Feb.Senate Banking Committee Examines the State of the Housing Market
At a Senate Banking Committee hearing on February 28, members heard from the Department of Housing and Urban Development (HUD), the Federal Reserve, and the Federal Housing Finance Agency (FHFA) on the state of the residential housing market and the barriers that are impeding its recovery.
While the overall economy has started to recover since the peak of the 2008 financial crisis, the current state of the national residential housing market remains fragile. Recent data released by the Fed and the Census Bureau indicate that homeownership rates are down, demand is still restrained, and housing prices continue to decline. The Fed highlighted the severity of the home price decline in its white paper, released January 4, 2012, noting that “more than $7 trillion in home equity – more than half of the aggregate home equity that existed in early 2006 – has been lost.” Despite the weakness in the housing market, improvement has been seen as existing inventories of homes for sale has decreased the last two quarters and home sales reached an 11-month high at the end of last year.
The hearing comes amid mounting pressure on the government-sponsored entities (GSEs), the FHFA and the Fed to explore principle reductions and expand real estate-owned (REO) pilot programs. On Friday, California Attorney General Kamala Harris sent a letter Edward DeMarco, Acting Director of the FHFA, requesting that he suspend all foreclosures in the state until he completes a thorough analysis on the efficacy of principle reduction. DeMarco was pressed further on Monday, when Rep. Zoe Lofgren (D-Calif.), chairwoman of the California Democratic congressional delegation, sent a letter signed by 116 lawmakers calling for principle writedowns for homeowners that are underwater on their mortgages but current on their payments.
In his opening statement, Chairman Tim Johnson (D-S.D.) referenced the Fed’s recent white paper on the housing market, highlighting its conclusion that continued weakness in the market is posing a significant barrier to overall economic recovery. Johnson said he shares that viewpoint, but noted the Obama administration’s recently released housing plan and the FHFA’s REO pilot program address some of the more crippling problems afflicting the market. He also said he would like to see the FHFA do more to facilitate refinancing and loan modifications. In closing, Johnson made it clear that he thinks the committee can do more to help the housing market and taxpayers, and pledged to hold more hearings on housing in the coming months.
Ranking Member Richard Shelby (R-Ala.) shared Johnson’s sentiments that the committee can do more to help the housing market, urging the committee to draft bipartisan legislation. He also expressed concern with the FHA’s balance sheet and the administration’s plan to bolster it with a bank tax. In closing, Shelby requested the witnesses to go into more detail on the State Attorneys General’s (State AG) settlement with servicers as the official details of the agreement have yet to be publicly released.
Panel 1
In his opening statement, Shaun Donovan, HUD Secretary, said that while there continues to be weakness in the housing market, there are signs of recovery. Highlighting the effect that housing programs have had on this progress, Donovan said that since 2009 more than 13 million homeowners have refinanced their mortgages, more than 5.6 million loan modifications have reduced borrowers’ monthly payments, foreclosures are down 50 percent, and vacancies are steadily declining, all “resulting in nearly $22 billion a year in savings for families and the economy.” Despite the positives, Donovan said there are three key barriers that are preventing the housing market, and the economy, from fully recovering.
First is keeping people in their homes. Donovan said too many mortgages are still underwater and have not received modification or refinancing assistance, putting homeowners at an even greater risk of default. However, Donovan said that the relaunch of the Home Affordable Refinance Program (HARP) has been more successful than anticipated, noting that the FHA has received more than 300,000 applications since the program was restarted in December. Second, he said the overhang of properties at risk of or in foreclosure is stymieing the recovery by dragging down property values. Donovan said the combination of the Project Rebuild proposal and the FHFA’s REO pilot program, which made its first major sale of REO properties yesterday, will make combating this barrier more manageable. The last barrier to recovery, Donovan said, is access to credit, indicating that it is still too difficult to get a mortgage today.
In closing, Donovan touted the positive effect that the servicer settlement will have on the market and highlighted the agreement’s principle reduction provisions. He said the programs currently in place have the potential to spur a real recovery in the housing market, calling on Congress to aid FHA efforts by ensuring everyone has the ability to refinance and urging members to adopt a balanced national housing policy.
Question and Answer
Johnson asked Donovan to comment on the risk of the Obama administration’s new refinancing program to taxpayers. Donovan said the focus of the proposal is on borrowers who are current with their payments, meaning the loans are low risk. He also noted that the program would have its own fund, separate from the Mutual Mortgage Insurance fund, and the FHA will be establishing a set of refinancing standards with a 140 loan-to-value ratio cap. Johnson followed up by asking how the servicing standards that were part of the State AG settlement will affect foreclosures and taxpayers. Donovan said the settlement has three key benefits on this issue. First, homeowners will be able to get “real help” to stay in their homes, such as not being able to be foreclosed on while their assistance application is being evaluated. Second, he said the standards will speed up the foreclosure process. Lastly, investors will have the ability to consistently know the terms of service agreements.
Johnson also asked how the elements of the servicer settlement will be coordinated with the administration’s housing plan. Donovan said the settlement’s servicing standards are a good starting point for the larger job of constructing uniform servicing standards. He also said the settlement makes non-FHA and GSE loans available for refinancing and believes the settlement will have a “catalytic effect” on demonstrating that principle reduction is positive for homeowners and investors.
Shelby and Sen. Jeff Merkley (D-Ore.) pressed Donovan on the solvency of the FHA, asking him if he could say for certain that a taxpayer bailout would not be necessary. Donovan said he could not rule out the possibility of a bailout, but he said the FHA is taking steps to shore up its main funds with rate hikes and will continue to scale back the agency’s presence in the mortgage market. Shelby also asked Donovan how many borrowers were foreclosed on. Donovan said he did not have that data in front of him, but 60 percent of foreclosure documentation contained significant errors.
Sen. Bob Corker (R-Tenn.) asked about lien priority in the servicer agreement. Donovan said settlement uses the lien standards from the HAMP program, meaning that the lien priority is “at minimum pari passu.” Donovan also disagreed with Corker’s assertion that contract law requires that first lien holders have priority if payment on the second lien is current, adding that if the second lien is seriously delinquent it would need to be completely written off.
Corker also blasted Donovan for what he said was an “overly political approach” to the nation’s housing situation. “I’m personally disappointed and I hope we’ll begin addressing the real issues that we have in our country in housing in a way that is fair to all Americans,” he said.
Sens. Jack Reed (D-R.I.) and Robert Menendez (D-N.J.) asked Donovan for his thoughts on principle reduction. Donovan said it is one of the “tools” with which the FHA has made the least progress. He noted that there is a significant amount of data showing that principle reduction can help keep borrowers who are severely underwater in their homes. He also assured Reed that the FHA is focusing on the issue and is hoping to jumpstart the process through the provisions in the servicer settlement.
Sen. Mike Johanns (R-Neb.) asked if Donovan has confidence in Fannie Mae and Freddie Mac. Donovan said structurally, the GSE model is unsustainable, but pointed out that during the crisis they were the only institutions that were lending.
Sen. Kay Hagan (R-N.C.) asked if delinquency rates were still declining. Donovan said 30- to 60-day delinquency rates are continuing to improve, but the rate of serious delinquencies and foreclosures has slightly increased.
Panel 2
In her opening statement, Elizabeth Duke, Governor of the Federal Reserve, defended the Fed’s calls for more action to bolster the housing market, which is a “significant drag” on the economy. Duke said the failure of the housing market to respond to low interest rates indicates that “factors other than financial conditions may be restraining improvements in mortgage credit and housing market conditions,” pointing to ongoing supply and demand imbalances, the large number of underwater mortgages and tight credit conditions as possible causes. She also said high foreclosure rates are likely to persist “for quite a while,” which will push home prices down further. In closing, she said the Fed will continue searching for ways to strengthen the housing market and encourage lenders to maintain prudent lending standards while increasing access to credit.
In his opening statement, DeMarco said the GSEs are playing a leading role in providing assistance to homeowners and preventing foreclosures. He said Fannie’s and Freddie’s portfolios currently guarantee 60 percent of mortgages, but only contain 29 percent of seriously delinquent loans. DeMarco also highlighted the GSE’s modification and refinancing efforts, noting that they account for 50 percent of HAMP modifications, and have completed 1 million loan modifications and more than 10 million refinances since the fourth quarter of 2008. He also said the FHFA is making “great strides” in improving servicer standards through its Servicer Alignment Initiative. Additionally, DeMarco touted the FHFA’s new REO pilot program and announced that programs first sale of 2500 properties was completed yesterday.
DeMarco also addressed the recently released strategic plan to wind down the GSEs, highlighting its goals to build a new infrastructure for the secondary market, diminish the GSEs dominate footprint in the housing market, and maintain the foreclosure prevention initiatives and credit availability. DeMarco said achieving these goals will satisfy the mandate of the FHFA conservatorship and establishes the groundwork for a robust housing system in the future.
Question and Answer
The question-and-answer session was dominated with queries on principle reduction and DeMarco’s opposition to it, including a very tense exchange with Merkley. DeMarco called principal reduction the least effective tool to assist in the effort to set up an affordable monthly mortgage payment for troubled borrowers, saying that executives at Fannie and Freddie “have advised me they do not believe it is in the best interest of the companies” to write down mortgage principal to reduce foreclosures. He said the agency has ”a responsibility to find all prudent actions” to prevent foreclosures, but refinancing, modifying the length of the loan, and deferring payments on mortgage principal all are more effective at keeping people in their homes and not increasing the risk to taxpayers, DeMarco said.
Johnson asked Duke to elaborate on barriers to the housing market hitting bottom. Duke said there is a significant difference emerging between demand for rental- and owner-occupied housing, keeping prices in limbo. She said the shift to a more rental-focused market and barriers to refinancing loans that are underwater have prevented the market from hitting a true bottom.
Johnson asked DeMarco if there is more the FHFA can do to help the effectiveness of refinancing programs. DeMarco said the FHFA and the GSEs are currently doing “a lot” to foster refinancing programs, noting that HARP 2.0 has been very successful according to early reports. Johnson also asked DeMarco what the timeline was for winding down Fannie and Freddie. DeMarco said the FHFA’s strategic plan was intentionally non-specific on a timeline, but he said the FHFA is currently working on the timeline and will be releasing it “soon.” Following up, Johnson asked DeMarco and Duke to comment on the effect of shutting down the GSEs immediately. Duke said if the GSEs were closed tomorrow, there would be “much, much less lending going on.” DeMarco agreed, adding that the FHA would most likely be tapped to pick up the slack.
Reed pressed DeMarco on reports from the FHFA Inspector General (IG) on his “hand off” approach to the day-to-day activities of the GSEs and the shortage of FHFA staff. DeMarco said he disagreed with the IG’s assessment of his staff, highlighting the hard work and dedication of the 500 people the FHFA employs. He also said that he and the IG have differing opinions on the degree of involvement that FHFA should have in the day-to-day activities of Fannie and Freddie, noting that before his time at the FHFA it was made clear that they would retain control over their day-to-day activities.
During Corker’s line of questioning, he asked Duke if the Fed’s staff could prepare a white paper on the effect of financial regulations, “something that’s actually in your central core area.”
For testimony and a webcast of the hearing, please click here.
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At a Senate Banking Committee hearing on February 28, members heard from the Department of Housing and Urban Development (HUD), the Federal Reserve, and the Federal Housing Finance Agency (FHFA) on the state of the residential housing market and the barriers that are impeding its recovery.
While the overall economy has started to recover since the peak of the 2008 financial crisis, the current state of the national residential housing market remains fragile. Recent data released by the Fed and the Census Bureau indicate that homeownership rates are down, demand is still restrained, and housing prices continue to decline. The Fed highlighted the severity of the home price decline in its white paper, released January 4, 2012, noting that “more than $7 trillion in home equity – more than half of the aggregate home equity that existed in early 2006 – has been lost.” Despite the weakness in the housing market, improvement has been seen as existing inventories of homes for sale has decreased the last two quarters and home sales reached an 11-month high at the end of last year.
The hearing comes amid mounting pressure on the government-sponsored entities (GSEs), the FHFA and the Fed to explore principle reductions and expand real estate-owned (REO) pilot programs. On Friday, California Attorney General Kamala Harris sent a letter Edward DeMarco, Acting Director of the FHFA, requesting that he suspend all foreclosures in the state until he completes a thorough analysis on the efficacy of principle reduction. DeMarco was pressed further on Monday, when Rep. Zoe Lofgren (D-Calif.), chairwoman of the California Democratic congressional delegation, sent a letter signed by 116 lawmakers calling for principle writedowns for homeowners that are underwater on their mortgages but current on their payments.
In his opening statement, Chairman Tim Johnson (D-S.D.) referenced the Fed’s recent white paper on the housing market, highlighting its conclusion that continued weakness in the market is posing a significant barrier to overall economic recovery. Johnson said he shares that viewpoint, but noted the Obama administration’s recently released housing plan and the FHFA’s REO pilot program address some of the more crippling problems afflicting the market. He also said he would like to see the FHFA do more to facilitate refinancing and loan modifications. In closing, Johnson made it clear that he thinks the committee can do more to help the housing market and taxpayers, and pledged to hold more hearings on housing in the coming months.
Ranking Member Richard Shelby (R-Ala.) shared Johnson’s sentiments that the committee can do more to help the housing market, urging the committee to draft bipartisan legislation. He also expressed concern with the FHA’s balance sheet and the administration’s plan to bolster it with a bank tax. In closing, Shelby requested the witnesses to go into more detail on the State Attorneys General’s (State AG) settlement with servicers as the official details of the agreement have yet to be publicly released.
Panel 1
In his opening statement, Shaun Donovan, HUD Secretary, said that while there continues to be weakness in the housing market, there are signs of recovery. Highlighting the effect that housing programs have had on this progress, Donovan said that since 2009 more than 13 million homeowners have refinanced their mortgages, more than 5.6 million loan modifications have reduced borrowers’ monthly payments, foreclosures are down 50 percent, and vacancies are steadily declining, all “resulting in nearly $22 billion a year in savings for families and the economy.” Despite the positives, Donovan said there are three key barriers that are preventing the housing market, and the economy, from fully recovering.
First is keeping people in their homes. Donovan said too many mortgages are still underwater and have not received modification or refinancing assistance, putting homeowners at an even greater risk of default. However, Donovan said that the relaunch of the Home Affordable Refinance Program (HARP) has been more successful than anticipated, noting that the FHA has received more than 300,000 applications since the program was restarted in December. Second, he said the overhang of properties at risk of or in foreclosure is stymieing the recovery by dragging down property values. Donovan said the combination of the Project Rebuild proposal and the FHFA’s REO pilot program, which made its first major sale of REO properties yesterday, will make combating this barrier more manageable. The last barrier to recovery, Donovan said, is access to credit, indicating that it is still too difficult to get a mortgage today.
In closing, Donovan touted the positive effect that the servicer settlement will have on the market and highlighted the agreement’s principle reduction provisions. He said the programs currently in place have the potential to spur a real recovery in the housing market, calling on Congress to aid FHA efforts by ensuring everyone has the ability to refinance and urging members to adopt a balanced national housing policy.
Question and Answer
Johnson asked Donovan to comment on the risk of the Obama administration’s new refinancing program to taxpayers. Donovan said the focus of the proposal is on borrowers who are current with their payments, meaning the loans are low risk. He also noted that the program would have its own fund, separate from the Mutual Mortgage Insurance fund, and the FHA will be establishing a set of refinancing standards with a 140 loan-to-value ratio cap. Johnson followed up by asking how the servicing standards that were part of the State AG settlement will affect foreclosures and taxpayers. Donovan said the settlement has three key benefits on this issue. First, homeowners will be able to get “real help” to stay in their homes, such as not being able to be foreclosed on while their assistance application is being evaluated. Second, he said the standards will speed up the foreclosure process. Lastly, investors will have the ability to consistently know the terms of service agreements.
Johnson also asked how the elements of the servicer settlement will be coordinated with the administration’s housing plan. Donovan said the settlement’s servicing standards are a good starting point for the larger job of constructing uniform servicing standards. He also said the settlement makes non-FHA and GSE loans available for refinancing and believes the settlement will have a “catalytic effect” on demonstrating that principle reduction is positive for homeowners and investors.
Shelby and Sen. Jeff Merkley (D-Ore.) pressed Donovan on the solvency of the FHA, asking him if he could say for certain that a taxpayer bailout would not be necessary. Donovan said he could not rule out the possibility of a bailout, but he said the FHA is taking steps to shore up its main funds with rate hikes and will continue to scale back the agency’s presence in the mortgage market. Shelby also asked Donovan how many borrowers were foreclosed on. Donovan said he did not have that data in front of him, but 60 percent of foreclosure documentation contained significant errors.
Sen. Bob Corker (R-Tenn.) asked about lien priority in the servicer agreement. Donovan said settlement uses the lien standards from the HAMP program, meaning that the lien priority is “at minimum pari passu.” Donovan also disagreed with Corker’s assertion that contract law requires that first lien holders have priority if payment on the second lien is current, adding that if the second lien is seriously delinquent it would need to be completely written off.
Corker also blasted Donovan for what he said was an “overly political approach” to the nation’s housing situation. “I’m personally disappointed and I hope we’ll begin addressing the real issues that we have in our country in housing in a way that is fair to all Americans,” he said.
Sens. Jack Reed (D-R.I.) and Robert Menendez (D-N.J.) asked Donovan for his thoughts on principle reduction. Donovan said it is one of the “tools” with which the FHA has made the least progress. He noted that there is a significant amount of data showing that principle reduction can help keep borrowers who are severely underwater in their homes. He also assured Reed that the FHA is focusing on the issue and is hoping to jumpstart the process through the provisions in the servicer settlement.
Sen. Mike Johanns (R-Neb.) asked if Donovan has confidence in Fannie Mae and Freddie Mac. Donovan said structurally, the GSE model is unsustainable, but pointed out that during the crisis they were the only institutions that were lending.
Sen. Kay Hagan (R-N.C.) asked if delinquency rates were still declining. Donovan said 30- to 60-day delinquency rates are continuing to improve, but the rate of serious delinquencies and foreclosures has slightly increased.
Panel 2
In her opening statement, Elizabeth Duke, Governor of the Federal Reserve, defended the Fed’s calls for more action to bolster the housing market, which is a “significant drag” on the economy. Duke said the failure of the housing market to respond to low interest rates indicates that “factors other than financial conditions may be restraining improvements in mortgage credit and housing market conditions,” pointing to ongoing supply and demand imbalances, the large number of underwater mortgages and tight credit conditions as possible causes. She also said high foreclosure rates are likely to persist “for quite a while,” which will push home prices down further. In closing, she said the Fed will continue searching for ways to strengthen the housing market and encourage lenders to maintain prudent lending standards while increasing access to credit.
In his opening statement, DeMarco said the GSEs are playing a leading role in providing assistance to homeowners and preventing foreclosures. He said Fannie’s and Freddie’s portfolios currently guarantee 60 percent of mortgages, but only contain 29 percent of seriously delinquent loans. DeMarco also highlighted the GSE’s modification and refinancing efforts, noting that they account for 50 percent of HAMP modifications, and have completed 1 million loan modifications and more than 10 million refinances since the fourth quarter of 2008. He also said the FHFA is making “great strides” in improving servicer standards through its Servicer Alignment Initiative. Additionally, DeMarco touted the FHFA’s new REO pilot program and announced that programs first sale of 2500 properties was completed yesterday.
DeMarco also addressed the recently released strategic plan to wind down the GSEs, highlighting its goals to build a new infrastructure for the secondary market, diminish the GSEs dominate footprint in the housing market, and maintain the foreclosure prevention initiatives and credit availability. DeMarco said achieving these goals will satisfy the mandate of the FHFA conservatorship and establishes the groundwork for a robust housing system in the future.
Question and Answer
The question-and-answer session was dominated with queries on principle reduction and DeMarco’s opposition to it, including a very tense exchange with Merkley. DeMarco called principal reduction the least effective tool to assist in the effort to set up an affordable monthly mortgage payment for troubled borrowers, saying that executives at Fannie and Freddie “have advised me they do not believe it is in the best interest of the companies” to write down mortgage principal to reduce foreclosures. He said the agency has ”a responsibility to find all prudent actions” to prevent foreclosures, but refinancing, modifying the length of the loan, and deferring payments on mortgage principal all are more effective at keeping people in their homes and not increasing the risk to taxpayers, DeMarco said.
Johnson asked Duke to elaborate on barriers to the housing market hitting bottom. Duke said there is a significant difference emerging between demand for rental- and owner-occupied housing, keeping prices in limbo. She said the shift to a more rental-focused market and barriers to refinancing loans that are underwater have prevented the market from hitting a true bottom.
Johnson asked DeMarco if there is more the FHFA can do to help the effectiveness of refinancing programs. DeMarco said the FHFA and the GSEs are currently doing “a lot” to foster refinancing programs, noting that HARP 2.0 has been very successful according to early reports. Johnson also asked DeMarco what the timeline was for winding down Fannie and Freddie. DeMarco said the FHFA’s strategic plan was intentionally non-specific on a timeline, but he said the FHFA is currently working on the timeline and will be releasing it “soon.” Following up, Johnson asked DeMarco and Duke to comment on the effect of shutting down the GSEs immediately. Duke said if the GSEs were closed tomorrow, there would be “much, much less lending going on.” DeMarco agreed, adding that the FHA would most likely be tapped to pick up the slack.
Reed pressed DeMarco on reports from the FHFA Inspector General (IG) on his “hand off” approach to the day-to-day activities of the GSEs and the shortage of FHFA staff. DeMarco said he disagreed with the IG’s assessment of his staff, highlighting the hard work and dedication of the 500 people the FHFA employs. He also said that he and the IG have differing opinions on the degree of involvement that FHFA should have in the day-to-day activities of Fannie and Freddie, noting that before his time at the FHFA it was made clear that they would retain control over their day-to-day activities.
During Corker’s line of questioning, he asked Duke if the Fed’s staff could prepare a white paper on the effect of financial regulations, “something that’s actually in your central core area.”
For testimony and a webcast of the hearing, please click here.