The committee will come to order. And let me welcome
our witness and congratulate you again, Secretary Donovan, for your
confirmation and for your willingness to do this. Senator Schumer and
others have raved about you and the tremendous work you've done in New
York, and a lot of other folks I know have talked glowingly about your
ability to get things done in that city on housing issues. And we're
very excited about your stewardship.
We're fortunate to have on our committee, of course, Mel
Martinez, who knows exactly what it's like to sit in that chair,
having run that agency himself, and has brought a wealth of knowledge
and understanding of these issues to our committee over the years he
has served with us. So we're particularly delighted to have you.
I sort of feel like -- and what I'm going to do is make some
quick opening comments myself, Senator Shelby, and then ask my
colleagues for any opening comments they would like to make as well.
You're our only witness today. We don't have a second panel. And so,
when I can, I like to let members have a chance to express themselves
before waiting. And I know this is particularly appealing to Senator
Warner and Senator Bennett; I assume as well to Senator Hutchison and
others, who are sort of at the end of the line. So this way you can
get a chance to be heard a little bit before we actually get down to
the question-and-answer period.
But for those -- Senator Shelby will certainly appreciate this;
Senator Martinez; Senator Reed; Senator Menendez.
This is -- and I
hate to use a Yankee expression from a Yankee, Yogi Berra, but it is
deja vu all over again, in a sense. It was about this time two years
ago that we had the beginning of a long series of hearings on
foreclosures. And it was -- Senator Shelby will tell you, I don't
know how many times we met and talked and gathered with people to try
and get people --
-- right here -- to get people to move, to work out,
to get something done on this problem. This was early 2007. And I
think back on it now, and maybe we didn't push hard enough -- I can't
imagine how much harder you could have pushed -- and nothing happened.
And we are in large part where we are today because of that, not
that that was the only reason. Obviously this problem began long
before 2007. But had we and had the administration, the previous
administration -- I say this respectfully -- (moved ?) on that issue
at the time, we could have mitigated this problem substantially.
As long as I live, I'll remember Bob Menendez's comments that day
for our first hearing. I think you were the first person to call it a
tsunami of foreclosures that were going to happen. Today you hear
that expression over and over again because we're in the middle of it.
But in 2007, in January and February, you were considered being
hyperbolic if you used language like that. You were an alarmist. You
were (flaming ?). It was just politics to talk like that. And, of
course, we've now learned painfully that, in fact, if they were guilty
of anything when they used those words, they were underestimating the
problem when we gathered here to talk about it.
So I'll share some opening comments and thoughts and then turn to
my colleagues. And then, obviously, Secretary Donovan, we're very
anxious and, I must say, enthused a bit about what we've heard over
the last few days and a new administration and a willingness to make
some of the president's comments on the subject matter.
Today the committee is going to meet to discuss, obviously, the
administration's Homeowner Affordability and Stability Plan outlined
two weeks ago to address the root cause of our economic crisis, the
foreclosure crisis. This plan represents, in my view, a sharp change
in direction from the previous administration's approach. It draws
upon funds expressly authorized by this committee to prevent
foreclosures in the Troubled Asset Relief Program, which was created
as part of the Emergency Economic Stabilization Act.
It was passed in October, and it couldn't come at a more critical
time. At the end of the day today, another 10,000 families in our
country will have received a foreclosure notice. In my state of
Connecticut -- and I know my colleagues, each of them here, some more
dramatically than others, can point to their own statistics and
numbers. But we could see in my state, the small state of
Connecticut, nearly 60,000 foreclosures in the next four years. In
all, across our nation, as many as 8 million families could lose their
Over the course of some 80 hearings and meetings in the 110th
Congress, this committee has asked a very simple question, the same
question that we get asked every time we go back to our respective
states: How in the world could this have been allowed to happen?
Certainly, as this committee has uncovered, the problem's origins
lie in the scourge of the unchecked, abusive predatory lending
practices. A little over two years ago, on February 7th, 2007, this
committee heard from Delores King, who sat right at this table, right
there -- (I'll say ?) exactly where she was sitting, right there to
your right -- she had owned her home in Chicago for 36 years, was in
danger of losing it due to an exotic mortgage she was duped into
signing by a telemarketing mortgage broker.
That day we also heard from a North Carolinian, Amy Womble, whose
broker intentionally misrepresented her income in order to secure a
loan that she could not afford. A mother with two children, she
wanted to pay off the debts left by her husband after his untimely
death. She was trying to act responsibly, and she ended up facing
Last year we met Donna Pearce, a grandmother from Bridgeport,
Connecticut, where there are now 5,000 families with subprime
mortgages in danger of foreclosure. Donna was offered assurances by
her lender that she would be able to refinance in six months, but he
failed to mention the thousands of dollars in penalties that
refinancing would cost her in the process.
Mr. Secretary, I defy anyone to suggest that these cases were
somehow the exception, that these were aberrational. The vast
majority of people losing their homes today are decent, hard-working,
good Americans -- grandparents on fixed incomes, working families
who've lost a job or faced a health care crisis, many of whom were
taken advantage of.
To suggest, as one or several commentators have, that this
problem was created, and I quote, "by deadbeats with an extra
bathroom," end of quote, is not only insulting and infuriating, but to
the families who are suffering right now, it's tremendously damaging.
It effectively lets unscrupulous brokers, lenders, credit rating
agencies and investment banks off the hook. It ignores the toll that
these foreclosures are taking on home values, an 18 percent drop
nationally and far more severe in certain areas of the country. And
it makes our task up here getting credit flowing again to families and
businesses that much more difficult.
As one mortgage lender told this committee, this crisis was the
consequence of "mortgage malpractice" -- his words when he appeared
before this committee. We don't blame the patient when a doctor fails
to tell them they might not survive the surgery. Why should we blame
the homeowners in many ways?
And so, Mr. Secretary, I appreciate the speed with which the
administration has acted to address the issue. The plan, as I think
most of us know, has three crucial elements. First, it offers 4
(million) to 5 million homeowners who are current on their loans the
opportunity to refinance into lower rates. This feature will open up
the mortgage market to homeowners who've been locked out and unable to
take advantage of the new lower mortgage rates currently available
because their home values have dropped. This provision is aimed
squarely at working and middle-class families.
Second, the plan finally creates a program to modify the loans
touched by troubled borrowers. This will help 3 (million) to 4
million families keep their homes and finally start to put a bottom on
the housing market.
And finally, the plan calls for bankruptcy reform, allowing
bankruptcy judges to lower mortgages on first homes, subject to
carefully crafted repayment plans. Carefully, the industry -- or
rather clearly the industry in the previous administration were late,
as I've said over and over again, in acknowledging the problem and
very timid in their responses. With this plan that I've just
mentioned, and ones we'll talk about this morning, issued only a few
weeks ago after taking office, the contrast could not be sharper.
Over and over, as we've begun to grapple with the mountain of
problems facing our country, from skyrocketing health care costs to
energy, we've heard members on both sides of the aisle say the same
thing over and over and over again. Quote: "We need to fix housing
first." And I couldn't agree more. And that's not just the chairman
of the Banking Committee talking. That's also the Republican leader
from Kentucky, Senator Mitch McConnell. That is our colleague,
Senator Kyl of Arizona, Senator Enzi of Wyoming, Senator Ensign of
Nevada and Senator Coburn of Oklahoma. All of these individuals have
said the same thing -- "Fix housing first."
So you're not talking about some great political divide up here
when it comes to this issue. We may debate about which nuanced
approach works better than the other, but we're all ears and want to
help in getting to the bottom of this. And so John McCain and Barack
Obama, again, during the presidential campaign, echoed the same thing
-- "Fix housing first." It's a bipartisan notion, as bipartisan a
notion as I can say that anything I've heard in the Congress in the
last number of years.
So with that, let me turn to Senator Shelby and then my
colleagues, and then we'll get to your comments and responses to
questions. We thank you again for being with us.
Thank you, Senator Dodd.
A little more than a week ago, President Obama proposed his
Homeowner Affordability and Stability Plan. The proposal aims to
stabilize our crumbling housing market and help struggling homeowners.
Unfortunately, I believe the proposal is long on good intentions and
short providing a credible solution for our ailing housing market.
For example, the proposed Fannie Mae and Freddie Mac refinance
program appears to focus its efforts on those households least in need
of assistance. The program would be open to households that are
neither behind on their mortgages nor struggling to make their
Consequentially, the program would waste, I believe, resources on
lowering the interest rate for borrowers who presently can and are
paying their mortgages. Mr. Secretary, I believe our immediate
attention should be to help those most in need who can be helped and
are willing to help themselves.
One part of the president's proposal, the Homeownership Stability
Initiative, is supposed to help the most troubled homeowners. I
believe, however, that it does so at considerable cost to the
taxpayer, and mainly serves as a further bailout to the very banks
that helped us get into our current condition.
The initiative, for example, will pay servicers $1,000 for each
mortgage they modify, and servicers and mortgage-holders $500 and
$1,500 respectively if they modify loans before a borrower falls
behind. Mortgage-holders would also get partial insurance to cover
losses on a modified mortgage if housing prices decline further.
Adding up all these payments, lenders could receive at least $4,000
per loan modification. This would be equal to almost five months of
principal and interest on the typical mortgage.
All of this, of course, would be paid for by the taxpayer. The
proposal would potentially pay billions to lenders who have already
received tens of billions under the TARP and other recovery programs.
For instance, with its acquisition of Countrywide Bank, Bank of
America now services almost 13 million loans. If only a fifth of
those loans, Mr. Secretary, receive assistance under the president's
proposal, Bank of America would receive an additional $10 billion in
taxpayer assistance, on top of the already over $45 billion that we
know of in taxpayer funds it's already received.
Mr. Secretary, before the American public commits another $10
billion or more to Bank of America, for example, to perform the same
services it's already paid to do, we need to consider whether this is
really the best way to help struggling homeowners.
We should also consider whether this proposal is fair. If
implemented, the American people may have to pay billions of dollars
to banks and servicers simply to do the job they're supposed to do.
In addition to the lender and servicer payments, the president's
proposal also pays borrowers up to $5,000 through a reduction in their
loan balance. That sounds good. In other words, they get paid to
make their payments. I'm confident that the vast majority of American
homeowners would welcome a $5,000 subsidy simply for doing what
they're supposed to do, make their mortgage payments. I'm equally
confident that the vast majority of Americans believe that it isn't
their responsibility to pay for that subsidy to someone else.
I spent last week traveling around my state of Alabama, and the
public reaction to your plan was not good. At a town hall meeting I
had in Boaz, Alabama, I spoke with a gentleman named Darren Lanta (ph)
who, with his wife, Carol, is struggling to keep their dry cleaning
business going. Mr. Lanta (ph) told me and everybody else there that
despite his struggles, he would never ask anyone to pay his mortgage.
In addition, he said, he resented Congress, us, taking his hard-earned
money to make somebody else's house payment.
Mr. Secretary, I believe he was not alone among my constituents
or the American people. We all want to help struggling homeowners.
The question is, how? It's crucial, however, that we do so in a
manner that is carefully targeted and based on proven solutions, and
especially if we're going to spend billions of dollars more of
taxpayer's money that has to be borrowed.
As President Obama said Tuesday night, and I quote, "With a plan
of this scale comes an enormous responsibility to get it right." He's
absolutely right. The American people should be able to have
confidence that their tax dollars are being used effectively. And I
believe they don't think so here.
To build that confidence, the administration should be able to
provide a reasonable estimate of how many foreclosures it believes its
$75 billion proposal will prevent as well as its impact on the housing
crisis. The administration, through you, should also be able to
demonstrate that its proposal is based on verifiable data rather than
ad hoc policy choices.
Until we begin, Mr. Secretary, developing solutions based on
facts and analysis, I do not believe we can hope to rebuild either our
devastating housing market or our confidence in our ailing economy.
Thank you very, very much. And I will now ask my
colleagues -- Senator Menendez, any opening comment?
Thank you, Mr. Chairman. I want to
thank you for holding what is an incredibly important hearing.
And Mr. Secretary, while I have several questions, I certainly
want to commend you and the administration for taking the housing
crisis seriously and developing the proposal that I think lays the
foundation for some real relief to American families.
As a member of this committee, I feel as if we have been
listening to a fire alarm wail for years as millions of Americans
watched their dreams of homeownership go up in smoke. We shouted the
statistics as long as we could, we held meetings to develop
legislation, but for years the previous administration just covered
its ears. And now finally, we have one that is willing to call in the
fire department, so to speak. And the question is, how big a fire
pumper do we need, and how do we turn on the water?
At a hearing in March of 2007 that the chairman mentioned, I said
then that we were going to have a tsunami of foreclosures, and the
administration basically said I was an alarmist. Well, at that same
hearing, I started to shed some real light on the crisis, shared a
story of a woman from my home state of New Jersey, who was given an
adjustable rate mortgage she could not afford and the promise of a new
mortgage term in one year. It didn't take long for her to fall behind
on her payments and a foreclosure notice to arrive. That was March of
2007. Over 20 months later, these stories are flooding into my office
as fast as they ever have.
Sixty-six hundred foreclosures are starting every week in this
country, one every 13 seconds. In New Jersey since the beginning of
this year, there have been over 9,000 new foreclosures, and we expect
there to be over 60,000 new foreclosures before the year ends. Just
recently, my office received a phone call. I know that Senator Shelby
talked about his constituent and that dry cleaning business. And I
appreciate what he thought. But I'll tell you a different story.
My office had a New Jersey resident who is a sergeant in the
United States Army Reserves. He recently returned from a long tour of
duty in Iraq. During deployment, he fell behind on his mortgage.
When he came back, he took on not only one but two jobs. But in this
tough economy, his income has greatly decreased, and he's having
trouble making ends meet. He has three kids who are depending on him.
And my office is working with him or going to his servicer to try to
work out an arrangement, but nothing has worked out so far.
Families like this Army sergeant are all over America, waiting
for their lender or servicer to strike an agreement and -- (inaudible)
-- padlock on their doors. And to top it off, he thinks it's unfair,
and so do I, that lenders can take taxpayer money but don't have to
help homeowners. That was not the intention in our original bill. In
fact, it was quite the opposite, and we need to fix that as soon as
So the relief you're talking about isn't a moment too soon. And
as much as I really commend you for these commitments on paper, none
of us can be satisfied until we see them put into action. I look
forward to hearing details of the administration's plan. I think the
whole country is waiting to find out exactly how American families are
going to receive assistance and how fast because in the end, this is
about all of us. It is about declining values in the home next door
that may not be in foreclosure, it's about declining values in
neighborhoods that has real consequences, as a former mayor, has real
consequences for a community. You either have to cut delivery of
services because your ratable base is going down or you've got to
raise taxes. Both options are pretty horrid in this economy.
And at the end of the day, it's really about all of us as
Americans because our collective economy, this is one of its major
drivers. And when it's not driving, it's falling. And when it's
falling, we all suffer. So at the end of the day, I look forward to
seeing what the administration's full plan is and how fast we will get
Thank you, Mr. Chairman.
Thank you, Senator, very much.
Former secretary of Housing and Urban Development.
Thank you, Mr. Chairman, very much.
I want to welcome Secretary Donovan and continue to wish you all
the very best in your job and appreciate the -- (inaudible) -- comment
on the current that it is important that -- (inaudible) -- the fact of
the matter -- (inaudible) -- to some it may have seemed -- (inaudible)
-- at the time that they would work. So I think it's entirely unfair
to simply say the problem was ignored, people didn't care about poor
people losing their homes. I just don't think that's accurate or the
So I think as you look forward to implementation of this program,
looking to HOPE for Homeowners and some of the issues that are raised
in that program, that created problems in participation by private
servicers are some of the very issues that I think we need to deal
with in the plan that is being currently suggested.
I was pleased with the president's initiative last week. I think
it's very important that we begin to deal with this very, very serious
problem that's afflicting so many Americans. And I believe we can
help deserving families stay in their homes by curbing unnecessary
foreclosures and, in doing so, help to preserve communities and put
our housing market on a pathway to recovery.
The president has laid out the groundwork for the plan which
includes three main components -- a refinancing option for qualified
homeowners as loans are currently owned or guaranteed by Fannie Mae
and Freddie Mac, a 75 billion (dollars) interagency loan modification
strategy and an additional 200 billion (dollars) in funding
commitments to the housing GSEs. I applaud the administration for
taking aggressive steps to tackle this crisis. And I also want to be
sure that as we go forward, we get some answers to some of the
details. I question whether it will be more effective than the
current programs in preserving homeownership. And that's at the very
core of why I say it isn't just enough to say the prior administration
tried nothing. Some things were tried not successfully, and we need
to learn those lessons rather than just simply ignore that the effort
One of the major stumbling blocks to the success of the current
preservation programs has been the lack of participation by servicers
of private mortgages. These mortgages which were originated without a
guarantee from the government account for more than one half of the
foreclosure starts despite the fact that they only are about 15
percent of all outstanding mortgages. Servicers of these securitized
mortgages make a critical decision of what to do when a mortgage
becomes delinquent by choosing to pursue foreclosure or a modification
of the mortgage. Existing research suggests that these servicers opt
for foreclosure much more often than private lenders that service
their own mortgages.
While Fannie Mae and Freddie Mac and FHA and private lenders are
actively and aggressively pursuing mortgage modifications, servicers
of securitized loans are still lagging. Two primary factors are
driving mortgage servicer's reluctance to modify loans when
modifications would make economic sense. One is our servicers are not
compensated for loan modifications. And secondly are the legal
constraints and the potential for litigation that dissuade many
servicers from pursuing modification.
I was glad to see that President Obama's plan addresses one part
of this problem by providing monetary compensation to the servicers.
But (in the midst ?) of this, the legal constraints hindering the
servicer's participation. Without this critical second element, I do
not believe the private marketplace will be any more willing to pursue
modification over foreclosures than they have in the past.
Chairman and I co-sponsored an amendment to the stimulus bill
which covered both of these items. And I recommend to you a look at
that amendment which passed but ultimately was not part of the final
bill, which I think would've dealt with both aspects of the problem,
not just the compensation but also the legal safe harbor provided to
I have concerns about the federal government's becoming a
guarantor of loan modifications enacted under this program. Although
the housing market may be stabilizing in some areas there are still
places around the country, including cities in Florida, where home
prices are expected to decline further.
According to the Obama administration's own projections, 40
percent of loan modifications through this program are expected to re-
default. We need to ensure the federal government is using taxpayer
dollars wisely and that we're working to really solve problems, not
just delay them.
One major factor for accelerating defaults is that consumers are
saddled with debt beyond their homes, including credit card debt, auto
loans, medical bills. And, you know, the fact that continuing
unemployment is a part of our daily landscape is something that cannot
be ignored as an added element of what is happening here.
In any event, I want to thank you for the job you've undertaken.
I want to thank you for the initiative that I hope we can see all of
the details of. And I want to work with you because this is a plan
that America needs to succeed. We need for it to work. So I hope
we'll continue to develop a plan in consultation with the Congress
that can not only begin to stave off more foreclosures and declining
values but also begin to really see a reemergence of the housing
sector, which is a vital part of an economic recovery.
I thank you, Secretary, and look forward to hearing your
I thank you, very much Senator. And I'm glad the
senator mentioned it, I realized I didn't so myself, but I want to
thank him for him amendment that we worked on together during the
stimulus vote. And I tried -- I tell my colleague that I got word at
the last hour that negotiation, I guess, in conference what was going
to happen. I called and I should say, to the credit of the
leadership, they apologized, they raced back in to try and salvage the
language. There was no cost to it. In fact, quite the opposite -- it
was quite a benefit to it -- and weren't able to do so and they regret
that. So it was unfortunate that it got dropped because it really
would do exactly what the Senator had just described and played a very
important role. We need to find a way to incorporate that in
something we do here pretty quickly. So I thank the senator for it.
And there's a vote that started. I'm going to go
vote and come right back. And we'll just keep the hearing going so we
don't have any delay in this.
Thank you, Mr. Chairman, for your
And Mr. Secretary, thank you for your public service in New York
and thank you for what you're doing today.
You have inherited quite a mess, a mess born of get rich schemes
for the very wealthy and the monetary middle-men who conceived of and
carried out these schemes; mortgage schemes that paint an unaffordable
as easily within reach; unregulated credit markets fueled by false
promises and sustained by false hopes and government regulators who
slept through all of it.
Not only did the perpetrators of these schemes paralyze American
families and the American economy, they tainted the American dream.
We all hear disillusionment and despair and unbridled outrage in the
voice of Americans, I hear them in the voice of Ohioans, as they watch
their homes slip away, their property values plummet, their
communities crumble. Their gut level feeling is that all of this is
not only unjust but perhaps criminal.
We owe it to Americans, the Americans we serve, to respond
quickly and forcefully to the housing crisis. We owe it to them to
stop prioritizing the demands of corporate moguls over the wellbeing
of every day Americans.
We all need, of course, to worry about the erosion of home
values. Too many working families who pay their mortgages on time are
facing home values -- or facing lower home values when their
neighbors' homes are foreclosed. As we know, each foreclosed home
reduces nearby property values by several percent. And it doesn't
stop at home values. Police, fire, schools, other programs that are
funded based on property values are also facing massive shortfalls.
Other building blocks of the American dream are also under siege;
a car in every driveway, a stable income upon retirement, a college
education for every child. A quick internet search of just one
website yields in the community of Pickerington, a city, a suburban, a
suburb outside of Columbus, a generally affluent suburb yields 109
foreclosures for sale in Pickerington. Pickerington has an estimated
population of 16,000 people.
Profiteers exploited the American dream pedaling subprime loans
in the quest for more, more bonuses, more private jets, more European
vacations. No one cared how much they spent, they always had the
golden parachute to safely land them when the money dried up. That's
the problem that you are left with that we are left with, cleaning up
after a long, loud party.
While I know the nuts and bolts of the administration's Homeowner
Affordability and Stability Plan are to be released next week, the
broad outline looks promising. I understand the plan the
administration's proposing will help at least 9 million struggling
families hold on to their homes, which is necessary if we care whether
people get back on their feet or fall into poverty.
It's also a smart move to help neighborhoods thrive rather than
fragment and help communities on shaky ground to get on stabler
I'm heartened that after eight long years we finally have an
administration that remembers that it reports to Main Street, not to
Thank you for your service.
Thank you, Mr. Chairman.
Thank you, Senator Brown.
Secretary Donovan, welcome. We are all delighted that you are in
the leadership of the Department of Housing and Urban Development.
You have extensive experience there. And in addition to that you have
been doing a remarkable job in New York City and we thank you for that
I share the sentiments of so many of my colleagues that action
delayed over the last several months has worsened this crisis. And so
the action plan that you proposed along with the president I think is
vitally important at this moment.
I think also the ability to react to the ups and downs of the
market is going to be critical. You're going forward with a good plan
but I think you're also, you're going to prepare to modify and adapt
and respond to changes in the situation.
One of the fundamental aspects, I think, of our recovery is
stabilizing housing prices and then beginning to get people back to
work. And once the American families feel that their housing prices
is stable and hopefully begin to appreciate, once they're confident in
their jobs the rest will be, I think, much -- not easy but the path
ahead will be sure and more confident for families across the country.
One thing I want to particularly thank you for is I heard today
that in the president's proposal there'll be a $1 billion fund to
launch the affordable housing trust fund, that's in the budget. I
know Senator Shelby and I worked on that. I was a key element of the
legislation a year ago, last August. And in this time when people are
losing their homes, particularly low income Americans, the expanding
affordable housing opportunities is more critical. And in addition
too, I think it sends the signal that our housing policy can't rest
simply on homeownership, that there are scores of American families
whose best and most -- and wisest course of action is to be in
affordable rental housing because of their family situation and
because of their economic situation.
And I think we were too, in a sense, beguiled by this notion that
we could put everyone in a home. And I think we found out that some
people, despite their best efforts, as it turns out today couldn't
afford it or were given loans that were just not commensurate with
their ability to pay and to sustain the homeownership.
So for all of these reasons I want to commend you. I would note,
I believe, Senator Shelby, you've already had your opening comments.
We are waiting for the return of Senator Dodd. And I -- Senator
Shelby, I think should be put it in recess for a moment?
I don't think so.
You want to --
See I'm relying on the wisdom and the counsel of the former
So that shows at least --
You've got the gavel.
I get the gavel. But he's got the wisdom and the
experience. So I will -- Mr. Secretary, will you give your statement
Thank you, Mr. Chairman. Senator Shelby,
distinguished members of the committee, thank you for the opportunity
to appear here before you today.
Homeowners in communities throughout the country have been
devastated by the economic crisis. Many responsible families, making
their monthly payments, have experienced falling home values that
disqualify them from opportunities to refinance with today's low
interest rates. And millions of American workers have been laid off
or forced to accept less work and are grasping at every resource
possible to make their mortgage payments.
In the absence of action, over six million families could face
foreclosure in the next few years, with millions more struggling to
stay above water.
In the absence of action we would've seen an intensifying spiral
of more lenders foreclosing, pushing nearby home prices even lower,
and putting more families under water. In fact, when a family loses
their home to foreclosure nearby homes drop in value by as much as
nine percent, causing harm to every homeowner, even those who make
every payment, when foreclosures is in their communities increase.
On February 18th President Obama announced the Homeowner
Affordability and Stability Plan, a plan to help make available to as
many as seven to nine million homeowners who are fighting hard to make
their payments and stay in their homes.
The plan will not provide money to speculators. It will target
support to the working homeowners who have made every possible effort
to stay current on their mortgage payments.
The Homeowner Affordability and Stability Plan is part of the
president's comprehensive strategy to get the economy moving in the
Just as the American Recovery and Reinvestment Act works to save
or create several million new jobs and the Financial Stability Plan
works to get credit flowing, the Homeowner Affordability and Stability
Plan will support a recovery in the housing market and ensure that
these workers can continue paying off their mortgages.
The plan not only helps the responsible homeowners at risk of
losing their homes, but prevents neighborhoods and communities from
decay as defaults and foreclosures fuel falling home values, local
business collapses, and further job loss.
There are three parts to the plan: First, encourage
homeownership by helping keep mortgage rates low; second, support for
refinancing of up to four to five million responsible homeowners to
make their mortgages more affordable; and third, to launch a $75
billion homeowner stability initiative to reach up to three to four
million at-risk homeowners.
To help keep mortgage rates low and promote stability and
liquidity in the marketplace, the Treasury Department will continue to
purchase Fannie Mae and Freddie Mac mortgage-backed securities. In
addition, the Treasury Department will increase its funding commitment
to Fannie Mae and Freddie Mac to ensure the strength and security of
the mortgage market and to help maintain mortgage affordability. This
backing will bolster confidence in the mortgage market, allowing
interest rates to remain at generational lows and to continue to
provide mortgage affordability for responsible homeowners.
As noted, mortgage rates are currently at historic low levels.
But, under current rules, only families with conforming loans -- owned
or guaranteed by Fannie Mae or Freddie Mac, who owe less than 80
percent of the value of their homes, are eligible for refinancing to
these low interest rates. Unfortunately, given the recent decline in
home prices, millions of responsible homeowners who made down payments
and timely mortgage payments are unable to access these lower rates.
The president's plan will help as many as four to five million of
these homeowners refinance to lower interest rates, through Fannie Mae
and Freddie Mac, by opening eligibility to borrowers who owe on their
mortgage 80 to 105 percent of the current value of their home.
Finally, the president has announced an initiative to reach
millions of responsible homeowners who are struggling to afford their
mortgage payments. In the current economy, millions of hardworking
families have seen their mortgage payments rise to 40 or even 50
percent of their monthly income, particularly if they received
subprime or exotic loans with exploding terms and hidden fees. The
Homeowner Stability Initiative operates through a partnership of
lenders, servicers, borrowers and the government to help responsible
borrowers stay in their homes, providing families with security and
neighborhoods with stability.
Based on estimates of the effects of foreclosures on the value of
nearby homes, the Homeowner Stability Initiative could protect the
owner of an average-valued home in the U.S. from as much as a $6,000
decline in home prices. Homeowners with high mortgage debt compared
to income may be eligible for a loan modification as long as their
home mortgage does not exceed the GSE conforming loan limits.
Further, the increase in GSE conforming loan limits -- up to
$729,750 in some high-cost areas, as enacted in the American Recovery
and Reinvestment Act, will allow more borrowers to qualify.
Significantly, this program will not require homeowners to be
delinquent in their payments to qualify for eligibility. Loan
modifications are more likely to succeed if they are made before a
homeowner becomes delinquent, thus the plan will include households at
risk of imminent default despite having not yet missed a mortgage
Borrowers with large, non-housing debts can qualify but only if
they agree to enter HUD-certified counseling. Specifically,
homeowners (who would ?) total "back-end" debt -- which includes not
only housing debt but other debt, including car loans and credit card
debt, equal to 55 percent or more of their income, will be required to
agree to enter a counseling program as a condition for a modification.
The Homeowner Stability Initiative could reach up to three to
four million at-risk borrowers in all segments of the mortgage market,
reducing foreclosures and helping to avoid further downward pressure
on overall home prices. The Program has several key components:
First, the government will partner with lenders to reduce the
homeowner's monthly payment to affordable level. The lender is solely
responsible for interest rate reductions and other changes necessary
to lower the borrower's monthly payment to 38 percent of his or her
From that point, the government will match, dollar for dollar,
any additional reductions the lender makes to lower that ratio to 31
percent. These adjustments could mean a monthly mortgage payment
lowered by more than $400 for a borrower with a $220,000 mortgage.
The lower interest rate arrived at must be kept in place for five
years, at which point it can gradually be increased to the conforming
loan rate at the time of the modification. Lenders will also have an
option of decreasing monthly payments by reducing the principal owed
on the mortgage, with the government sharing those costs.
Second, servicers will receive $1,000 for each eligible
modification meeting Initiative guidelines. They will also receive
fees to reward them for continued success, awarded monthly as long as
the borrow stays current on the loan, up to $1,000 each year for three
Third, to encourage borrowers to stay current, the Initiative
will provide a monthly principal balance reduction payment. As long
as a borrow stays current on his or her loan, he or she can get up to
$1,000 each year for five years.
Fourth, because loan modifications are more likely to be
successful if they are made before a borrow misses a payment, to keep
lenders focused on reaching borrowers who are trying to stay current
on their mortgages an incentive payment of $500 will be paid to
servicers, and an incentive payment of $1,500 will be paid to mortgage
holders if they modify at-risk loans before the borrow misses a
Finally, to encourage lenders to modify more mortgages and enable
more families to keep their homes, the administration, together with
the FDIC, has developed an innovative Home Price Decline Reserve
Payment. The fund, which may be as large as $10 billion, will provide
holders of mortgages modified under the Program with an additional
payment in the event that the home price declines, and therefore the
risk of loses in cases of default is higher than expected.
As mentioned earlier, the Homeowner Affordability and Stability
Plan is not a self-contained initiative but is intended to work in
conjunction -- excuse me, with other efforts, such as the American
Recovery and Reinvestment Act and the Financial Stability Plan to
provide a comprehensive and multi-faceted response to the current
As part of the American Recovery and Reinvestment Act signed by
the president, the Department of Housing and Urban Development will
award $2 billion in competitive Neighborhood Stabilization Program
grants for innovative programs that mitigate the impact of
foreclosures by supporting strategies to address the problem of vacant
Additionally, the Act includes $1.5 billion to provide assistance
to renters facing displacement, reducing homelessness and avoiding
entry into shelters. HUD allocated that $1.5 billion of homelessness
prevention funding to recipients yesterday, just one week after the
bill was signed, as part of our successful allocation of three-
quarters of Recovery Act funds for HUD programs yesterday.
In addition to the already mentioned efforts, the president's
overall economic recovery plan will seek careful changes to personal
bankruptcy provisions. The administration will work with Congress to
ensure that legislation works well in conjunction with our voluntary
Finally, the HOPE for Homeowners Program offers one avenue for
struggling borrowers to refinance their mortgages. In order to ensure
that more homeowners participate, we support changes to the program
that will reduce fees paid by borrowers, increase flexibility for
lenders to modify troubled loans, permit borrowers with higher debt
loads to qualify, and allow payments to servicers of the existing
Thank you, and I look forward to your questions.
Well, thank you very much, Mr. Secretary.
I note we've been joined by Senator Johanns. And we've been
asking if you have opening statements.
In that case I will begin a quick round of questioning -- but,
let me just do this, because we have to vote. I'll recognize Senator
Johanns for questions, and by the time you finish Senator Dodd will be
here and all will be well.
Thank you, Senator Johanns.
Mr. Secretary, welcome.
It's unusual that we get this kind of opportunity,
but I appreciate the opportunity.
Let me, if I might, offer a thought, and then I'd like your
reaction to a couple of questions. The thought is that one of the
challenges we are finding in the marketplace, in terms of lending at
the moment, is the market is looking for stability, predictability;
they're looking for confidence in the ability of that borrow to repay,
So, I'm going to turn to just the last comment you made about the
bankruptcy provisions. And I think what you're referring to is "cram-
down," although you did not use that word. Talk to me about how that
fits into what you are doing here. How would a cram-down approach fit
with what you're proposing here today?
It's a very important question, Senator. And let
me first start by saying, as the president made clear in his
announcement of the plan last week, that this is an issue of fairness
-- to him and to the administration whether it's a second home or any
other kind of debt, that currently can be modified in a bankruptcy.
And we have been able to find ways to ensure that markets are stable
for those types of loans as well, but we also agree that particularly
in this time of difficulty in the market we don't want to disturb the
markets any further.
And so there are a couple provisions that we think are important,
in terms of carefully tailoring this legislation. One of those is to
make it available only for loans that are already in existence. In
other words, new mortgage loans would not have this provision applied
to them. And --
If I might just interrupt. You lost me. Make
The option to modify a loan in a bankruptcy
-- would be -- would apply only to loans that have
already been originated. In other words --
-- the idea is not to have an impact on lenders
that are out making mortgage loans today and to potentially impact
interest rates as a result of that.
Okay. Let me stop you there --
-- just so we're on the same wavelength. You've
got I don't know how many dollars worth of loans out there today --
billions and billions and billions -- they would all be subjected to
this new bankruptcy authority is what you're saying. Now if you end
up with a loan the day after, you don't benefit from that new
bankruptcy authority. Am I -- are we together so far?
Right. The idea is that prospectively for new
loans that will be originated this provision would not apply and
therefore there is no risk of it affecting originations going --
Okay. Now let me take another step with you,
because I think I know where you're going. Let's say that we are
going to continue to ask the taxpayer to bail these things out,
because I think that's kind of what's going on here. And they're
going to in some form or fashion -- whatever the idea is, they're
going to in some form or fashion be the owner of these bad loans, or a
certain portion of them.
How can we assure the taxpayer that with this new bankruptcy
authority as you refer to it, I call it cram down because it is; I'm a
lawyer and that's what we'd call it. How can we assure them that
there will be stability because all of the sudden we've forced into
that basket of debt that the taxpayer's going to own a big
uncertainty. We've got one judge somewhere who has been empowered to
say that loan isn't worth what you think it is because I'm going to
force something different. Isn't that the very uncertainty that we're
trying to avoid in the marketplace?
Again, I think with careful tailoring of this
legislation, there are a number of ways to ensure that it doesn't
introduce that kind of instability. One of them is this prospective.
Another is to make sure that every effort is being made to modify
loans, keep people in their homes, before they ever get to bankruptcy.
So we would support a provision that would, if a lender has made a
good faith effort to use this modification plan, that that would
exempt them from the bankruptcy.
So in other words, we want to be very clear, this is not a
solution to the issues that homeowners have struggling with their
payments as a primary response. It is only a last case resort. We
want to make sure that we're getting to this problem of modifications
and it's why we have our proposal as early on as possible to take away
exactly the instability that you're talking about -- to ensure that
mortgages are affordable and that people can make their payments. And
that will help markets to stabilize because it's the foreclosures
today that are happening and that instability it is driving so much of
the problems in our mortgage market.
Forty-five percent of all home sales in December were distressed
sales. And so helping to make mortgages more affordable before you
ever get to bankruptcy is incredibly important. So there are a number
of ways to do that built into the bankruptcy provisions, we think.
I am out of time and the chairman has arrived, so
let me just wrap up with this. I hear what you're trying to say and I
think you're trying to assure me that, Mike, it isn't going to be that
bad. But if the only option is for these people who are in default or
have missed payments, if the only option is bankruptcy, they'll
probably take that option, I think you'll see bankruptcies sky rocket.
And then like I said, because of the uncertainty that you've now
introduced into the valuation of that mortgage debt, what is it worth
if a judge holds that power. I think as this trails out, the people
who are going to pick up the tab for that you know, is the taxpayer
out there because I think in the end, they're going to own -- it looks
to me like they're going to own a lot of those bad debts.
Yeah. If I could, Senator, there's one other
provision that I haven't mentioned that I think is important as well.
There has been this discussion about a limitation of any reduction of
the debt in bankruptcy to at -- the maximum it could be reduced is to
the market value of that home. And I think also that is quite
important in terms of taking away some of the uncertainty that you're
So again I think there are a number of ways to minimize that
uncertainty and we clearly agree that bankruptcy is not the way to
work out these mortgages. And we have taken action, that's exactly
what the modification plan that we've introduced is, is to make sure
that we avoid the problem of foreclosure and bankruptcy in the first
place and help as many families as possible, responsible homeowners
stay in their homes with the modification plan.
Mr. Chairman, thank you.
Thank you Senator very much.
Senator Merkley, I know you didn't get the chance to make an
opening comment at all so why don't you take the floor?
Thank you very much Mr. Chair and
thank you for your testimony and I'll keep it very simple. This is an
incredibly important plan for millions of American home owners,
certainly important to the financial foundations for our families, but
also for the health of our economy. And I look forward to hearing the
exchanges of questions and thoughts and working with the
administration to try to make sure that this program works both for
our families and for our economy.
I understand Mr. Secretary that Senator Merkeley has
a -- we talked a little bit yesterday as well privately and has as all
of us do -- but a very deep and abiding interest in this subject
matter and spent a lot of time on his own, in fact meeting with people
outside of Washington to talk about this issue as well. So he has
some very strong ideas that I'm sure you'll listen to.
Let me say about a couple of things. One is I don't need to tell
you Mr. Secretary that the level of frustration of the country is
beyond probably anything any of us have witnessed in a long, long time
and the word frustration and anger and disappoint, the adjectives
don't even begin to adequately describe what so many millions of our
constituents are feeling, whether they're directly affected by a job
loss or foreclosure, retirements being dissipated almost before their
very eyes -- if they know people or they know that's what their
children are going through.
I don't know anybody not adversely affected by this at this
moment. And obviously they're looking for answers and how this is all
going to work. I presume the other offices are not unlike mine by
getting a lot of calls coming in saying they're optimistic about this,
now how does it work and how do I qualify and what do I do?
Can you share with us any plans that the administration has as to
how we can begin to communicate directly with the American people
about this so they can understand this and determine whether or not,
because obviously timing is important in all of this, where you are in
that economic cycle can determine whether or not you're going to
benefit from this or not. If you act too early you may not, if you're
too late you may not.
So the windows are not terribly wide for people to
step through. And I think it's critically important that the very
people we're trying to help here understand what this is and how it
works and what they need to do and can do.
Mr. Chairman, incredibly important question. We
have been spending a lot of time with my staff, staff on the National
Economic Counsel, at Treasury, reaching out to organizations that are
talking to home owners to servicers to make sure that we get as much
information out as possible. You may have seen that Secretary
Geithner and I hosted a meeting yesterday with the largest national
groups that are involved in counseling and servicing to make sure that
we do that.
First of all, we have a lot of information available today, I
think as you know next week on March 4th we're going to publish the
detailed guidelines and there will be more detailed information
available then. But we already know a lot about who is eligible for
the program and we've already begun communicating with the servicers
and the counselors about how to talk to borrowers to help them
understand if they're eligible.
And what I would suggest most specifically is that, whether it's
your office or anyone interested in getting more information, you can
go to HUD's website at www.hud.gov and get all of our question and
answers, all of the detailed information that we have today, or pick
up the phone and call the hope hotline which is 888-995-HOPE and we've
been working very closely with them to make sure they have the very
latest detailed information on who's eligible and how to get
As you know the servicers have all agreed to stop foreclosures
until the detailed guidance is out next week and we would expect them
to begin modifying loans immediately after the guidelines are out
based on that information. So we believe that this can happen very
quickly and that there is the information available today to start to
help homeowners make those decisions.
Well I would hope in that regard -- obviously we're
all of our offices are prepared to try and answer what we can and
certainly yours would as well, but we're also very conscious it's a
new administration, you're not exactly fully staffed, I presume yet as
well. In addition to everything else you're doing, to go and then
handle the volume and I raise this really merely as an idea and the
thought and others may have some similar suggestions. I wonder if you
might even be convening the major heads of some of our largest
television radio outlets for them to as a public service to the
country provide some basic information.
Lending institutions themselves, particularly those receiving
TARP funds here ought to be required in some way to do something in a
proactive way so that people are going right to the source where they
All of us getting a lot of calls coming in is -- certainly we
welcome those calls, but we're going to be wanting to defer them and
if we do it just to you, you end up with a set of problems. But if we
could actually hook them up --
-- with the people who can then actually deliver or
answer their questions very directly.
And I think it's one of those moments where the kind of
cooperation of some of our major media outlets could really be of help
at a time like this to give those numbers out, to give numbers of
where people can call or do something that would allow people who are
more likely to get their information through that than watching --
(inaudible) -- with all due respect to C-SPAN, who I love dearly. The
idea they all watch this is unlikely. So I raise that with you. And
there may be other thoughts and ideas we're going to talk about.
Let me quickly get to one other question I have for you as well.
And that is and a lot of us have heard the debates about whether or
not we ought to have an affordable payment plan or have a principal
reduction model. And I've received a number of e-mails and others
from people who are very knowledgeable in the area of finance and have
argued for the principal reduction model rather than the affordable
payment plan. Could you share with us briefly why you decided to opt
for the affordable payment plan rather than the principal reduction
plan and what the pitfalls would be, as I presume you've drawn the
conclusion, in the principal reduction proposal?
Mr. Chairman, it's an outstanding question. I
mean, in some ways, this gets to the very heart of the key to how we
think this plan will be successful. And we've spent a lot of time,
you can believe, with Larry Summers, with the president, with
Secretary Geithner, thinking through these issues. And what we found
looking at the evidence is that we believe very strongly that by
getting payments to an affordable level, that's the single most
important thing we can do to keep people in their home.
The evidence from a series of studies, most recently a Boston Fed
study, shows that a very small percentage of people who are underwater
but can afford their mortgages actually walk away or default. Now, I
will recognize with all humility that we are in an unusual time, that
we may not be able to compare our current environment to what's
happened historically. But there is very clear evidence, as this
recent Boston Fed study said that for people who are underwater but
can afford their payments, only in the range of 1 to 2 percent of
those homeowners actually walk away and go through foreclosure.
So we believe, based on the best evidence that we could gather,
that the key to keeping people in their homes is getting them to an
affordable payment rather than focusing on principal reduction. And
frankly, it's also, we believe, a more cost-effective way to reach
more people. There are a range of estimates, but it would have been
hundreds of billions if not trillions of dollars to try to get to
principal reduction across the whole portfolio of people who are at
risk. So those are really the two primary considerations.
There would appear to be obvious benefits to the
principal reduction in that it would allow people to start to
accumulate equity back in their homes, the wealth-creation idea.
That's obviously appealing from that perspective.
There were also complaints, or not complaints, but questions
raised, I guess complaints as well, about what would happen in the
bond market and so forth in this area because of this choice over
affordability over principal reduction. Can you respond to that?
Yes. And I do think it's very important to make
clear principal reduction is a good thing. And we have done
everything we can in the plan to ensure that the owners of these loans
can go ahead and reduce principal. And in fact, we will share -- if
they choose to get the payments more affordable through principal
reduction rather than interest rate reductions or principal deferral,
we will match that dollar-for-dollar in the same way that we would an
We also have this feature that for successful modifications over
five years, borrowers can get up to a $5,000 payment to reduce the
principal. So we have ways that we can help to start build equity
Finally, I would say that we have other tools that get to
principal reduction. HOPE for Homeowners is a good example. We've
been talking with a number of the investors that you mentioned and
want to make sure that our plan treats across the board principal
reduction with the same sort of incentives that we've provided for
affordability. We haven't gone to the point of actually paying for
that principal reduction in a scale that we think could, you know,
have a cost of hundreds of billions if not trillions of dollars.
So we do allow it, we do encourage it. But we do think that the
most important focus is on affordability.
Okay, I'm going to come back. I wanted to ask you in
the next round I have about the HOPE for Homeowners and what steps do
you think -- Senator Shelby and I worked very hard on that last year
to try and put a plan with Mel Martinez. And it was difficult because
there were a lot of -- we weren't quite in the intense moment we are
today in all of this, so there were a lot of issues being raised. And
I think we sort of, with all the good intentions, created a process
that was so intimidating and so full of hurdles that it discouraged
both lenders and borrowers from being involved. And I'd love to know
if you've given that some thought, how we might modify that so that
that program could also work certainly far better than it has.
But let me turn to Senator Shelby.
Thank you, Senator Dodd.
Mr. Secretary, Section 1517 of the Housing and Economic Recovery
Act of 2008 requires HUD to undertake a study of the root causes of
high foreclosure rates among residential mortgages. An interim report
was due January the 31st of this year. And I know you haven't been
there long, Mr. Secretary. I believe such a report could, however,
provide a valuable foundation upon which to structure foreclosure
Until we have a firm understanding, Mr. Secretary, of what is
driving foreclosures, I believe assistance plans will continue to be
ad hoc and uninformed, for the most part. When can the Banking,
Housing and Urban Affairs Committee here expect to see HUD's
foreclosure report that is required by law?
First of all, let me say, Senator, that -- and you
made this comment in your opening statement -- I could not agree with
you more that we need to take actions based on history, based on data,
based on real information. And I'm happy to talk about a lot of the
detail and assumptions underneath what we've done. I think we've
tried to do that and to meet your standard which is absolutely the
On the report, when we took office roughly a month ago, it seems
like a little longer some days, we had a rough draft of that report
presented to us. We have been reviewing that, not only within HUD but
also at OMB and at the White House to make sure we understand, to ask
for any more detailed information where we think it should be. And I
can promise you we will have that report to you within the coming
weeks, based on the review that we're undertaking right now.
Do you believe that report is important?
I do believe it is.
Okay. The targeting of assistance -- historically,
the number one event resulting in mortgage delinquency has been job
loss. When a family has lost the wage of its primary earner, it's
unlikely that any reduction in their mortgage rate will keep them in
their home, generally. Mr. Secretary, what does the president's
foreclosure plan do to help families that are struggling to pay their
mortgages due to job loss? What's there? I don't see it there for
First of all --
You understand what I'm asking, don't you.
Yes. First of all, I think the president made
clear in his speech this week to Congress that we cannot think about
the mortgage and the housing problem in isolation from the other parts
of the recovery. We have to take action, and we have, to create or
preserve 3.5 million jobs through the recovery act. We must get
credit flowing again, and the financial stability plan will do that.
And so I cannot tell you that the housing plan alone solves all the
problems, job loss --
We know that.
SEC. DONOVAN -- but, and you will see this in the detailed
guidelines that we release next Wednesday, that we are looking at job
loss, in particular, as a factor that we use in determining
eligibility for the plan. For example, if a borrower is still current
on their mortgage but has recently lost a job, that would be one
indicator we would use to be able to say there's a reasonably
foreseeable event of default -- is a sort of term of art in many of
these pooling and servicing agreements -- that that could be one
factor, for example, that would allow a servicer to say, well, they're
current, but it's important that we go ahead and modify based on their
new job information. You're absolutely right.
If someone has no income, it's going to be very difficult to get
a modification to work for them. But in many cases, what you have is
people working two jobs, other wage earners in the family. And so
with that attention to recent job loss, I think we will be able to
make sure that the plan reaches as many of those, you know,
unfortunate families who are suffering from job loss or reduction in
Mr. Secretary, I brought this up in my opening
statement, and I'll just pose it as a question in a minute. A number
of banks that have received assistance, including the TARP funds, have
agreed to implement foreclosure mitigation plans as a condition of
that assistance. Citibank, for one, has agreed to implement a
foreclosure plan based upon FDIC's IndyMac model that you're familiar
with. Mr. Secretary, will those financial institutions that have
already agreed to implement foreclosure mitigation plans be eligible
for subsidies under your new plan, the president's plan?
That's a very important question. I'm glad you
asked this, and this goes to Senator Martinez's point as well. We
can't forget history here. We can't forget that there are things
already happening in terms of modification plans. We don't think
they've been as successful as they could be for a number of reasons.
But we've had a lot of discussions with FDIC, with servicers.
And what we're generally seeing in the current modification plans is
that they get down, in the best cases, to 38 percent debt-to-income
ratio. And so one of the reasons why we've structured our plan the
way that we did is we want to build on the current efforts that are
there, like the Citibank one, where we're requiring lenders 100
percent at their own costs to bring the payments down to 38 percent
debt-to-income ratio, and then we will share costs.
So this actually builds on those current efforts. It doesn't
mean that they're going to get paid for something they were already
doing. What it means is we're going to bring what was a plan to bring
somebody down to a 38 percent DTI through a shared payment with them
further to 31 percent DTI, which we think is the right affordability
standard, and will make sure that modifications are successful.
Mr. Chairman, if I could ask one more question.
Lender payments. Subprime mortgage servicers, it's my
understanding, are paid about 20 basis points annually, or about $400
a year, to service the typical subprime loan. The president's
proposal would more than double the current per-loan servicing payment
for modified loans. This appears to be a significant subsidy to pay
servicers to perform the jobs they're already paid to do.
Mr. Secretary, could you explain to the committee how the $1,000
up front and the $1,000 annual lender subsidies in the president's
plan were derived? In other words, what was that based on?
It's a very important question, Senator. I think
hindsight is 20/20, as they say.
And if you look at these securitizations, the way
that the pooling and servicing agreements were done, I think we all
recognize today that there were a range of mistakes in the way the
incentives were set up that frankly made sure that the people
originating these mortgages didn't act like they should have acted,
didn't have the right interest at heart. And I think we can fix that
On this issue of payments, one of the problems with these
agreements that were put in place is that the way that servicers are
paid gives them a bigger incentive to foreclose than to modify,
because they can access additional payments.
So what we're trying to do with these payments is to basically
level the playing field for modifications, to make sure that a
servicer, who today doesn't get any compensation for a modification
but does get compensation for a foreclosure, that we can tip the
scales to try to help make modifications move more quickly.
On the reason for the $1,000 payment, you know, no number is
perfect, but we did a fair amount of research, talked to servicers,
talked to a range of others in the mortgage industry to try to get to
what we think the rough costs of a modification is, and that's how we
arrived at the $1,000 payment.
Thank you, Mr. Chairman.
Thank you very much, Senator.
Senator -- who came in first? Senator Menendez, I guess, was
here before Senator (Bayh ?).
Thank you, Mr. Chairman.
Mr. Secretary, let me ask you -- I appreciate -- and I read
through your testimony -- we hear this plan will only help, quote,
"responsible" homeowners. Can you define that term for us? What
exactly -- what universe does that include?
Yeah. First of all, let me just say how excited I
am to work with you as the new chairman of the subcommittee. I will
miss Senator Schumer as chairman, of course, as my home-state senator,
but your intelligence around these issues, your commitment to housing,
I'm very, very excited.
I look forward to working with you as well.
I think there are a couple of components of this
issue of how do we target responsible homeowners. First of all, the
plan -- we've talked a lot about the modification proposal. But to
make clear, the refinancing initiative as well as the increase in the
backstop to Fannie Mae and Freddie Mac are both targeted at making
sure this plan benefits every American homeowner. By keeping interest
rates low, obviously borrowers with good credit are the ones and who
have made their payments are the ones who are going to be able to
access the mortgage market today most easily for those low rates.
The refinancing initiative to help 4 (million) to 5 million
existing owners with loans through Fannie Mae and Freddie Mac that are
under water is available only if you've made your payments on those.
And then, finally, for the modification plan, a couple of things.
We've targeted this to owner-occupants, not to investor-owners who may
have bought a home as a speculation or in order to flip it quickly
because of what was happening in the market. We've targeted this to
reasonably priced homes by using the loan limits that I talked about
in my testimony, up to $730,000 as of yesterday when we implemented
those increased limits from the Recovery Act.
And then, finally, I think we have to make sure that we don't
fall into the traps that got us here in the first place. We will make
sure that we verify income so that if a family who lies about their
income try and get a modification, we'll ensure not only that the
servicers are checking that but that we're auditing -- we're drafting
the contracts right now to implement this program through auditing and
a range of other features to make sure that we know people's incomes,
we can verify them, and we don't have the kind of fraud either on
lenders' parts or on families' parts that got us into this in the
On the income side, we're using the same ratios
as we have in the past?
We are using the 31 percent debt-to-income ratio,
if that's what your question is. As I mentioned earlier, one of the
concerns we've had about existing modification programs is that
they've gotten to, say, 38 percent debt-to-income ratio. And in fact,
in many cases -- and this is why the redefault rates have been so high
-- we see lots of modifications where payments actually increase
rather than decrease.
So we think the 31 percent debt-to-income standard is the right
standard, widely accepted affordability standard in rental programs as
well as home ownership. So we think it's the right standard to make
sure that we have successful modification.
So give me, as briefly as you can, what's your
time line of the proposal? What will happen first? What will take
the longest? When are we going to see the first modification as a
result of this?
Yeah. So next Wednesday, March 4th, we will
release the detailed guidance to servicers and others about how
exactly the program is going to work in the implementation. And we
would expect servicers to be able to begin modifying loans based on
that almost immediately.
As you know, a large number, the vast majority of servicing at
this point, the servicers have held up on foreclosures, subject to
getting that guidance next Wednesday. So we expect them -- they are
very eager to see that guidance and are ready -- I've talked to Jamie
Dimon and others myself directly. They are prepared to implement that
guidance as quickly as possible after it's released next Wednesday.
Let me ask you one other thing. One of the
biggest lessons I've learned over this period of time is that some of
these institutions simply won't police themselves, and lenders won't
modify on their own in many cases. Voluntary efforts just don't work.
Do you believe -- are you confident that there are sufficient
carrots and sticks that you have provided here that will work,
specifically the servicers? Are there too many carrots here and not
Well, I think there are a couple of pieces to
that. This is a very important question; first of all, a requirement
that any new funding from TARP to any financial institution requires
that they participate in this plan. And we will be looking to see
that they are auditing very carefully, that they are applying this
correctly, that they're using the guidance on every loan in their
portfolio to figure out which can qualify and not.
I think it's also important to remember that we have the
servicers themselves as well as the investors. And one of the reasons
why the servicers hadn't acted -- and this goes to Senator Martinez's
point earlier -- is concern that the investors will not allow them to
act or will bring suits against them. The guidance that we're
releasing next week is critical in being able to set a standard, a
standard for what is a reasonably foreseeable default which allows
them to move ahead and modify those loans, and what is a reasonable
Those standards, issued by Treasury, applying to every financial
institution, we believe, will go a very, very long way to allowing the
servicers to move beyond this concern around the investors, because
we've got an industry standard that has the force of guidance from
Treasury to allow them to move forward. So we think we have the
sticks. We also think we have the protection that's needed to allow
these modifications to go forward.
Thank you, Mr. Chairman.
Senator Dodd asked me to recognize -- (inaudible)
-- have no power.
Well, I appreciate you recognizing me with (or
without ?) power. I appreciate that very much.
Secretary, let me follow up on that very issue of -- I'll call it
a safe harbor; I think others have as well. And I know you met with
the servicers yesterday and the industry folks. And my understanding
is that there continues to be concern about the lack of a legal safe
What is your thought on that? What are your plans? Do you think
you need such authority to have a legal safe harbor? Or will the
servicers be satisfied not to have the legal protections that I'm led
to believe they insist upon?
Yeah. Well, let me say up front, Senator, there's
more legal wisdom on that side of the room than here. I'm not a
lawyer. I'm not a --
I'll never admit it. (Laughs.)
I'm not a tax lawyer. I'm not an expert on some
of the tax issues that surround these contracts. But it's a difficult
issue, because certainly some of the proposals for safe harbor go far
enough that they are effectively -- would be modifying existing
contracts, which my understanding there can be constitutional issues
There are also provisions around changing tax laws that would be
retroactive that there are significant certainly policy concerns if
not legal concerns around. So I know that we're engaged in
discussions about this right now with a number of folks on the Hill to
try to figure out what the best way to do this is.
But let me be clear. We looked at this. Our sense is that for
80 (percent) to 90 percent of the pooling and servicing agreements,
with the guidance that we're going to issue next week. We feel very
comfortable that provides servicers with the comfort that they need to
go ahead and start modifying the loans without significant fear about
There remain roughly 10 (percent) to 20 percent of these pooling
servicing agreements that have more restrictive language, which
potentially will still be problematic, and that's where I think we
need to try to focus our effort and to see if there are other --
whether it's legislative solutions. We think we're going as far as we
can go under our existing power with these guidelines, which do have
the force of guidelines from Treasury that apply to every financial
institution that we can solve a large piece of this problem through
I hope so. My sense is that -- well, maybe the
problem is not with all private servicers. I believe that anyone who
is, you know, concerned of private investors' reactions to a
modification might have a problem. But anyway, I'd like to know your
thoughts on bankruptcy -- crime now essentially as it's called -- and
you mentioned the constitutional issues with renegotiating contracts.
Obviously, in the legal context of a bankruptcy perhaps those problems
would be avoided. But I know we're going to be confronting that
Do you think that is a necessary element to have in the arsenal
available to be able to stave off continued foreclosures and the --
you know, the detrimental effect that has on the housing market?
Yes, the president believes and I believe that
carefully tailored bankruptcy reform is a piece of the solution.
Clearly, making sure -- and this is absolutely why we took action in
the way that we did -- we have to make sure that well before we ever
get to a bankruptcy court or to foreclosure -- and in fact, even
before borrowers get to 90 days delinquent, it's critical that we
start to modify these loans in significant numbers. That avoids
bankruptcy court; it avoids foreclosure; it avoids the terrible
effects on the families themselves but also their neighbors and the
So we do not see bankruptcy court as the place to work out
mortgages. We think that would be a terrible result, frankly, of what
could be happening. But we do see that carefully tailored reform that
includes the kind of things that I mentioned earlier -- for example,
having it be retrospective rather than prospective applying only to
existing loans rather than new loans; a limit on the size of loans.
We've discussed as well too, for example, the conforming loan
limit so that we don't have, you know, millionaire homes that end up
in bankruptcy court; provisions that would ensure that if a servicer
has made good faith efforts to modify the loan along the lines of our
program that they're protected; as well as making sure that there are
provisions in the code that would allow us to protect against an
example where it was coming through foreclosure and would be modified
down to a level that was well below the market value of the home.
We don't want, you know, arbitrariness or the unpredictability of
a bankruptcy judge modifying, you know, to a level that was well below
the value of the home because we don't think that that is fair as
well. So those types of careful tailoring of it we think can make
sure that it's done in the right way and not introduce instability
into the process.
My time is up. Thank you very much, Secretary.
Thank you very much. Senator Merkley, and then I'll
come back to you.
Thank you very much Mr. Chair and Mr.
I want to follow up -- there's a little bit of new
information there that I hadn't heard before regarding your points
about the tailored nature of bankruptcy. Can you just expand a little
bit on the good faith provisions? If I caught you correctly, that if
a servicer proceeds to work with the administration's program that --
and does so in good faith -- that then in that case modification and
bankruptcy would not be on the table. Is that correct?
Well, let's be clear. Bankruptcy reform is
something obviously that Congress is going to make a decision about.
There are discussions ongoing about ideas like this so there's nothing
in our modification plan that sets the detailed limits or lays out
these ideas about bankruptcy reform. That's really going to be part
of a discussion with all of you and those discussions are ongoing. So
what I'm laying out are potential ideas for ways to target bankruptcy
for them in a way that we think would be most effective.
Thank you. And I will say that as I went through
the details of the loan modification program, I think that your team
and the Treasury team and Larry Summers' team are to be saluted for
really wrestling with a lot of nitty-gritty details in trying to lay
out a road map to how to make modifications work. So I do compliment
you all on that.
I remain a bit of a skeptic about how easy this is going to be
because of the enormous thicket of challenges -- the issue of second
mortgages; the issues of legal liability; the fact that the servicers
have conflicting language over the range of their authority.
Certainly, we have seen in the past that there's been great reluctance
to wade into those issues. I think you've done everything possible to
lay out this plan to overcome that.
But is there a plan B? If, in fact, all of these incentives and
in addition the carrots and the sticks, these things do not result in
a significant number of loan modifications due to the problems we all
have worked to overcome -- your teams worked to overcome -- is there a
plan B on how to take on using, if you will, the refinance strategy in
addition to the loan modification strategy?
First of all, let me say you are absolutely right
that this is a complicated problem -- that we find ourselves in a very
difficult situation. The complexity of these loans and the securities
behind this, it is not simple and we have done an enormous amount of
work with our team to try to get through a lot of those issues. And I
appreciate your recognizing that.
What I would say is that we have through this plan tried to
provide a range of options: the refinancing proposal that will move
forward with the GSEs for underwater borrowers; fixes to Hope for
Homeowners to make sure there is an option that includes principal
reduction; and getting folks into long term fixed rate FHA loans. So
we do have a couple of pieces to this that I think complement well the
And obviously, to go to Senator Reed's comment, we will be
watching this very closely, watching the results. If there are tweaks
that we need to make to the program we will do that. But I want to
make very clear that we expect servicers to move quickly and not --
one of the problems that we've had, I think, over the past year or so
is a shifting target and a shifting set of programs. We want to send
a very clear message that this is a comprehensive full solution that
we want to focus on today and make it work.
We are working with the servicers. With the guidelines out next
week we expect to see large numbers of modifications happen very
quickly, and I don't want to engage in too much discussion about Plan
C or Plan D because, frankly, we think this is the right program and
we think that it can be effective and that it will be effective with
the set of options that we've provided.
Thank you for laying that out. I held a
conference in my state last week over the foreclosure mitigation
issues -- a wide range of participants. What came out of that meeting
was -- the single core message was how difficult, how extraordinarily
difficult it is, for homeowners to reach anyone with whom they can
actually negotiate. You can imagine the situation of going through
the phone tree and finally getting somebody on the line after you've
been waiting an hour or so and the person says, well, I can't address
loan modifications. I'm -- you know, I can tell you what your balance
is on your loan or when your last payment was or whatever. And so
they try to get through to somebody with authority, and after they've
spent multiple hours, several days they give up.
Anything that can be done -- and my time is up so I'll just --
anything that can be done, whether it's a national hotline, whether
it's the support you're considering providing to servicers to enable
them to expand their training and their staff, their negotiation team,
if there is not a channel of communication that ordinary people can
get through to someone it will greatly hinder the success of this.
And I'd just encourage -- I bring you a message from frustrated
homeowners in Oregon. They need help getting through to people that
they can actually talk to.
And it certainly is much less of an issue when loans are held in
portfolio but when they have a servicer connected to a trust and the
trust has split up the cash flows and sold them as derivatives, that
it just seems like in that situation when there's not a personal
relationship with a local institution, it's very, very difficult.
I couldn't agree more, Senator; I think it's a
very, very important point.
Both to make sure that we have outreach from the servicers and
the compensation you talked about is an important part of them being
able to staff up and really provide the service that we need.
We also need counselors out there and as part of Housing And
Economic Recovery Act a significant amount of funding that you
provided through Neighborworks, we've been meeting with Neighborworks
and making sure that all of this information is available, that
they're reaching out and that that money is available as quickly as
possible to help counselors.
And also Chairman Dodd had a terrific idea earlier about
advertising, using campaigns, that's something that I think we will
try to see if there are ways that we can get out there and inform
people. And as I said earlier 888-995-HOPE is the national hotline
that's been setup that is available for borrowers who have questions
about the plan, want to see if they're eligible, or go to our website
at www.hud.gov. So thank you very much.
Thank you very much, Senator, and I apologize to
Senator Bayh and the other senators.
I'm trying to do this in the
order that people arrive.
Thank you -- Evan, do you need to -- (off
mike). Okay. Secretary Donovan, I've been arriving and leaving
constantly so I thank you for keeping track. But Secretary Donovan,
again congratulations and we're extremely delighted and very confident
of your role going forward.
The plan rests upon the effective actions of the GSEs -- FHA,
Veteran's Administration, Fannie, Freddie -- and there's an issue of
capacity, do they have the resources, the computer resources, the
personnel. This is a program that has to work not only to help
families but also to be financially sound and well managed, and I
wonder if you have any specifics relating to program improvements or
additional resources you need. And I say this, the context is last
year Senator Shelby and Senator Dodd were very kind because we
included an FHA modernization language in the legislation. They have
that but you have to go beyond the language and make sure they have
the resources. So any comments I'd appreciate.
Well very important both that the GSE's and the
FHA have adequate resources, president releasing our initial budget
today and I think you'll see that does focus extensively on building
FHA capacity. You all have been very I think forward looking in terms
of recognizing the need to enhance staffing, systems at FHA to handle
the increase in volume. And that includes the modification efforts
that we'll undertake at FHA. There is legislation that we hope would
be part of the package that both has some improvements to help for
home owners but also allows partial claims to happen at FHA so that
FHA can participate in this modification program in a very consistent
way with the plan that we've laid out.
And then on the GSE side, you know, at the broadest level the
announcement as part of this plan that we would as authorized by
Congress increase the keepwell by $200 billion ensures that Fannie and
Freddie will have the resources to be able to implement this plan and
continue to guarantee mortgages but we are rest assured, I was talking
to somebody this morning who was in meetings until 12:30 in the
morning with the team that's implementing this. We are making very,
very sure that there is adequate reporting, oversight, that the
systems are there to be able to implement this plan. We're doing it
very quickly and I can't promise that we won't make some mistakes,
that we won't have to learn as we're going, but we are very focused on
the implementation and making sure the GSE's have the resources and
are doing what they need to do.
Thank you very much. There's another issue and this
is part of the not directly related to housing but part of the current
crisis. There are many not for profit organizations, hospitals are
just one example, who have been sort of squeezed out of the credit
markets. Some hospitals participated in these auction rate bond
mechanisms, that auction rate bond mechanism has essentially closed
down and they are looking at serious financial issues. And since 1978
my understanding HUD has the ability to allow hospitals without
existing capital projects to refinance their debt into lower interest
rate loans. I would ask you to look at this issue and not just
yourself but share it with your colleagues in the economic team
because I have a feeling that one of the repercussions of this crisis
is there's going to be some not for profit or hospitals across the
country who are going to be in difficult shape when their existing
financing which sometimes was as low as 3.5 percent is now kicked up
to 12 and 13 percent just unaffordable.
So you know I think some authority and I wish you would look into
that if you would.
Absolutely. I think we both need to do things to
strengthen the bond markets in general and that was part of what the
president announced last week was strengthening for FHA's, state FHA's
who can be a real part of this solution with refinancing using the 10
(billion dollars), 11 billion (dollars) in tax exempt bonds that was
part of your Housing and Economic Recovery Act, but also the hospital
program is key and despite being from New York, it used to be that the
portfolio in the hospital program was about 80 percent New York City
hospitals and New York state hospitals. One of the great things about
the program it's now expanded significantly where it's providing
financing for hospitals across the country and is very, very
One final point because I have a few minutes and the Chairman has
pointed out and my colleagues have echoed a need to communicate with
the public in these details, but I think there's another message that
has to be continually communicated not just by yourself but by the
president is that for those people who are paying their mortgages that
are, and feel the sense of some kind of, well, they're torn because
they want to help their neighbor but they've made their
responsibilities. The fact that if we don't move aggressively with
respect to these foreclosures, the market will deteriorate so that
people a year ago or today who are making it won't be making it.
They will be in the next wave of these foreclosures. And I think that
message has to be communicated as well as the details of how one gets
into this, qualifies for this plan.
Very important point. Our models based on the
plan show that simply by modifying mortgages that we're proposing, the
$75 billion dedicated to that, we will help to avert a loss of $6,000
in value for the average home owner. Not the average home owner in
foreclosure, for the average home owner that's making their payments
across this country. So it does have a very tangible, concrete
benefit to everyone.
I think the point has to be made over and over again
because frankly people, you know, they're struggling and they're doing
their best and they've got to know that they're getting a benefit,
Thank you, Senator.
Thank you Mr. Chairman. Secretary thank you for your
I think your energy and your confidence will bring a
breath of fresh air to the Department at a time when the country needs
it, So thank you for that.
Two very brief questions about things in particular just to my
state that are tangentially related to the topic at hand today. Last
June 30th, President Bush signed into law an act that Representative
Donnelly from my state worked with me on. It was called the FHA
Manufactured Housing Loan Modification Act. If you have staff here, I
hope they'll make a note of that. It's particularly important to
North Central Indiana, particularly Elkhart County where the president
made his first trip outside of Washington as president of the United
States. The unemployment rate there is 15.1 percent. The changes
called for in the act, although signed into law more than half a year
ago now have not been made. Can I report from your staff about when
the department intends to make those changes?
Yep. Can I give you a report myself right here?
I'm highly impressed.
You have a well-paid secretary Mr. Chairman.
When we came into office about a month ago, there
was a lot of concern on your part, Senator Corker, Representative
Donnelly and others, Chairman Frank reached out to me about this, that
there had been potentially a determination within the department that
implementing this law needed full rule making, which would have
delayed the implementation of it another months frankly. And that
were critically changes that needed to move quickly. We've gone back
with our legal team, we've made sure that we can go ahead and get this
law into effect just with the mortgagee letter rather than going
through the entire rule making process. That letter is being drafted
as we speak and I can't tell you exactly what day it's going to be
done, but I think within 30 to 60 days, we will have that out and the
law will be implemented.
Thank you. I'm very impressed. If you would let us
know as soon as the letter's complete, I'm sure the people of Elkhart
would be very gratified to know the administration has moved this
quickly in the face of previous inactions so thank you for that.
Second thing that comes as no surprise to you either, you had
mentioned at some time before your confirmation the situation in Gary,
You know, they are very desirous, as are people
outside of Gary in that part of our state, they have hundreds of
derelict homes, it's keeping private capital from coming in, they've
become sites for the, you know illegal activities and that sort of
thing, they'd like to have an aggressive program of you know, tearing
down those homes, rehabilitating the land, preparing them for you know
private home construction, that sort of thing. I was pleased to see
that the administration is putting together something called the
Affordable Housing Trust Fund, which might be eligible for this or you
already have in place the Neighborhood Stabilization Fund, if I could
just get a report at some point Mr. Secretary about what could be
done through those avenues or others to help facilitate this process
in Gary. Because until we take care of those homes frankly it's going
to be very hard to generate much positive activity on the upside.
Absolutely and you know when we talked about this
one of the points you made which I think is right.
I've been hearing this from smaller counties in California and
Florida as well, where the original formula for the $4 billion in
neighborhood stabilization funding, a large share of it went to
states, it didn't necessarily reach, at least directly, lots of the
locations, particularly smaller areas, smaller towns that weren't
eligible directly to be able to deal with the problems of foreclosed
homes, vacant homes.
I'm very happy that, as part of the recovery deal, there's an
additional $2 billion in neighborhood stabilization funding.
Yesterday the vice president announced we were releasing allocations
for 75 percent of all the HUD funding that was in the bill, over $10
billion. We're now going to move to implementing the competitive
aspects of it. And we should have those (compositions ?) written
within the next 30 days or so, and that includes this neighborhood
stabilization funding. It's competitive, and we want to really target
the areas that have comprehensive strategies, that are working already
well with neighborhood stabilization or didn't get access to it.
But I think, in particular, in Gary where, for instance, in the
Chicago metropolitan area there's been a very good, strong,
coordinated effort around this issue, that we ought to be looking at
innovative things like that.
Well, it's such a concentrated problem that it really
would pay huge dividends. So I thank you for your cooperation on
that. I've got 22 seconds. Let me ask you this, my final question.
I hear from -- do you know what percentage of mortgages in the country
are current, being paid on time? It's got to be 90 percent, something
Roughly 90 percent are --
Here's my question. I hear from people all the time
who say, look, I did the write thing, I've lived my life prudently,
I've saved my money. I didn't buy a house that was too big for me. I
didn't take on a loan that I couldn't afford. And now I see my tax
dollars are being used to help those who made different decisions.
How is that just? How is that fair to people who, you know, live
within their means? And so my question to you would be, on behalf of
the 90 percent of people who are current with their payments, how are
we not, in essence, enabling, you know, unfortunate behavior through
our activities? Now, I'm playing a little bit of a devil's advocate
here, as you can imagine, but that question is out there. People are
angry. I think it needs to be addressed head on. What would you say,
It's a very important question. There's a lot of
things that are happening in this country that are unfortunate, that
are happening to families. And I think it's very important, first of
all, that we recognize the most significant part of our plan, in many
ways, is to take the actions we need to take to keep interest rates at
what are really generational lows. That benefits every single
American family that owns a home or wants to buy a home, $1,200 to
$1,600 a year, on average. We think just the actions we took to keep
Fannie Mae and Freddie Mac interest rates low will have that benefit.
So that reaches every homeowner in the country.
Refinancing where a family has made every payment, they're
current on their mortgage and simply because housing values have
dropped around them in their community, they may have a 7 or an 8
percent mortgage rate, they can't take advantage of the refinancing to
today's low rates. We're going to change that through our initiative
in the plan, 4 (million) to 5 million homeowners who can benefit an
average of about $2,600 a year for those families to benefit.
All of those -- good credit, paid their bills, done everything
right, haven't made mistakes -- they're all benefiting.
But I think the final thing that's perhaps most important for
those concerned about are we providing money to people who
overstretched, who shouldn't have gotten into homes that were too
expensive to begin with, we're doing everything we can in that plan to
target it to people who are paying their bills, that are working hard.
But we have to recognize, first of all, there's a lot of job loss in
this country. There is a number of people because they have a medical
emergency and they can't pay a bill.
We have to, I think, as Americans rise to the occasion and say,
yes, we're going to do everything we can in this program. We're not
going to allow speculators to participate. We're going to check
incomes carefully. We're going to make sure we don't have fraud.
We've got to help folks. And by the way, it's helping ourselves
because 45 percent of all home sales in December were distressed
sales. That drives everybody's home price down. Just through the
modifications that we're doing, we think we can save the average
homeowner in America, the ones who have played by the rules, and make
them almost $6,000 on their home value.
So we've got to make sure that, I think, Americans understand
that this crisis we're facing, the foreclosure crisis is hurting
everyone. And we've got to stop it so that everybody benefits as
Thank you, Mr. Chairman.
Those are excellent, excellent points. And I'd just
point out the same point in my home state. I don't know if this true
of all states. But my community bankers -- and I think one of the
things we've got to be careful of is the language we use describing
bankers. A lot of our bankers at the local level have been prudent
lenders over the years. In Connecticut, they tell me, my community
bankers, that the best month they've had on mortgage origination was
the month of December. And the next best month for them was August of
last year. And I don't know what the January numbers look like.
But at a certain level, and obviously, it's not everywhere, but
there is good lending going on out there. And there is activity. In
fact, in credit markets, I think, what is it, a 5 percent, 30-year,
fixed-rate mortgage is available today, which is a pretty good
indication that, at least in that credit market, there's some level of
activity that ought to be encouraging to people.
And we need to get back to basics in the lending
the way a lot of community bankers did the right thing. And those
mortgages are performing well.
But your $6,000 figure is a very important piece of
information that I think needs to be transmitted, as Senator Reed
said, over and over and over again to people, that they understand
that even though they are not in that category, they are a beneficiary
by getting this back on its feet.
Senator Schumer, before you were in and out, I was saying that a
lot of us got to know about Shaun Donovan because of you.
And your best cheerleader up here in terms of your tremendous
work in the city of New York was certainly trumpeted by Senator
Schumer over and over again. So you've got a great ally and friend
here in the senator from New York.
Thank you, Mr. Chairman. Thank
you. And I think, as you know, because you're so on top of all these
issues, as America gets to know Shaun Donovan the way New York has
gotten to know him, they're going to realize we're going to have one
of the best Housing secretaries that we've ever had.
And so welcome, Shaun. I'm glad to see you here.
First, just a point of reiteration. Senator Jack Reed mentioned
putting hospitals, seeing if they can be eligible for FHA. You know,
the problem of people getting financing is just everywhere. And
sometimes I worry that we're not even as knowledgeable of it as we had
-- well, hospitals. I've heard many hospitals have the money, have
the resources, have the ability to build and can't get any financing.
So looking at FHA that way in terms of job creation without cost us
much, please look at it.
But here's my main point. You know, I think the housing plan
that you and Tim Geithner and, of course, the president put together
is really a home run. The Bush administration said, when it came to
foreclosures, you know, watched all the fast balls go by -- they are
fast balls, they're hard to hit -- and refused to even swing. You've
stepped up to the plate, you're swinging, and I think you've knocked
it out of the park.
And I don't think there's enough understanding of this. And so
I'd like to just reiterate. Senator Menendez sort of touched on it.
I'd like to just elaborate on what he talked about. Sorry I couldn't
be here while you were being asked all these questions.
The real block, in my opinion, has been the servicers and the
bondholders. It hasn't been the homeowner, even the homeowner who
could afford to pay back. It's been the servicers and the
bondholders. Now, the bondholders have their own economic interests
sprayed all over the lot because very few home mortgages are held, and
the riskiest tranche holder has a different interest than the safest.
And the riskiest says, I'm not doing this because, you know I lose all
my money if the house is 98 percent of its value. Well, you know, you
got the higher interest rate for that.
But the servicers are the ones who could do something. And
unfortunately, the previous administration didn't really focus on the
servicers. They said, go do it and we'll protect you, but it was sort
What you've done in your plan is laid out specific guidance that
every regulator agrees to and that most legal experts say will protect
the servicer as the servicer endeavors to refinance the mortgage so
that it can be at a lower rate. And the plan also, very intelligently
-- I mean, I know Evan asked the question, well, what about people who
really got underwater way over their heads? They're not going to be
helped by this. But people who may have lost the job, who had always
paid and, you know, maybe they're paying 50 percent of their income as
mortgage -- not 80 (percent), but 50 (percent), not 200 (percent) --
will really be helped by this. And they're the right group to help.
But I think the most important thing is something you told me,
and I'd like to get that out here. And that is that many, many
servicers have agreed to start refinancing the mortgages. And they
feel they are protected by the guidance that you've issued. That's a
key because if a large percent of the servicers say they're going to
step up to the plate, you're going to see a lot of refinancing and a
lot of homes that might have gone into foreclosure taken off that list
in the next three, four months. So could you elaborate a little on
that? I think that's really important for the public to know.
Thank you. And as I said earlier while you were
out of the room, I'm very excited that Senator Menendez will chair the
Housing Subcommittee. But I will miss you as its chair there.
Very excited that he's the chair of the DSCC.
So that is very important. And we have tried to
work very closely with servicers. We believe, as you said, that we've
tried to make sure we're covering all the issues around their
compensation, their incentives, around these legal issues with the
But the proof of the pudding is that they are -- first of all,
they've suspended foreclosures, pending the plan, which clearly
signals, I think, there's something in the plan that really helped
them move forward on the modifications.
And I've already had commitments. Jamie Dimon himself said a
million loans they think they can do through this just at JP Morgan
Chase. We had a meeting yesterday with the servicers, with the
president of Wells and he said this will allow them to move forward
and to do a very large number of loans.
I think the public has this view that the
servicers are little entrepreneurs all over the lot. What percentage
of the servicers come from the large banks who, say, have accepted
significant money from the TARP?
The largest banks cover about two thirds of the
And you have a little leverage over them, I would
And, in fact, we've made it explicit that any
funding from TARP requires participation -- any new funding from TARP
So this means that right now two thirds of the
servicers are likely to go along with this plan for those mortgages
that meet the guidelines and the guidance that you've put out. Is
We hope it goes well beyond those biggest.
But if it goes to two thirds shouldn't that be a
real change in the housing markets and rates of foreclosure? And
even, shouldn't it help us find a floor, couldn't the markets, the
housing markets then say, hey, so many of these are being refinanced
we're going to -- we know now that there's going to be some floor to
Yeah, let me ask. How about the previous recipients
of TARP as well, doing exactly what we discussed? How many more would
you include if we added previous recipients of taxpayer money?
I, to be honest, I don't know. I don't have the
details, I don't know the numbers of going forward versus the
But it'd still be higher.
Yeah, and Mr. Chairman, I think most of the big
banks that have already received TARP money, who are servicers have
agreed to be part of this. Isn't that right?
Yeah. So you've got them. I mean, the
Citigroups, and the JP Morgans and the Wells', and all of them. And
they are the servicers. That's the amazing thing. I didn't really
know that until you told me.
And so, I really would say that your program is going to have a
significant and deep effect on housing markets, improving them. And
that can reverberate throughout the whole economy. You know, I'm sort
of surprised it hasn't gotten more focus and more attention. I don't
know why. But --
I think when we can show results and we will very
clearly be focused on auditing and making sure that we're getting the
results that we --
One final question, when should we start seeing
the results that this guidance will -- the effect it will have on the
Well, next Wednesday, March 4th, we're going to
release the guidance. We, based on our discussions with servicers
believe that servicers will be able to almost immediately begin
modifying loans under the guidance. It may take some of them a little
bit of time to, you know, get the systems and all of that going but
we're working on it with them already.
So I would hope that in March but certainly in April we start to
see a significant decline in foreclosures.
Again, 45 percent of all home sales in December were distressed
home sales. So there's no question that if we can lower the number of
distressed sales, of foreclosures, that we can begin to stabilize the
market and help it return to balance.
And that's going to mean some real stuff to the
stability of the banks and of the whole financial markets because
they're still holding this paper, they don't know what the bottom is.
So this is dramatic and significant. And I would just commend to
my colleagues, the public, everybody, pay a little attention to this
because it's one of the first early bits of good news, I think, that
I've heard about this.
And I congratulate you, Secretary Geithner, and the president for
coming up with it.
Thank you, Mr. Chairman. Let me thank
you and colleagues who've been here long before me for continuing to
raise this issue, particularly in terms of the importance of finding
relief for the housing sector and the fact that you've been a constant
advocate both sides of -- if we're going to spend TARP money make sure
some of its directed here in the housing area.
Mr. Secretary, good to see you again. I got a couple of lines of
questions and I'll try to be brief. One, I know some of my colleagues
when I was not here pressed somewhat on how we make sure that folks
around the country understand this, these new programs and how they
get access to it.
One point that I'm not sure you fully address though is that --
I'm getting folks calling our office and Lord knows it's going to
exponentially increase on the 4th, and they're saying they're calling
their servicers and some of their servicers and actually not telling
them who owns their loan at this point. And there seems to be some
ambiguity in the law whether a servicer is actually required to
disclose who the owner of the loan is. And we've had this on a number
of occasions and it sure as heck seems that, you know, we need to make
sure that there's clarity on that, whether there needs to be
regulatory change or at least guidance. I can see these servicers
getting flooded with calls on March 4th and if there's still this
ambiguity, some folks coming back even more confused if they don't get
the fact that they can't even find out who actually owns the loan at
this point. Have you heard --
I appreciate you mentioning that and we'll --
we're working in depth on the guidance now and we'll ensure that
that's an issue we look at.
Please look into that.
And I'm a bit of a broken record. Senator Bennett and I are on
this issue and Senator Menendez and Senator Schumer has raised it in
terms of hospitals. But I do think anything we can continue to do for
this whole municipal bond market that -- and a piece of that,
obviously, are our housing agencies that I think can play an important
role. And have you given any more thought to how our state and local
housing agencies will play a whole role in this real estate recovery?
Very glad you asked that. Virginia in particular
has one of the strongest housing finance agencies in the country and
have done great work.
President actually mentioned in his speech last week that as part
of this plan we are going to provide some assistance to housing
finance agencies who can really be part of the solution here. There
was $11 billion in new tax exempt bond authority that was part of the
Housing Economic Recovery Act last summer.
But because of the issues in the bond market, that you rightly
point to, they have not been able to fully utilize that funding to be
able to take advantage of the refinancing they could provide and other
benefits they could provide.
So, we really have two lines that we've been working on with
Treasury on this front. One is there are existing bonds that because
of the lack of liquidity out in the marketplace -- and many of these
are weekly resats (sp) or bonds in particular that have struggled.
Auction rate securities, in my experience in New York, the market just
dropped out on those.
So, making sure that there's adequate liquidity available for
existing bonds that are out there so that we don't have, you know,
real problems for the housing finance agencies on the loans that
they're already holding.
And then, in addition, for new bonds that they're going to issue,
looking at whether we can -- what we can do to insure that there's an
adequate market out there.
Obviously, this goes well beyond just HFA bonds, municipal bonds,
there are lots of different issues in the market and Treasury is
looking at that issue more broadly. But we want to make sure, on the
housing front, that there is an adequate market for these bonds going
Well Chairman Dodd has been very supportive and
helpful to those of us who have raised this issue. And all I can make
a request is when we've had Secretary Geithner and when we've had
Chairman Bernanke in we've not heard a lot of specificity.
In fact, I
believe, Secretary Geithner said he had not seen any good ideas around
how we can restart the annuity markets. And I would hope that you
would be the inside the administration advocate that this is directly
helpful, not only to the housing market, these are oftentimes shovel-
ready projects. I know Senator Bennett has got a great interest in a
number of school bonds, there are highway bonds, there are a whole
host of municipal bonds out there that if we can jumpstart that these
are truly projects that are ready to move forward and that would be
On the good news front as well, just to make sure
you know, yesterday we released $10 billion over about 75 percent of
all HUD's funding from the recovery act, that included $2 billion,
over $2 billion for housing finance agencies to help jumpstart tax
credit deals that are stalled.
So, very hopeful that by getting it out so quickly we can make
sure those projects move forward.
Mr. Chairman, can I ask one more question? I know
my time's expired.
Because you missed your opening statement and so take
a little more time, yeah.
A (Schumer?) two minutes or -- (Laughter)
Don't press your luck. (Laughter)
I think you've laid out a framework of a good
program. I am anxious to see more of the details. But a piece, and I
know the chairman has been supportive of this as well, and I've had my
thinking change on it, if we are going to look at bankruptcy reform
that would allow principle readjustment or so called cram down, my
hope is that it does become the hammer of last resort. And it seems
what has been missing, and I can understand perhaps timing-wise now
why you didn't include it in this initiative.
But for those homeowners that are truly under water, if we
provide that bankruptcy reform I would hope the administration would
give some thought to, you know, what initiative or what program could
be out there as the step before you have to take the -- we should use
that, we should reserve that bankruptcy process as the ultimate last
resort hammer. And I hope there will be some interim prerequisite of
good-faith acted by the homeowner to make sure they've really tried
and that the servicer and the lender have really made a real effort
and that we only push folks into using this tool and bankruptcy as the
ultimate last resort.
And that has been kind of missing from the -- (inaudible).
I know you've received some comments that the program does not
address those folks that are more than 105 percent below their loan-
to-current-value ratio, those folks who are really deeply underwater.
At some point they're going to have to be part of the equation as well
or they're all just going to move into the bankruptcy provision if the
reform is made.
A couple of comments (that I think are ?) very
important. We completely agree that bankruptcy court should not be
the place where millions of loans are worked out. But if that
happens, that's a problem for everyone, and we want to do everything
we can to avoid that.
And I do think there are other options in this program. The
president did say, as part of his speech, obviously it's dependent on
legislation in Congress, that we do support tailored, targeted
bankruptcy reform. But we do have options as well -- making sure Hope
for Homeowners is a viable alternative which allows a mortgage to be
re-underwritten at a reasonable level with principal write-down; make
sure that program is effective.
As Chairman Dodd said earlier, none of us knew maybe where we
would end up and that what was designed in Hope for Homeowners was
based on what was happening at the time, and we're at a different
place now, so we need to adjust the program to make sure that that
works. I think that's an important component.
The other thing I would say, and there hasn't been much attention
on this, but it's important as well, we've added incentives for things
like short sales or deed in lieu of foreclosure. If you lost your job
but you find a job at a new town, you've got to sell your home but
it's underwater, you've got a problem, right, because your only
alternative, really, is bankruptcy or to go through a foreclosure,
wreck your credit. And frankly, the bank is not going to recover --
if you're really underwater, they're not going to recover any more
So the best solution there is often a short sale, which is where
a bank takes less than the face value of the mortgage to satisfy the
debt, and you can then move and leave your home. It doesn't restore
all your equity, but it at least allows you to get on with your life.
We have incentives for those kind of alternatives so that you don't
end up in bankruptcy. So there are a number of provisions we've tried
And making clear that's what those bevy of options
would be --
-- before bankruptcy. Last point I'll make, just
as a comment, that I sure as heck agree with the chairman and Senator
Martinez that one piece on the servicers is to make sure we get them
the right incentives to act. But the other piece, I continue to
believe -- and Senator Schumer made a comment about this -- since we
have sliced and diced these loans into so many tranches and because
there will be an unwillingness of those folks who are at that top 5,
10 percent, the discussion we had earlier, that are most exposed, and
we've got all of the side bets in the credit default swaps that were
made, on that last tranche, the more we can clear out some of the
legal hurdles and the more we can do some hold-harmless or what the
chairman put forward in his amendment, it's got to be a piece of this
mix or all these good intentions could still be -- (inaudible) -- in
Thank you, Mr. Chairman.
Before I turn to Senator Bennet and Senator Akaka, can I raise
just -- (inaudible) -- take advantage of Senator Warner's question?
This is about the safe harbor bankruptcy, the lenders that offer
borrowers a loan consistent with your program, the second lien-
There's an issue here that we're going to confront, and I don't
know whether we address it or not. There are some concerns that under
the administration's proposal in the safe harbor -- and this is a very
important question -- are we adequately covering the second -- are we
going to be able to deal with the second lien-holders? So many of
these were piggy-back loans, and whether or not they're going to be
accommodated for that in these --
Yeah. So I think it's --
Are we giving the lender, in effect, veto power over
all of that? That's, I guess, the --
I think it's important to make clear that there
are two very different situations for second lien-holders -- a
modification versus a refinancing. In a modification, you're keeping
the existing first loan in place and changing the terms of it. A
second lien-holder has no ability to stop a modification or to -- so
for the modification program, the second liens really -- and we've
heard this consistently from servicers -- they're not a significant
We're still looking at whether there are some enhancements to the
program as part of the final guidance that we might, you know, want to
deal with secondly, even in that case, to make sure that they stay
silent and they're not an issue.
But I think the real issue is around where you have refinancings,
where you're extinguishing the first lien. And then would you have to
get explicit permission to resubordinate the second? What do you do
with those? And that's where we're looking at in more detail exactly
what should be done and as part of the guidance. I think you'll see
next week that we have some ideas around that. But really, I want to
make clear, on the modifications, everything we're hearing is that
they're not a significant issue because the first remains --
I appreciate that. And obviously a lot of members on
this side of the dais are very interested in how this moves forward,
so we'd love to stay in very close contact with you.
Mr. Chairman, if I could just take one moment -- I
No, that's fine.
Senator Warner made a point that I want to make
sure is absolutely clear, because there's been some real confusion
about this. The 105 percent loan-to-value restriction is only on the
Fannie Mae and Freddie Mac refinancing initiative. For modifications,
borrowers that are much more significantly underwater, up to typically
about 150 percent loan to value, can participate in the modification.
But that's in your first -- the homeowner stability
program, I thought, was the one that had the cap of the 105.
There is a portion of this which is a refinancing,
4 (million) to 5 million homeowners, existing Fannie Mae or Freddie
Mac loans that are current on their mortgages, that are paying, and
cannot refinance to today's low rates because they're at 80 percent to
105 percent loan to value. Those are the folks we're going to allow
to refinance, but they're current.
Where somebody is more significantly underwater, having trouble
paying their mortgage, you can be more deeply underwater to be able to
participate in the modification. There's been a lot of confusion
about this in the press and otherwise, and I'm happy you raised it,
because I want to make sure that that's clear.
So those folks can be at 150 --
More deeply underwater. We think generally 150
percent loan to value is as far as we can go, because for
modifications to be successful, you can't be so deeply underwater --
And that is the program where we're going to try to
Modify their --
-- (inaudible) -- and modify and buy down to 31
percent of income.
Mr. Secretary --
Making that clear would, I think -- I think there
has been --
Yes, there has been --
The press has really --
Has been confused.
-- has not understood that.
Senator Shelby has -- it's the same question. I
apologize to my colleagues --
Along these lines, it's my understanding of the
legal -- (inaudible) -- you've got a first mortgage, then you've got a
second mortgage. Of course, we know the first mortgage has priority
over everything. But if you supersede that first mortgage with
another mortgage -- in other words, pay it off and modify it, lower
the terms -- couldn't you get into a dicy situation? Because the
second mortgage -- you know, you're the secretary and I'm sure you've
got lawyers everywhere.
But the second mortgage then becomes the first
mortgage in an ordinary situation. And you've got -- I guess that's
what some of us -- Senator Warner is kind of alluding to this. That's
kind of dicy. I hope you're doing it right. I guess you could -- I
don't know this; it depends on -- you could modify something, modify
the note. But you start fooling with the mortgage, you know,
especially if you pay off the mortgage and supersede it, that mortgage
is gone. You know, and then you're in line behind the second
mortgage, which comes to the front.
That's exactly why --
Does that make sense?
No, you're exactly right. And that's exactly why,
in a refinancing, where the first mortgage is actually extinguished --
-- that's where the second lien becomes an issue.
And that's what we're focused on dealing with.
(Inaudible) -- wouldn't it?
Right, whereas a modification, the first stays in
place and it doesn't -- the second has no right to supersede the first
in that (situation ?).
And it has to be done right, though.
You'll have some lawsuits. I think Senator Warner
was alluding to that.
Right. And if we're going to do this, we've got
-- not just create this whole new --
-- legal pile of trouble. And I also think you've
got the issue, even on the first mortgage, if it has been securitized
and chopped up so much, the challenge of those most at risk, first 5
or 10 percent -- it's a different issue, but it's got issues too since
you've got all the -- that's where a lot of the side bets were placed
That's where the safe harbor, I think, is critical --
Right, which is --
-- whereas on this one, the modification goes to the
refinancing. I think it's pretty clear. If you're modifying, the
safe harbor is really, I don't think, as necessary as the first
situation we talked about. If you're refinancing, as Senator Shelby
points out, then you've crossed over a line and then clearly you've
got a problem with the --
Even with the modifications, there have been
concerns on the part of the investors. That's why this guidance that
we're going to do next week, which, from Treasury, applies to all
financial institutions, is critical. The pooling and servicing
agreements say the servicer has a responsibility to act on behalf of
the whole trust, but we think this guidance will provide them very
clear specific support for their being able to modify, except in the
most extreme cases where pooling and servicing agreements had unusual
language; only about 10 percent or so.
Let me thank Senator Warner and Senator Shelby for
raising this point. We've taken a little time on it, but it's very
worthwhile to have this exchange.
Very helpful, yes.
Senator Bennett, welcome.
Thank you, Mr. Chairman. I
appreciate it. And I apologize for coming in on the tail end, so I
will be --
Well, Senator Akaka is here too, and --
Well, I'll be very brief.
I first wanted to come because I always like to see a local
government guy make good. (Laughter.) So congratulations, Mr.
Secretary, on your confirmation, and I look forward to working with
I know there's been some discussion this morning about
proactively communicating with our citizens on this and I just want to
underscore, from my point of view, how important that is. We in
Colorado are fifth, we think, in foreclosures in the country, by some
measures -- which is nothing to write home about, but we used to be
first, and we've started to see these foreclosures decrease.
The state, a couple of years ago, (with the) cooperation of
state, private enterprise and non-profits, put together a hotline, I
think, along the lines of the one you're talking about. And what
we've discovered is that four out of five of those calls resulted in
something other than a foreclosure for the people that were calling,
and we think we roughly saved 4,200 homes by doing that. So, I
And I know, based on my travels during the recess, that there's a
profound lack of clarity out there about what it is we're trying to
do. I want to congratulate the administration on your efforts here;
and the reminder in the president's speech this week about how
comprehensive these issues are, that it's not just one thing, there's
not one silver bullet to deal with it.
I also know you testified that as things -- as this proceeds,
you'll continue to reevaluate whether the program is being effective
or not. And I'd love it if you could tell us a little more about what
kinds of triggers you're going to look at to assess progress with this
plan, and what sorts of metrics we should be thinking about as we
evaluate your success.
Well, look, obviously, the long-term metric on
this is what happens to the housing market, and can we help it to turn
around. So, that's -- clearly what this is aimed at is improving the
housing market for everybody, not just those homeowners that are most
at risk but recognizing the terrible impact that foreclosures are
having on everybody's home value in the country. So, that's the long-
I think, in the shorter term we're going to be looking very
carefully -- with the data we get back from the servicers, and the
auditing and other things that we're going to be doing -- first of
all, what do we see in terms of modifications increasing? Hopefully
-- and we certainly expect that that would lead to fewer foreclosures,
so looking at the rate of foreclosures, and what's going to happen
It's also going to be the quality of the modifications and how
long they last; making sure that people have verified income, that
we're getting to the 31 percent debt-to-income ratio. We've seen lots
of modifications, frankly, where payments are required to go up rather
than down. And so it's not just a modification, it's the right kind
of modification, and the Program sets very strong standards on that.
We'll be measuring to make sure that servicers are meeting that,
they're checking income adequately.
And then also to see how long those modifications last, that
they're successful. One of the things that we think we've -- we
certainly tried to do, and we hope we've got right, is to pay for
success rather than failure. So, instead of guaranteeing any loss,
which only happens with a redefault, we've structured our payments so
that if it only lasts six months -- the modification, well, you only
get the payment for those six months. If it lasts five years, you get
a much more significant contribution.
So, we think we're -- we've structured it to pay for success, and
we want to make sure that we see the redefault rates come down, and
that we have as many homeowners who can succeed with these
modifications as possible. So, I think those are the key metrics
we'll be looking at.
Thank you, Mr. Chairman.
Thank you very much, Senator.
Thank you very much, Mr. Chairman.
Let me add my welcome to Secretary Donovan to this committee
again. I remember your lovely family when you were here earlier.
But, I want to let you know that I really appreciate your efforts in
helping the struggling families in trying to remain in their homes.
And I'm impressed with your responses --
-- and look forward to continuing to work with you.
Let me be more focused on my concern in my question, and that is
implementing housing policy in Native American communities and on
trust land, which often requires unique and innovative approaches.
And, Secretary Donovan, my question to you is, what will be done to
assist homeowners in Native American, Native Hawaiian, Alaska Native
Well, first of all -- and I think we started
talking about this a little bit before, outreach and education on this
issue is absolutely key. National number -- I'll say it again, at the
risk of repeating myself, 888-995-HOPE. Anyone, anywhere in the
country, can call and get information; go on HUD's website, hud.gov,
and get information about what's available, the options that are
We had a very good discussion yesterday with lots of counseling
agencies, and others, who have made it very clear, ensuring broad
geographic outreach, different languages, a whole range of things that
we need to do to make sure that we're getting the word out as
comprehensively as possible.
And then beyond that, what I would say, in particular, there are
a range of things we need to do for Native Americans, for Native
Hawaiians. One of the things about the Recovery bill that I think was
so important is it recognized that. And, in fact, just yesterday we
announced allocations of $255 million for Native American block grant
funding, and I believe it's $10 million for Native Hawaiian funding.
So, we got that out within a week after the president signed the
bill. And so those communities will know what they have available.
They can come on in and start to sign the contracts to actually
obligate that money in the next 30 days. So, those are some things I
would say about dealing with specifically with the issues in those
Well, thank you for that, Secretary. I appreciated
your comments on that.
Let me then point to some loans on VA. In addition to sitting on
this committee, I am chairman of the Veterans Affairs Committee. The
Department of Veterans Affairs administers the successful Home Loan
Guaranty Program. Lenders have expressed concern, however, about the
possibility that the "cram down" proposal may negatively impact VA's
Home Loan Guaranty Program.
So, my question to you is, what will be done to mitigate any
potential negative consequences that the proposal may have on the VA
Home Loan Guaranty Program?
Excellent question, Senator. I'm very glad you
brought that up because it's something I hadn't mentioned before, but
it's a critical issue.
Because of the way FHA insurance, VA insurance have been
structured -- whether it's in bankruptcy or even in a loan
modification, there isn't current authority to be able to pay partial
claims in those situations. And so, in addition to the changes for
HOPE for Homeowners, we've been working on language with the
committees here that would allow FHA and VA to pay partial claims in
modifications -- as well as in bankruptcy, that would ensure that
lenders that, when they made a loan, relied on the full faith and
credit of the U.S. government, can actually -- can rely on that in
those situations. So, that is an important part of the legislative
language that we've been working on with the committees.
Well, I appreciated your thoughtful comments again
And during your nomination hearing, the need to incorporate
education through the home loan process, we talked about this. And I
know that the Homeowner Affordability and Stability Plan focuses on
keeping mortgage rates low, supporting refinancing efforts and
assisting at-risk homeowners. As we work to develop longer-term
policies to better educate and empower prospective homeowners, my
question to you is, how should education be incorporated into the home
You mentioned outreach. You even gave the 889-HOPE. Are there
other matters that we can think of in helping in the home buying
Very important question. And we do -- we do have
to remind ourselves, I think, in the midst of this crisis, that we
need to look forward and, as I said earlier, get back to the basics,
in terms of lending.
In New York we had a program to create and preserve
homeownership, where we helped over 17,000 families. And we only had
five foreclosures in that program, and the reason for that is because
we did the education, we made sure it was affordable, we made sure the
loan terms were acceptable -- you know, really the basics. And
education is an important part of that.
I think you'll see -- the president is releasing the first
information about our budget proposal for 2010 today, and I think
you'll see that counseling is an important part of efforts, going
forward. HUD-approved counselors around the country are a critical
resource, not just for helping work out foreclosures but also for
first-time home buyers or home buyers getting into a home, to make
sure that they're getting the right mortgage product, that they're
prepared for homeownership. And I think that that's -- it's a key
thing we've got to focus on, going forward, as well.
Thank you. Thank you very much for your excellent
Mr. Chairman, thank you.
Senator Akaka, thank you very much.
And as you'll discover, if you haven't already, Mr. Secretary,
that Senator Akaka has -- as long as he's been on this committee, and
I suspect even predating that, he's had a deep interest in financial
And we've talked about it extensively here and it's something we
really need to focus on.
And I often wish that even at public elementary schools they'd
begin just teaching at the earliest grades -- math and so forth -- by
utilizing examples of just balancing checkbooks and things like that
could be helpful.
I've often said as well too -- and I say this respectfully to all
of us here -- that a little financial literacy might even begin here.
And I say that respectfully to my colleagues, but I think we all
appreciate that we do the best we can, but these are subject matters
that all of us as lay people -- most of us lay people -- try to get
our arms around and understand as well as we should. So I thank
Senator Akaka for his deep interest in that subject.
Senator Merkley has some additional questions.
Thank you very much, Mr. Chair.
And Secretary Donovan, thank you so much for your testimony.
Your thorough knowledge of the topic and the details is refreshing and
gives us a lot of -- (inaudible) -- the work that you're going to be
I wanted to put in one request with you, as you go
forward, and that is in regard to the hotline that is being set up or
has been set up, if it's possible to expand it beyond simply a
description of the existing programs, if you will.
When folks call, if they are able to be able to talk to a real
person, if they are able to say, "I have a loan that is serviced by
so-and-so, how can I get through to somebody ready to talk about
renegotiations?" so that they can get through to a real person on the
servicer end and bypass what will be numerous days, numerous hours of
frustration? If there's any way to utilize that hotline in a way to
really help connect people to the servicers and to action, it would be
a huge -- just a monumental service to the homeowners of America.
I couldn't agree more. And in the discussions
that we've been having, trying to make sure that that centralized
hotline can connect folks up to the servicers, as well as counseling
agencies in their neighborhoods, that can help them stay in their
homes and get the assistance they need -- that's absolutely right.
Thank you so much.
Senator Shelby, any closing thoughts?
I just want to tell the secretary again we welcome
you here. We look forward to working with you. We know you have great
challenges, but we think you have the energy and you've got a great
background. And I think you'll be before this committee a lot and we
will always welcome you back.
I'm looking forward to it. Thank you.
Let me echo those words as well, Secretary Donovan.
It's been very impressive this morning.
And on the Hope for Homeowners, I know you're doing this, but
I'll just publicly -- we need to get as much information, because to
the extent we can go back and make some fixes to that so it can work
as well as we'd all like it to would be very, very helpful.
Senator Shelby and I would like to get that as early as we can to
the extent we can bring our members together, get around some of these
ideas and then go to our respective leaders -- assuming we can reach
that kind of understanding, which I believe we can -- so that we can
go forward and bring some of these matters up for the consideration of
our colleagues on the floor of the Senate, it would be very helpful.
And there is a sense of urgency, obviously, of getting this stuff in
place. So we'd ask you to do that.
And secondly, we've got other issues we need to talk about with
you as well as, obviously, foreclosure issues. There's a lot of issues
dealing with housing and related matters of transit.
This committee has jurisdiction over urban mass transit issues
and the surface transportation bill is going to come up this year.
And so that's going to be a matter which I'm going to want to engage
you in -- along with the secretary of Energy, the secretary of
Transportation, the secretary of even Health to some degrees -- to
talk about how we might do a better job of coordinating these
questions when it comes to service transportation issues where
housing, energy, obviously transport and environmental questions -- I
said health -- and environmental issues can really come together. And
we'll get a working group on this so we think about it more
holistically than just transit questions, but rather how they
interrelate with each other.
And I know you've done a lot of work on that. I was very
impressed in our conversation about your full understanding of that
holistic approach to this question. So I'm going to really draw upon
those years of experience you've brought to this subject matter
Senator Shelby had a comment.
Just along the same lines, the secretary I'm knows
very well, we have about -- on transit-related stuff -- about 20
percent of the highway budget, I believe --
-- the whole thing, so we will need to engage you,
because this committee's going to be very active there.
And a lot of interest in the subject matter today.
This is no longer just an east coast-west coast thing. But now, you
know, places like Utah and Nevada and Idaho and --
And Alabama. But the concentrations in urban areas
-- a great trivia question is: which is the most urbanized state in
America? And people are inclined to maybe say New York or Connecticut
or Illinois or something, but the most urbanized state in the country
is Nevada with the largest concentration of population in one county.
And so we have a tendency to think of the West as not in need of
transit issues in the past. But clearly, the whole country needs to
focus on this.
So I didn't mean to digress from the subject matter this morning,
but I wanted to tell you how much I appreciate your service and look
forward to working with you.
And we've been doing some thinking around the budget -- you know,
based on our conversation and others -- about how we can begin to do
I would also just say, we've been working with your staff on --
we've announced the intent to nominate Ron Sims as deputy for HUD and
I think you'll find -- I hope you'll find in the hearing that he is
very knowledgeable on these issues. He has been a real leader around
bringing transit together in King County in Washington State with
housing and a whole range of issues. And I think he could be a
terrific resource on doing this. So I hope you'll find the same when
he comes before the committee.
We've got to move on that.
Thanks very much for being with us.
The committee will stand will adjourned.