in this situation. fha scaled back lender liability for representations and

warranties which lenders cite as an obstacle to encourage them for same as far assers and refinancers in harp 2. they did not scale back representations in warranties, cases where a different servicers was refinancing the loan which has led to a lack of competition among lenders that has resulted in much higher interest rate for borrowers according to analysis from am hurts security and others. many supports competition, we need to inject competition and market forces into this market where servicers have an unfair monopoly on refinancing certain borrowers effectively have no choice but to use their original lender. another obstacle, and i've heard discussion on this today, is that second mortgage holders and one particular mortgage insurer, united guarantee do not always allow their interest to be transferred to a new refinance

loan, even though they are generally better off when the first mortgage refinances to a lower payment since that makes the loan less likely to default and the homeowner more likely to be able to pay the second mortgage as well. so i compliment the other mortgage insurers for working with fhfa to streamline these refinances and transfer their interest automatically but united guarantee is an aig subsidiary, t.a.r.p. bailout recipient that has not agreed to do that there by hindering refinances, costing homeowners and taxpayers money. it's pretty amazing to me. another obstacle, up front fees and appraisal costs that homeowners without savings can't afford keep them trapped in high-interest loans. another barrier verification of income tax returns and other paperwork needed for new loans but not necessary for refinance loans where the borrower is

already making payments on time. i was gratified to hear, mr. chairman, at our subcommittee hearing that i chaired a few weeks ago from every witness representing all points of view that they didn't think this paperwork was necessary for refinanced loans. for these risk if these homeowners default regardless of whether we allow the homeowner to refinance or not. so stopping home owners from refinancing into lower-cost loans where they are less likely to default homes both homeowners and taxpayers and is in my mind a terrible policy. fhfa needs to change this now. this is urgent because we don't know how long those low-interest rates will remain. and once interest rates rise it won't make any sense for homeowners to refinance. every day the fhfa and congress delays is another day that both taxpayers and homeowners are losing millions of dollars. one of the best aspects of the

refinancing act is that according to preliminary cboest mats it will stop bailouts, it will save taxpayers money because fewer with default when their mortgage payments are lowered. that means it is not a cost, according to that preliminary estimate. mr. chairman, i appreciate that opportunity. i just have two questions. one is to mr. emerson. do you believe that current harp-2 policies give an advantage to the borrower's existing lender, thereby increasing competition among lenders and thereby reducing interest rates for borrowers? >> senator, i believe that that's the case simply from the fact that it is, as you said, more difficult and more risky for a new originator to take on the risk associated with the way the loan is originated today and that, as a result of that, they're staying away from doing a lot of the harp-2.0 loans. another point that's important is ve los pi. you mentioned we don't know how

long it will be before rates go up. we may get to 2.5 million borrowers if we do nothing, but how long is it going to take to get there? i think the sooner we can act and open up the origination capabilities of the entire country to help these homeowners, the better opportunity we'll have to help more of them faster and make sure they get into the low rates that exist today. >> it seems that only the fhfa are about the only ones who think that harp-2 is eliminating competition. let me ask mr. veissi and, for that fact, anyone who wants to join in, another obstacle to refinancing is that second mortgage holders, as i said, and mortgage insurers, do not always allow their interest to be transferred to a new refinanced loan even though they are bert off than when the first mortgage refinance to a lower payment since that makes the loan less likely to default and the homeowner for likely to be able to pay the second mortgage. does it make sense to require

automatic courtability to the refinance law? could you put your mike -- >> i'm sorry. that's -- what we hear, senator, across the board is a little bit different than the statistical evidence you get. and i deal with folks from california to new jersey and back down to florida, again across the country. and we're hearing again and again that secondary financing in many cases holds up both refinancing and in many cases sales. i'd have to think about the answer to that question and maybe confer with you, but my knee jerk may be that that might be an interesting opportunity. >> mr. emerson, what do you think? >> i think we're open to looking at how do we make that process better from a subordination perspective. i do think there are a lot of second lien holders that are subordinating. i think, though, that the problem is in the process it becomes very ccumbersome, theres

a time delay in the information. many times you're not with this harp program, you're not utilizing an appraisal because there's no need to. but when you subordinate the second lien holder requires that appraisal. and so you now have to go out and get -- charge additional moneys to get an appraisal when you don't need it for the first lien. so while i do think that a lot of people are -- a lot of learns are subordinating the process itself needs to be dramatically improved. we here that every day from homeowners. some form -- i don't know if portability is the right answer, but we need to figure out a way to streamline that process. >> would our bill take care largely of what you're concerned about in the context of the process? >> based off of what i said so far, i think it goes a long way to getting there, yes. >> finally, mr. zandi, i'm not sure you saw the federal lender survey out recently, but it indicates second mortgage liens are in fact obstacles to harp refinancing. i would call your attention to

it because i do believe this is one of our challenges in moving forward. that survey made it pretty clear that these are elements of a real challenge and that's something we seek to take on in terms of the legislation. >> can i just make one quick point? i think the legislation, the key points of the legislation are very good and if enacted quickly, given the rate environment, are going to have a very significant impact. i think, though, to try to complicate it in any way, unless it's absolutely clear that that's going to make it better is a mistake, because it's going to slow things down, it's not going to get done, and it will lose your window. so you got to -- i err on the side of being parsimonious here in getting what can be done done because we're really close to generating a lot of refinancing activity. >> thank you. >> senator corker. >> thank you, mr. chairman.

and, you know, while i have a bias, again with a bias, i say this to the senator from new jersey, we've had 16 programs now trying to fix housing. and i do think, you know, we've done a lot to try to gear things around. i'm open to looking at this, and i have some questions that i hope you'll consider legitimate as you look at trying to move this legislation through. and i want to thank the chairman for having -- having this hearing. and i hoped the other die to go to a mark-up in appropriations. i know he knows what those are. i hope we'll have a mark-up on this bill, a real mark-up. i think the senate hasn't been functioning properly because we've been airdropping things in, and yet i notice when we pass things out of committee in a bipartisan way they actually seem to happen. and i hope we'll have a mark-up on this bill. with those editorial comments, i would ask -- my questions really

go to papagianis and dr. zandi. today i thank all of you for your testimony. one of the things -- and i notice in this bill, you could just continue to refinance, and would it be fair to say that each homeowner can only use this program one time? would that be a legitimate parsimonious move to make? >> yeah. i think that would make sense. just to move this thing along. i think that would be an appropriate thing to do. one time, get it done. >> and you agree? >> i agree with that. >> i don't know about the sponsor. i hope so. is there a way to do the streamlining in such a way that -- and i really appreciate the desire to do that, and i certainly appreciate the attempt of the senator from new jersey to solve this problem. but is there a way to do it without vitiating the gsc's ability to put these loans back? in other words, you know, we are saving taxpayers a lot of money

by putting loans back where originators didn't follow appropriate guidelines. and is there a way we could streamline this but not give up the right to put it back if -- if things were done inappropriately on the front end? >> could i say, this is why i think you'd only want to do it once, right, because if you allow one refi, then you have -- and you have a history with this borrower -- in most cases you have several years of history with a borrower. they're current on the loan and you're confident there isn't fraud and misrepresentation. that's why it makes sense to do the streamlined refinancing, relaxed revenue warranties and no rescission rights. my companies are saying, listen, you know, i have a good experience with this and my economics say i can do this without any rescission rights. so once makes sense to me. if you start doing it over again, then you don't have that experience, and you may and you

just don't know and i think it becomes more of an issue. but once you've got that experience, and i don't think we need to do anything, we understand what the risks are and we can go forward. >> i agree with that. i think one other issue that's come up earlier on the panel, thinking with regards to new servicer refinancing versus same servicer financing and whether in a new servicer situation income needs to be verified. that's one of the challenges that's been presented here before the committee. i do think it's important to keep in mind that from the gse's point of view, and it speaks to warranty risk, is it's really in everybody's interest to ensure that the borrower does have a job, does have income in this situation because it may be that a refinancing is actually not the best option for that borrower. it may be that they should have a modification and they should go through