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Hearing of the Transportation, Housing and Urban Development, and Related Agencies Subcommittee of the Senate Committee on Appropriations - Fiscal Year 2010 Budget Request for the Department of Housing and Urban Development


Location: Washington, DC

Chaired By: Senator Patty Murray

Witnesses: Shaun Donovan, Secretary, U.S. Department of Housing and Urban Development

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SEN. MURRAY: Good morning. The subcommittee will come to order. Today this subcommittee will hear testimony from Secretary Donovan on the President's fiscal year 2010 budget request for the Department of Housing and Urban Development, and I want to welcome the secretary back to our subcommittee today.

HUD's many programs provide the resources and support to help hardworking families achieve homeownership, maintain safe and affordable housing, and access the services that they need. Today, as our nation deals with the housing crisis and an economic recession, this discussion takes on an added importance. Foreclosures remain at record levels, fully 32 percent higher than this time last year. Meanwhile, unemployment is approaching ten percent, its highest rate in 26 years. As we continue to work through this economic crisis, we can expect increasing demand on HUD's housing and community development programs.

So I'm pleased that the starting point for this discussion is a budget that proposes substantial investments and innovative approaches that will move our nation's housing policy forward. The budget proposes resources totaling over $46 billion, a ten percent increase over the level of funding provided in fiscal year 2009 Omnibus Appropriations Bill. For the first time since the subcommittee assumed oversight of HUD, we are not starting from a position of having to beat back proposals that would drastically cut elderly and disabled housing, community development block grants, and other key programs, and that is a welcome relief.

However, as Congress and the Administration work to address the housing crisis and turn this economy around, we need to do more than maintain the status quo. HUD must demonstrate leadership in developing solutions to stem the current foreclosure crisis, strengthen the safety net for vulnerable families who are hit by this recession, and preventing future housing disasters.

I'm pleased that to date, Mr. Secretary, you've shown the kind of leadership that this department really needs. In February, Congress moved swiftly to pass the American Recovery and Reinvestment Act, which provided the investment that was necessary to help get our economy moving again. Just a week after that bill was signed into law, Secretary Donovan worked to ensure that HUD allocated nearly $10 billion, or 75 percent of the funding it received under the act. So I want to applaud your efforts and the staff at HUD for working to allocate that funding so quickly.

These dollars are making a difference in my state. In Yakima, Washington funds appropriated for the Public Housing Capital Fund are being put to use to rehabilitate housing and are generating much needed job opportunities. In Spokane, millions in funding has gone to eliminate dangerous lead-based paint from low-income homes and protect young children from lead poisoning. And I know that over the summer this Recovery Act spending has accelerated. We're going to see further investments in providing safe, stable, and affordable housing throughout the country.

But despite the positive signs that Recovery Act investments are paying off, there is still significant work to do. As the secretary well knows, problems in the housing market persist in Pierce and Clark Counties in my home state. Homes continue to remain on the market for 12 to 14 months. So it's really critical, not just for the families facing foreclosure, but to communities across the country that we find new ways to boost the housing market. To date, the Hope for Homeowners Program that was designed to help families in danger of foreclosure has failed to make the progress that we need. While originally projected to help over 400,000 families, it has served fewer than 1,000 due to investors' reluctance to participate.

Recently, Congress passed legislation aimed at giving HUD additional tools to make its program more effective. So I look forward to hearing from the secretary today how these programs can better assistant our families.

While I believe that the FHA has a critical role to play in providing affordable housing options for our hardworking families, I remain focused on ensuring the solvency of the Mutual Mortgage Insurance Fund and protecting the interests of our taxpayers.

Mr. Secretary, you were here earlier this year, and we had a good discussion on the FHA, but that was before we had the President's budget. I'm pleased that the FHA's Regular Sale and Refinance Program, the lion's share of the MMI Fund portfolio, does not require a positive credit subsidy. The fund's Reverse Mortgage, or HSAM Program, requires an appropriation of the nearly $800 million.

So today, I want to continue the important discussion about what the appropriate role for the FHA to play is as we navigate this housing crisis. As I mentioned, the President's budget includes important increases; the funding levels requested for Section 8 tenant-based and project-based rental assistant programs represent a total increase of nearly $3 billion over the levels provided in the '09 Omnibus Bill. These funding levels demonstrate a real commitment to the more than three million elderly, disabled, and low-income tenants these programs serve, and that is a commitment I share.

In addition to increases in important programs, such as the $550 million increase to Community Development Block Grant Program, and an increase of over $115 million for homeless assistance grants, the budget also proposes several new initiatives. They include the Sustainable Communities Initiative, which is a joint effort with the Department of Transportation, to facilitate integrated housing and transportation planning, and the Choice Neighborhoods Initiative, the department's vision for broadening and expanding Hope VI Program and integrating schools in neighborhood revitalization efforts. I do have some questions about the details of those programs, but I want to commend the department's efforts to propose bold and ambitious ideas for rebuilding our communities and the nation.

Finally, I will have some questions for you, Mr. Secretary, on your efforts to remake HUD into an effective 21st century agency through the Transformation Initiative. When we first met, we talked about the leadership necessary to improve and strengthen HUD and its programs, so I support your efforts to improve the department's operations.

But I am concerned about the lack of detail in this particular proposal, as well as its potential cost during the first year. So I look forward to having a productive conversation about ways that we can achieve our shared goal of creating a stronger and more efficient HUD while maintaining this subcommittee's oversight role.

As I said before, in this recession HUD is at the center of the storm with foreclosure rates skyrocketing and affordable housing options increasingly scarce, and the dream of homeownership at risk for our working families. The budget decisions and leadership at HUD are going to make or break it for those most affected by this recession. That's why today's hearing and discussion and working in partnership to promote responsible and sustaining housing policies is so critical.

So with that, I will turn it over to my ranking member, Senator Bond, who's been a great partner in working with me on these critical issues.

Senator Bond.

SEN. CHRISTOPHER BOND (R-MO): Thank you very much, Madam Chair, and thank you. It's a real pleasure to work with you and to work with the secretary.

We welcome you, Mr. Secretary, for appearing again. We've had very many constructive discussions, which I appreciate, and certainly no one can deny that the secretary is passionate about housing and community development and is working hard to make the department, as you indicated, a very tough, but necessary task.

The secretary has also been a key player for the Administration on tackling the ongoing mortgage crisis. With your knowledge, skills, and experience in the private and public sector, it's important to get you out in the lead on this issue.

I understand one of the steps you've taken to address future housing crises is rebalancing federal housing policy to place greater focus on affordable (renting housing ?). As you know from New York City, there's a severe lack of decent, affordable rental housing in our nation, and unfortunately, the government's housing policy over the past two administrations failed to correct the problem and ultimately contributed to the subprime crisis by pushing homeownership on people who could not afford the burdens of homeownership, thus making the American dream the American nightmare and causing a nightmare in our financial system. Affordable rental housing was shortchanged. That was a mistake, and we appreciate your efforts to correct the course.

The federal government has taken some extraordinary steps to address the mortgage crisis and the credit crisis through the Federal Reserve, Treasury, FDIC and HUD. Despite these efforts, Americans across the nation and in my state of Missouri continue to struggle to make their mortgage payments. Housing prices continue to fall. Foreclosures remain unabated. The rate of foreclosures has gone down, but it has come down from a totally unacceptable rate to a very unacceptable rate. With the country shedding hundreds of thousands of jobs every month, the mortgage crisis has spread from subprime to prime or traditional mortgages, hurting our economic recovery.

Recent data that I've seen indicates that prime mortgage foreclosures are accelerating and rising in states where unemployment is growing. We know that housing started the economic crisis, which in turn resulted in massive job losses. It now appears that job losses are contributing to the troubles in the housing sector. I guess economists call this a negative feedback loop. Whatever it is, it's very, very unfortunate.

Adding to the problem, rising mortgage interest rates threaten foreclosure mitigation efforts, and our economy has many homeowners unable to refinance their loans into ones with payments they can afford. In other words, we're definitely not out of the woods yet. I raised with Treasury Secretary Geithner two days ago -- some of the positive economic signs may be misleading, and I am concerned that we may be seeing what they call on Wall Street a dead cat bounce.

These challenges factor into my view that health and solvency of the Federal Housing Administration, or FHA, remains at high risk. You and I have discussed this concern many times, including back in early April with a hearing on the FHA's role. Nevertheless, I think it's important to repeat, reemphasize and discuss these concerns.

Specifically, FHA has been exhibiting troubling signs as default rates have risen to the highest rates in several years, capital reserves have substantially declined, and the foreclosures have accelerated. Perhaps the most visible and troubling sign is a significant increase in foreclosures, since we know the government is not a good landlord. When the government takes over properties, it typically leads to the instability of communities and neighboring homes. Sadly, there have already been reports of rising FHA defaults and foreclosures in areas already victimized by subprime lending, which are making problems much worse for the families and for the entire communities in which they live.

Further, FHA remains vulnerable to fraud. It's been a long-term problem. It's been well documented by the HUD inspector general. It's been a great area of concern to this committee. Senator Murray and I have worried about it, and when Senator Mikulski and I had this portfolio, we were worried about it. This is not a new worry. But it's one which is I think rising to the top. You inherited the FHA problems, and to your credit, you've acknowledged them and taken steps to address them.

But despite your best efforts, I fear the agency may be swimming upstream. As fraudulent activity in the mortgage industry is on the rise, we're hearing more about lenders who have -- loan originators who have caused problems in the subprime area, migrating to FHA, whose business continues to expand. Regrettably, Congress and the White House have placed more demands on the agency and is already understaffed, does not have the proper information technology, the skills or proper controls in place.

That's why I continue to believe that FHA is a powder keg, a mixture of ongoing and troubling problems in the housing market. FHA's internal problems, rising fraudulent activity, and increasing political demands is an explosive combination. If changes do not occur, the FHA powder keg could explode, causing even more harm to taxpayers, communities, the economy and homeowners, and in the current tenuous economic environment that's a huge risk to be taking.

A few other areas of strong interest to me -- as you may know, I'm a long-time champion of Hope VI. I appreciate your acknowledgement in your testimony. I'm very interested in working with you and my colleagues, like Senator Murray, as well as Senator Mikulski, on the program's future. You've proposed to expand Hope VI beyond public housing through a new Choice Neighborhoods Initiative. Since Hope VI got its start in St. Louis a number of years ago, we've seen the program revitalize communities and families from the worst public housing projects. Communities that were once a magnet for crime and poverty are now catalysts for development. Senators Murray, Mikulski and I look forward to more discussions with you and your staff on developing this proposal. It's critical we continue to work on innovative initiatives to tackle the cycle of poverty and distress that afflict too many communities.

On homelessness, I thank you for backing the permanent supportive housing approach that was included in the recently enacted HEARTH Act. The permanent and supportive housing approach, which has been initiated through this subcommittee in Appropriations, has been embraced by providers, local community leaders, and government officials as they have seen homelessness reduced. I've seen it in Missouri, and I believe the numbers reflected across the nation. These positive results clearly demonstrate that the tragedy of homelessness is no longer a hopeless situation when strong local coordination and permanent, supportive housing is utilized.

Finally, investing in rural communities also is important to me. I continue to hear from many constituents, who believe that rural areas are not receiving as much attention and resources as urban areas. Urban areas don't have a monopoly on economic development housing needs. That's why a number of years ago I created the Rural Housing and Economic Development Program. I am pleased the Administration is not eliminating this program, but is aiming to augment HUD's capacity to assist rural needs through a new Rural Innovation Fund. I look forward to working with you and learning more about the Rural Innovation Fund.

I thank you, Mr. Secretary, for your hard work and willingness to work with this committee.

We want you to succeed, and we look forward to continuing to work with you on a challenge that is a significant one, but one we cannot afford to lose.

Thank you, madam chair.

SEN. MURRAY: Thank you very much, senator.

Senator Lautenberg?

SEN. FRANK LAUTENBERG (D-NJ): Thanks, madam chairman.

Welcome, Secretary Donovan. We're seeing each other, as you are with other members, on a more frequent basis. That tells you something about the view that we all have on what kind of housing availability there is in the country, and when we look at it in these days of job dislocation, the pain is felt even worse, and -- on regarding housing availability. And you've got a big job, and I know that you're working hard at it. Unfortunately, there's a lot of competition for funding, and this is one place that really deserves as much as we can do. Unemployment in New Jersey and across the country has hit record levels, families finding it increasingly harder to pay their bills, save for the future, and afford their homes.

Instead of realizing the American dream of homeownership, more than 60,000 households in New Jersey could see their homes taken away this year. In these difficult times the Department of Housing and Urban Development has a more important job than ever, has a larger influence I think on our living standard than it has in decades, and President Obama and the secretary deserve praise for acting quickly on these issues. The Economic Recovery Law, for example, included a temporary increase in the Federal Housing Administration's maximum loan limit in high-cost metropolitan areas to help more home buyers access FHA loans. The residents of 12 of our 21 counties in New Jersey are benefiting from this change, but we have more work to do to help both homeowners and ranchers -- to be able to keep a safe and affordable place to call home.

Many homeowners, as we've already heard -- reminded about here -- many homeowners owe more on their mortgages than the home is worth, and they need help refinancing, gaining equity in their homes to get their debt under control. And many ranchers cannot find a place where they can afford the monthly bill. In addition, we need to make sure that our nation's public housing authorities have the funds necessary with which to operate and the resources to keep their property safe.

Public housing is home to more than 1.3 million low-income families nationwide. More than 50 percent of these households are headed by seniors or people with disabilities. New Jersey alone has more than 47,000 public housing (units ?). And while the HUD budget request shows a commitment to helping all Americans find and stay in quality homes, it also cuts some critical programs, particularly in the area of affordable housing.

So Mr. Secretary, we look forward to hearing from you and working with you to try and solve these problems that are so deeply engrained into the structure, but we've got to find a way out. Thank you.

Thank you, Madam Chairman.

SEN. MURRAY: Thank you very much, senator.

Mr. Secretary, we will turn to you for your opening remarks.

SEC. DONOVAN: Thank you very much, Chairwoman Murray, Ranking Member Bond, and members of the subcommittee. Thank you for this opportunity to discuss the U.S. Department of Housing and Urban Development's 2010 budget proposal.

I want to thank the committee for its work as a champion for HUD's budget this past decade, including its recent extraordinary work securing almost $14 billion for housing and urban development programs as part of the Recovery Act. As you so kindly recognized, Senator Murray, we are moving very quickly to get this money out, and I appreciate your recognition of that. And these funds are already at work helping families find and remain in affordable housing, putting people to work in green jobs, and stabilizing neighborhoods.

The 2010 budget we have provided for your consideration will move us forward. With your support, what we have proposed would ensure mortgages for up to two and a quarter million families with the Federal Housing Administration, provide housing counseling to 571,000 households, fund rental assistance for over four and a half million households, expand the supply of housing affordable to low income families by 306,000 units, and increase the capacity to serve homeless individuals by almost 15 percent.

As you know, the Obama Administration has already begun to comprehensively address the housing and economic crises, and this budget would advance that effort further. Already on loan modifications, which you've mentioned this morning in our efforts to stem the foreclosure crisis, we have -- our extensive efforts have begun to take hold. Almost 80 percent of all loans in the country are now covered by our modification and refinancing plan, Making Home Affordable, and just last week 30,000 modification offers were given to homeowners around the country, bringing the total to over 150,000 modification offers thus far.

However, we do have, as you recognized, further work to do around modifications and stemming the foreclosure crisis, and I look forward to working with the committee to make sure that we do that. This budget requests the authority to compliment those efforts so that FHA and Ginnie Mae can match their expanded roles, requesting loan guarantee levels of $400 billion for FHA and $500 billion for Ginnie Mae.

In 2010, HUD is projecting that FHA will generate nearly a billion dollars more income than will be paid out in losses over the life of the loans. That is, we project our 2010 business to be in the black. We must also have better informed housing consumers, and this budget requests $100 million for HUD's housing counseling program, a $35 million increase over 2009.

Senator Murray, building off your leadership, HUD is requesting funding to better protect consumers and taxpayers against those who would seek to commit mortgage fraud. This budget has over $37 million to combat mortgage fraud and predatory practices, including improving FHA's data systems, as Senator Bond talked about, quickly and effectively implementing the new Secure and Fair Enforcement Mortgage Licensing Act and enhanced Real Estate Settlement Procedures Act requirements, and increased funding for the Fair Housing Initiatives Program and Fair Housing Assistance Program.

The second objective of the 2010 budget is to restore a balanced housing policy. This budget proposal returns the federal government to its leadership role as a catalyst for expanding the availability of decent and affordable rental housing, as you, Senator Bond, mentioned. The President is proposing several key initiatives, including $1 billion to capitalize the National Housing Trust Fund, full funding of the Public Housing Operating Fund, 12 months of funding for project- based rental assistance, a $117 million increase for funding for homeless programs, and a $1.8 billion increase in calendar year funding for the voucher program that will preserve affordable housing for more than two million households and give HUD and housing authorities new tools to more effectively allocate budget authority in order to serve the maximum number of households with the funding provided.

The third objective of the 2010 budget is to invest in urban and rural communities. This involves full funding for CDBG at $4.45 billion, a $550 million increase over 2009, creation of two new competitive programs, the University Community Fund and the Rural Innovation Fund, and creating a $250 million Choice Neighborhoods Program, as you've discussed. Choice Neighborhoods builds on the vision of Senators Mikulski and Bond when Hope VI was created 15 years ago and our experience with what has been most successful in that program. As Senator Mikulski noted with the introduction of a bill to reauthorize Hope VI, where Hope VI has been most successful, it has transformed communities and transformed the lives of people living in public housing.

Choice Neighborhoods expands on the best practices of Hope VI to encompass not just public housing, but also privately owned assisted housing and the surrounding neighborhoods of extreme poverty. Choice Neighborhoods will create viable neighborhoods with decent and affordable housing, improved access to jobs, better schools, and increased public transportation opportunities.

The fourth objective is to drive energy efficient housing and sustainable inclusive growth.

The proposed $150 million Sustainable Communities Initiative is intended to catalyze a linkage between housing and transportation planning and support development of new land use and zoning plans. Through the FHA, the proposed $100 million Energy Innovation Fund would support several pilot efforts in innovative communities to identify new approaches for financing energy improvements in new and existing housing. Led by Deputy Secretary Ron Sims, we are proposing the new Office of Sustainable Housing and Communities that will expand our relationships with our federal, state and local partners and coordinate HUD's programs to catalyze both sustainable planning and greater energy efficiency.

The final objective of the budget is to transform the way HUD does business. We need better data and research about our existing programs and the housing market in general. We need to be forward- thinking and use demonstrations to test ideas on how to transform our existing programs so that they serve more people with the same or less money. We need the flexibility to target technical assistance where it's needed most, and we must transform HUD's data systems, procurement and hiring practices to match our housing and community development challenges going forward.

In sum, HUD's budget request is intended to result in better programs that serve more people with fewer resources. In particular, we propose a transformation initiative that would permit HUD to set aside up to one percent of its total funding to be used for four activities; next generation technology, demonstrations, research and technical assistance. As proposed, no more than 50 percent and no less than ten percent would be spent on each activity.

I truly appreciate the time of the committee and look forward to your questions. Thank you.

SEN. MURRAY: Thank you very much, Mr. Secretary, and we will now move to the questions. As I mentioned in my opening statement, HUD's budget request comes in the context of a lot ongoing challenges in the housing and the economic crisis, and increasingly, we are seeing our home buyers and our lenders turning to FHA in the absence of available credit in the private market. You pointed out in your testimony that FHA's market share has increased dramatically over the last two years. The President's budget is asking us to increase the FHA annual loan volume guarantee limit to $400 billion. That's an increase of $85 billion.

That request seems to imply that the FHA's market share is going to continue to grow in the next year. Does that reflect a kind of pessimism that home prices and credit markets are going to be -- begin to stabilize in the coming fiscal year?

SEC. DONOVAN: First of all, I want to be very clear. Based on the latest trends that we've seen where we do see a stabilization in housing prices in many markets and in some cases increases in volume of sales transactions, particularly in the hardest hit markets, we do continue to believe that we are on track for a return of the housing market to positive growth this year, and hopefully even by the end of the summer.

So it is not reflective of pessimism. The most specific thing that I think is affecting the continued high volume of FHA is the lack of mortgage insurance available in the market. That is the primary factor that is driving the continued high volume of FHA business. And even as the housing market recovers, we believe that it will take some time for mortgage insurers to build back up their financial strength and to be able to allow other lenders to fully enter the market.

But I want to be clear. Our interest is not in having FHA be the sole or one of the primary sources of financing. Our interest is getting this housing market back on track, and we welcome and will work with the private sector to get back into lending as quickly as possible.

SEN. MURRAY: Okay. Let me ask about the Hope for Homeowners Foreclosure Prevention Initiative. That was originally expected to serve about 400,000 families, as I mentioned. There's less than a thousand applications. Congress recently took actions to modify that program to make it more effective with these changes. Do you think that FHA will now reach its goal of assisting 400,000 families?

SEC. DONOVAN: Two things I would say about that, senator. First of all, as you rightly recognize, there has been almost no use of Hope for Homeowners. Just over 50 loans closed at this point in the program. With the recent changes signed by the President, passed by Congress, I do believe we will have significant improvements in the program. We hope to have that program -- the revised program up and running in the next couple months. And I do think we'll see significantly increased volume.

I think it's unlikely that we reach the 400,000 number. And the reason for that is that when the Hope for Homeowners Program was created, it was the primary alternative for helping families at risk of foreclosure. As I discussed earlier, as you know, we have since introduced the Making Home Affordable Plan, which has already reached a scale, as I mentioned in my testimony, of over 150,000 modifications just in the first few weeks, and we expect it to continue expanding substantially. And so with these other alternatives, I think it's unlikely that Hope for Homeowners reaches the 400,000, but obviously, we'll keep the committee informed as we do begin to see volume pick up once the changes are introduced.

SEN. MURRAY: Okay, I appreciate that. I have long raised concerns about the solvency of the FHA's MMI Fund and want to make sure that our nation's taxpayers aren't exposed to the elevated risk of re-defaults of these already troubled mortgages. If Hope for Homeowners or some of these other foreclosure prevention activities do succeed in bringing in more distressed borrowers into the FHA's programs, what safeguards are there to ensure that these foreclosure prevention measures don't destabilize the FHA?

SEC. DONOVAN: So two things about that -- first of all, thanks to the Congress and changes that you have made, we have been able to and do project a surplus for the main MMI program and for FHA overall in this budget. There are two primary things that are driving that that I think are important to emphasize. Congress's swift action to ban the Seller-Funded Down Payment Program alone -- our estimates are -- will improve the performance of just 2010 loans by $2.5 billion. So that alone has been a substantial help to improve the health of the fund.

Second, what we have also seen is that with the credit crisis that's happened in the rest of the market, our average credit scores within FHA have gone up by over 50 points over the past year. So we are seeing, despite the troubles in the market, an improved borrower profile across the board in FHA, a substantial, substantial improvement that will help to keep the overall fund healthy, we believe, in -- for the 2010 loans.

Specifically, on Hope for Homeowners -- two things I would say. One is that there is a clear requirement for Hope for Homeowners. This is one of the reasons why I don't think the volume will get to the 400,000 that requires a write-down of the principle to a level that is sustainable on today's value, not on original value, but on today's value. And with hopefully being at the trough as the program ramps up, we should see long-term housing growth for those that will make those safer loans.

The other important point is that Congress wisely set aside $300 billion at Treasury to fund any losses from the Hope for Homeowners Program. So any losses there do not affect the broader health of the MMI Fund. They're isolated to this fund that's been established at Treasury and should not affect the overall --

SEN. MURRAY: What about the more specific program, the Reverse Mortgage -- HECM -- Program for Seniors to reverse mortgage -- for the first time the budget is seeking a positive credit subsidy of $798 million for that. Does that positive subsidy requirement portion of the MMI Fund portfolio raise concerns for you about the overall solvency of the MMI Fund?

SEC. DONOVAN: It does not. On the overall solvency -- first of all, HECM is a very small portion of the overall set of programs, and even with that cost, our estimate is that the FHA -- the loans made in 2010 will show a surplus of almost a billion dollars. Specifically on HECM, I would say two things. First is we have tried in this budget across the board to be as clear and direct and honest as possible about what we see going forward. The HECM program is far more sensitive than traditional loan products -- it's much more like an annuity -- far more sensitive to house values and long-term house price growth. And we've been I think relatively conservative in the budget in projecting that for the HECM program. So that's the first thing.

The second I would say is we do have options that I would be happy to discuss with you as we work through the discussions on the budget for changes to the HECM program.

And --

SEN. MURRAY: Okay. So some tools to make sure you've got some control on it?

SEC. DONOVAN: Yes. We have not chosen to raise premiums given the stress that seniors are under right now. But there are premiums as well as loan-to-value and other factors that we can make changes on that would eliminate that need for the cost. Those are obviously choices about how many seniors we want to be able to help versus the costs in the program. And I think it's important that we have discussions with the committee --

SEN. MURRAY: Okay, good, and maybe you can --

SEC. DONOVAN: -- about that (to make the decision ?).

SEN. MURRAY: -- get back to us on that after the hearing, and we can talk about that. I appreciate it.

SEC. DONOVAN: Absolutely.

SEN. MURRAY: Okay. Senator Bond?

SEN. BOND: Thank you very much, madam chair. We're trying to get some numbers here, and it looks like our 302-B allocation, which has just come down today, is not going to support the HUD request. We view it as -- when you take out your renewals, it's about $1.5 billion over the '09 enacted level. So we're going to have to do a lot of work in HUD and transportation.

Speaking of the FHA problems, again, I was just -- it's called to my attention -- some research done by a New Jersey-based financial data firm, SMR, and they gave St. Louis the number one place for FHA lending. The dollar value from 2008 has quadrupled from $719 million '07 to $2.9 billion in '08. And the analysis is they're kind of last man standing in the subprime space. They're refinancing a lot of people who've got subprime mortgages for private lenders. And the analyst goes on to say, you know, the federal government might just step back and say what we have gotten ourselves into?

And here's the point that concerns us. Quote, "Whenever you see a lender ramping up this quickly, there are often some mistakes made. When you suddenly explode like FHA has, that's something to watch for," close quote. And while you came up with a mildly optimistic $1.7 billion revenue generated by FHA on a book of business of $400 billion during our FHA hearing in April, the HUD inspector general responded to one my questions on the need for taxpayer bailout by saying based on the numbers we're seeing, I think it's going in the wrong direction. And CBO projects a zero credit subsidy rate for the FHA program.

So we are very much concerned about it, and is there anything that you are doing or can do to mitigate the possible need for additional funds to compensate for FHA losses? And if the economy continues to deteriorate -- and I know one of the assumptions you built in was low interest rates, but it looks like the markets and foreign governments are responding to our fiscal policy by driving up interest rates. So we've got another collision coming.

How confident are you that you will not have to raise premiums or come to the taxpayer for assistance?

SEC. DONOVAN: First of all, Senator Bond, we have done fairly extensive analysis of where the fund is today with current projections, not just for 2010, which is contained in the budget, but for all FHA's current book of business to look at the reserves. And while it is too early to say for sure where we'll end up in the re- estimate this summer, we think there's a better than even chance that we will stay above the two percent reserve threshold in terms of that analysis. So that suggests not just for the 2010 business, but overall for the portfolio that we're more than likely to stay out of a broader need for any taxpayer funding.

Second of all, I do want to emphasize that while I've reported on some of the positive trends, you talk I think rightly so about the need to enhance FHA's fraud detection. There's a range of things that we need to do, and I couldn't agree with you more on that. And we are moving in that direction. We have established and sent out swat teams to lenders where we see early evidence of defaults. We have asked for and received, thanks to the Congress, increased authority to go after bad apples. One of the problems that we've had is that we've been able to de-bar companies, but principles have been able to change their stripes, reestablish themselves in new companies, and we didn't have the ability to bar them until legislation signed by the President just a few weeks ago. We are implementing that now.

And one of the key things that we want to do with this transformation initiative -- the single biggest usage of funding from that in our plans is to enhance FHA's systems, and I can't stress enough that a systematic approach to fraud detection is absolutely the direction that we -- that we need to go.

We -- I've detailed in my written testimony much more about the kinds of initiatives that we would want to pursue with the transformation initiative but that is the single most important that we will want to pursue. So I do agree that we need to --

SEN. BOND: We agree with you on that and I think I mentioned previously the U.S. attorney for the Eastern District of Missouri, who's been aggressively prosecuting these fraud cases. There are -- there are some bad apples who really need to be put out of the business and, in my view, put out of circulation, and that -- that's an added problem we don't need.

SEC. DONOVAN: And if I could just add to -- thanks to you we also, in the bill that I just talked about that gave the FHA enhanced capacity, have significantly increased resources not just with Ken Donohue, who I've been working very closely with at HUD, our inspector general, but also at the Department of Justice, the Federal Trade Commission -- increased authorities and increased funding to go after exactly this kind of fraud.

SEN. BOND: Let me move on. You motioned the importance of getting rid of the seller finance down payment. I have -- I have long warned about the no down payment option. There's another item that I've noticed.

In Canada, mortgage loans are recourse loans, and they've not experienced anything like the same type of problem experienced in the United States. Going forward, is this something that -- it's controversial but we see what happens when people can buy a second home on spec and walk away from it. Is it worth considering whether we need to change the system and make mortgage loans recourse loans?

(Side conversation.)

SEC. DONOVAN: This is a proposal that I think is worth some consideration as part of a much broader look that we're going to do at the mortgage market. Obviously, our regulatory structures have failed over the last few years to contain this kind of lending process. I think the concern that I would raise is that at a time when the markets are fragile that a major change like that could be --

SEN. BOND: I'm not saying -- I'm not saying -- right now --


SEN. BOND: -- we're scratching and clawing to get out of this. But going forward, I don't always trust regulators to avoid problems. I think that we have -- ought to have some standards in place that lessen the number of people who can come close (to the line ?) and I believe Canada also generally requires a larger down payment, which all goes back to the point that you emphasize, that I emphasize -- that we need to make good quality affordable rental housing available for people to have a good home until they can afford to buy a home and do it without risking their credit or without risking the viability of the community. Thank you, Madame Chair. I've got a whole lot more to go but I want to hear --

SEN. MURRAY: We'll come back. (Laughter.)

SEN. BOND: -- Senator Lautenberg's --

SEN. MURRAY: All right.

Senator Lautenberg?

SEN. LAUTENBERG: Yeah. Mr. Secretary, with the elimination of the or the -- I think that's a fair representation of the HOPE VI program, its principal mission revitalizing distressed public housing with this new Choice Neighborhoods Initiative. Now, recent estimates indicate there's still 80,000 distressed or severely distressed public housing units that remain nationwide. Now, if HOPE VI is eliminated, is it possible to have enough resource available to revitalize these public housing units?

SEC. DONOVAN: Senator, I'm glad you asked that question because I want to be absolutely clear about this. The Choice Neighborhoods proposal is, in my view, quite frankly, a celebration of HOPE VI and it says it's worked so well that we ought to think about expanding that model and making more resources available. But I want to be very clear as well.

What we've proposed, I think it's extremely clear to us, would expand resources for housing authorities to continue to take on and accelerate the efforts to revitalize troubled public housing, and here's why. First of all, what we've proposed -- this year $120 million was provided for HOPE VI -- we're proposing $250 million. So a significant expansion of resources, first of all.

But even though we are opening it up to assisted housing, we've looked very carefully, and not only is 30 percent -- there is three times more public housing that is in troubled condition and located in neighborhoods of high poverty than there is assisted housing. So the expectation is that the large majority of these resources would go to public housing, not to assisted housing. The third thing that I would mention is that we are making -- we are proposing to make eligible privately-owned housing as well.

We hear from housing authorities all the time that one of the challenges they have is the inability to use HOPE VI to help turn around privately-owned housing that surrounds public housing, whether it's been foreclosed or vacant or abandoned. So we think we're actually not only giving housing authorities more resources to do HOPE VI redevelopment but actually expanding the kinds of things that they can do as well. So we believe strongly that this is a, as I said, a celebration of the model, not an elimination by any means of the program.

SEN. LAUTENBERG: We're pleased to see the expanded amount of resources available but that still falls short of the need, substantially. What do we -- what do we do to encourage people about the -- their living standard that, as you just said, (includes ?) deterioration in the neighborhoods around these places? How many units will still be left in this distressed condition that we have to pay attention to?

SEC. DONOVAN: Well, I think the good news on that is that this proposal comes on the heels of a recovery act, thanks to you, that made substantial investments in public housing stock -- $4 billion total of capital funding that I think will go a long way to helping to ameliorate that. I don't believe we're there yet.

There's still significant needs in public housing. But I think the combination of the significant expansion in Choice Neighborhoods as well as the $4 billion in recovery act funding is a very, very important down payment on where we need to go with public housing.

SEN. LAUTENBERG: We're still not at the goal line and we have to keep working --

SEC. DONOVAN: I would agree.

SEN. LAUTENBERG: The economic recovery act raised the maximum loan limit for FHA so that potential homeowners in high cost-of-living areas like my home state could access FHA loans. Do you support extending the increased maximum loan limit when it expires at the end of this year?

SEC. DONOVAN: I would say, Senator, that it's too early, in my mind, to give you a final answer on that. It was extended really to make sure that we had expanded capacity, not just at FHA but also the GSEs, to serve a market, quite frankly, that had disappeared when the credit crisis occurred. I think we have to look carefully at how far the market is at the end of the summer, at the end of the year, before making a decision to extend it beyond the one-year extension that was there.

I do believe, as I said earlier, that FHA's purpose is to work in concert with the private market to provide financing where it's not available from the private sector, and I think we need to look at that -- the loan limits -- in light of where we are in terms of that balance as we get closer to the expiration.

SEN. LAUTENBERG: The prospects realistically are not for lower prices if the economic recovery takes hold -- that we're going to see an increase in prices. We are now seeing an increase in interest rates for housing loans. So I wanted to discuss the counseling situation. The president's budget increased funding for housing counseling by $35 million, and this is a substantial increase in funding.

The demand for housing counseling is also far greater. Is the funding request enough to meet the need for housing counseling? How many people are we talking to currently and what -- will we have enough money available to increase that availability? Because that's such an important part of people's emotional and, (obviously ?), financial condition.

SEC. DONOVAN: Yeah. What I would say, Senator, is that while it is a substantial increase it would allow us to serve over 570,000 households with counseling next year. That alone is not enough to deal with the current crisis that we have. Importantly, we have two other sources of -- resources. One is from Congress through NeighborWorks there was an additional allocation of, I think, $190 million last summer -- that brings the total to, I think, around $300 million -- which has been an enormous help for -- that is specifically targeted to foreclosure prevention.

Our counseling money is for broader purposes that includes first- time homebuyer counseling, post-purchase counseling, et cetera. So that is -- it's very important to see it in the context of the 300 million (dollars). But even that, I think, is not going to get us there and we are -- I met with NeighborWorks the other day on this.

Servicers have agreed that counseling is an eligible expense but we have not seen a broad use of that authority to allow reimbursement of foreclosure counseling, and I think if we're really going to get to the scale we need to on this problem we need to encourage the servicers and work with the servicers to have them expand their reimbursement of foreclosure counseling. And we are doing that. I met with HOPE NOW just this week to encourage them to do that, and they've reengaged with the servicers to see if they can get them to more broadly reimburse. And I think if we can do that then we could actually get to the scale that we need to to really deal with the full problem.

SEN. LAUTENBERG: (Off mike.)

SEN. MURRAY: Thank you. Mr. Secretary, HUD recently clarified that participants in the FHA program can use the $8,000 first-time homebuyer tax credit to defray closing costs or to increase their down payment. That, we know, is going to enable more families to afford housing and provide an important jolt to the housing market.

Some people have proposed allowing the tax credit to be used to defray closing costs for non-FHA products. Do you think that monetizing the homeowner buyer tax credit can be effective in helping to just -- to stimulate demand beyond the FHA products?

SEC. DONOVAN: What I would say on that, Senator, is that I think it would have some incremental benefit. I think it's unlikely to have as much benefit as what we've done with FHA. The reason for that, quite simply, is that today, because of the lack of mortgage insurance, as I talked about earlier, or the limited availability of mortgage insurance, the down payment requirements are quite large, and that an $8,000 credit in that case will have a harder time overcoming the barriers for first-time buyers with the size of the down payment that they need in general in programs.

That's why we focus in our guidance on FHA lenders, where we have a lower down payment requirement, as well as on state housing finance agencies that, I think, have been some of the most creative lenders to first-time buyers, and that's where we do see a lot of the activity.

Having said that, I also think it's important to recognize we did try to balance very carefully that we don't get back to the point of having zero down payment loans, and so our guidance is unless you have an approved down payment assistance program through a government entity or NeighborWorks you need to have that 3.5 percent down payment even for the FHA loan. And we -- so we really tried to make sure we're balancing the health of the fund with the need to stimulate the market.

I think we've got that balance right. Again, I think there could be some incremental benefit to expanding it more broadly. There are private lenders that are -- that are looking at that. But I just don't think it's going to have as much boost as the FHA because of the down payment requirements.

SEN. MURRAY: Okay. All right. Section 8 tenant-based rental -- critical tool for a lot of our families today. At a time when this economic recession is really hitting a lot of people especially hard I think that program is even more important than ever. In order to continue this program, the president's budget included $17.8 billion in total resources for the tenant-based rental assistance. That is an increase of 1.8 billion (dollars) over '09. Are you confident that the amount of funding is sufficient to fund all of the existing Section 8 vouchers?

SEC. DONOVAN: Based on our latest information, we are confident. In fact, we base those estimates on the December -- end of December very latest leasing, and one of the reasons there's such a significant increase is that we did see housing authorities really increase their leasing late in the year, which I think is a positive thing in terms of helping more families in the economic crisis, and that led us to really think that it was important to request a significant increase.

The other thing that's contributing to that is not just vouchers that were outstanding at the end of December but also the significant number of vouchers that will be expiring for the first time, whether they be tenant protection or incremental vouchers that the committee has provided. And I think it's obviously critically important as VASH vouchers and other vouchers start to expire that we ensure we have -- we have adequate resources for those.

We have preliminary information from March 31st which shows roughly level leasing from December, so we continue to believe that that number -- that significantly increased number -- should be adequate for next year. The only other thing I would just mention, I do have some concerns, given the ramp-up in leasing that we saw late in the year, that we may have some housing authorities that will have difficulties this year during 2009 with the allocations. So I want to make sure that our staffs are in contact about that to make sure that we give you the latest information of what we're hearing --

SEN. MURRAY: Okay. Okay.

SEC. DONOVAN: -- from housing authorities so that we're dealing with the issues in '09 and the ramifications it might have on the --

SEN. MURRAY: Okay. Congress and HUD have struggled for a long time to balance the need to serve as many families as possible with the need to ensure that we're managing the growth and this program's cost. We have taken several steps to provide stability and consistency of the Section 8 program over the last few years and we have seen an increase in utilization by PHAs. It's (good ?) more families are being served but, you know, we have to balance that with the cost in the future. Can you describe for us what your long-term plan is for ensuring that we are increasing vouchers at a level that we can sustain in future years?

SEC. DONOVAN: Well, first of all, to be very frank, one of the problems here is that you haven't been able to get good information from HUD and we haven't had the systems in place to be able to give you that information. And one of the key investments that we propose to make with the transformation initiative in the budget is to build a system that can accurately provide you data on the budget cost. We spent a lot of time -- I probably personally spent eight or 10 hours with budget staff as we developed this estimate, and I believe we finally have good information for you this year.

But we need to go farther to have not just information that we're getting today from March 31st leasing but have real-time leasing information from around the country to be able to make sure that we get the best information and can respond quickly to trends that we're seeing to keep program costs under control. So that's the first thing. Second of all, there are many things about the voucher program that require (work by ?) housing authorities having run the fourth largest voucher program in the country -- I know this very personally -- that, frankly, aren't necessary, and I think the Section 8 Voucher Reform Act and other efforts to simplify the program will go a long way -- things like seniors on fixed incomes, not having to recertify them on such a regular basis because we know that it's predictable, and focusing our efforts on families that need to be recertified more often -- a whole range of other simplification of rent rules and income rules. A whole range of things that could make the program more cost effective -- that's the second thing.

Finally, I think one of the critical things is getting a stable predictable funding formula, and I -- we've attempted in this budget proposal to make some of the fundamental changes that we believe would make sense, provide the flexibility around (unit caps ?) and other things that will allow housing authorities to plan better and therefore be able to move their programs in the right direction to stay within their budget cap.

So there are a range of things that are critical in doing that. There's no one magic bullet there. But I believe, with those set of things, that we can get to a point where we can keep voucher costs under control, we can serve more families with less money and get you the information that you need to make decisions -- (crosstalk).

SEN. MURRAY: Okay, all of those are important. I want to see the increased utilization for our families to have this. What we don't want people to have is the promise of vouchers for a budget that, in the future, we can't sustain and we're sitting at a town hall meeting and people are screaming that their vouchers have been taken away. So we want to work with you on this balance as we work through this.

SEC. DONOVAN: Absolutely.

SEN. MURRAY: Senator Bond.

SEN. CHRISTOPHER BOND (R-MO): Thank you, Madam Chair. And we've been talking about simplifying the process, cutting the red tape, and getting us better information. I can only say amen and thank you. It's a long time coming, and we're looking forward to it.

I touched briefly on concerns I have in the Making Homes Affordable Initiative. The administration projected it would benefit 7-9 million homeowners. And unfortunately, the reach in benefit was linked to mortgage interest rates. And with them hovering now around 5.5 percent and potentially going higher, what impact do you see that having on the goal?

SEC. DONOVAN: Well, I think there are two different issues there. One is around refinancing, Making Home Affordable projected 4-5 million homeowners that we would be able help through refinancing for underwater homeowners. For the vast majority of those, a half a point or a tenths of a point change in interest rates isn't going to significantly affect the benefits of the program because those are families that are in general at much higher interest rates. But I do think it will have some marginal affect on the number of folks that can benefit from that.

On the modifications, however, we still have the ability, under the program through modification, to get an interest rate down to as low as 1 percent. And that's independent of where interest rates are today. So I don't think it will have a significant impact on the modification portion of the program. And in fact, I quoted that we had offered 30,000 modifications last week. We expected to help between 3 and 4 million homeowners with the modification plan over three years. And so if you do the math, 30,000 in a week actually gets us to in that range over three years. So we're starting to get to the kind of volume that can get to the scale. And I don't think, on the modifications in particular, that interest rates will have a significant effect.

SEN. BOND: But I think obviously that it's optimistic that you'll be able to continue in the modifications while it's not in the budget. If you're lending out money at 1 percent and the federal government is borrowing everything that's going out the door now, we don't have a -- there is a hidden subsidy that fortunately is not charged against our budget. And I guess we shouldn't raise it here, but it's going to go on the debt of the federal government balance sheet.

SEC. DONOVAN: Most of the cost is actually absorbed by lenders, because we require them to take more than 50 percent of the losses through the program. And as you said when we were talking before, they should because the alternative for them is foreclosure, where there are significant -- (crosstalk).

SEN. BOND: Yeah. And on these, are you giving them a soft second, a second lend on the home so if it is sold for more than the reduced rate the lenders -- and to the extent that the government, that we're subsidizing, they are to get some -- will there be a soft second on the assumption that maybe the home prices will rise again and they will be sold at higher than their reduced loan rates?

SEC. DONOVAN: On the modifications, in fact, the loan stays intact. So the full amount of the loan is there, so if there is an increase. One more thing I would just say about the cost of this, we are paying for our share of the program through TARP funds. So we have already set aside $50 million -- $50 billion, excuse me -- in TARP funds, and that will not require new appropriations, so that's already built into the cost of TARP. It doesn't have, whether on FHA or any other government program, an impact.

SEN. BOND: Well, I'm pleased to hear that because I've been wondering. After we agreed to the TARP Program to buy troubled assets, I have seen us buying a lot of troubled banks, troubled auto companies. And if you're finally buying down some troubled assets, it's about time. We kept wondering where it was coming from, and that was a whole reason to support it in the first place. And I've been extremely disappointed that since we enacted it last year and this year we have not been using it for the purpose that it's being used.

Another question may be before us. As part of the Stimulus Act, Congress provided an $8,000 tax credit for first-time home buyers. There is a new proposal that would increase that to a higher level, at $15,000. There was a proposal to limit that to foreclosed -- buying homes out of foreclosure. What's your sense on the impact this could have and whether that would help stop the decline in home prices?

SEC. DONOVAN: Two things I would say, obviously increasing the amount of the credit would bring more buyers in, but obviously at a cost. And so Congress has got to weigh whether that cost is affordable and whether it can be absorbed given all the other expenses. The other piece of this that has been discussed is extending it, not just to first-time home buyers but beyond that to any home buyer. And I think the issue there is that while that could have some incremental benefit, when you have an existing home buyer who is buying a new home, you're selling a home and buying a home, so it doesn't have the same --

SEN. BOND: Yeah.

SEC. DONOVAN: -- kind of positive impact on the market that a first-time home buyer getting into the market from renting, in the first case, to absorb the overhang of demand -- (crosstalk.)

SEN. BOND: Well, I agree with that, but is there any wisdom in limiting it to foreclosed homes to try to save communities?

SEC. DONOVAN: It's an interesting idea. I had not thought about that before.

SEN. BOND: (Crosstalk.)

SEC. DONOVAN: We obviously have significant resources from the Recovery Act through the Neighborhood Stabilization Program from last summer that's doing exactly that and trying to concentrate on neighborhoods with lots of foreclosures. I think there's more we can do with our own foreclosure -- (crosstalk) --

SEN. BOND: Okay, that's -- because the community, the city council members, the mayors who say what am I going to do with this community that's got 20 percent foreclosed. The retail businesses are shutting down. That's causing further collapse. And they're seeing their communities absolutely deteriorate, so --

SEC. DONOVAN: We should follow up, because we are releasing, today, the competition for $2 billion in neighborhood stabilization funding that was in the Recovery Bill. We're already provided Missouri significant funding from the $4 billion that was allocated last summer. But this is an opportunity, this additional $2 billion, to really take those efforts to the next level in St. Louis and in a range of other places. So we ought to follow up and make sure you have all the information.

SEN. BOND: Yeah. Could we get the information on that, because it's not just limited to the major cities?

SEC. DONOVAN: Not at all.

SEN. BOND: There are suburbs and rural areas.

SEC. DONOVAN: In fact, one of the things we really want to encourage in the competition is that jurisdictions work together across regional lines, including suburbs, rural areas, so very interested in doing that.

SEN. BOND: I'm going to impose on the chair's time for just one question we're both interested in. The president's budget does not include additional HUD VASH vouchers. While the president said he wants to end homelessness among veterans, and Senator Murray and I are very interested in homeless veterans. How are you going to address the needs of homeless veterans, especially those with disability? What's your plans there?

SEC. DONOVAN: I'm very glad you asked this question, because I want to make sure I'm very clear that I and the president strongly support the VASH Program and are working hard to make it as effective as possible. We already have the 10,000 vouchers that were allocated in 2008; 79 percent of those have been issued. Over 40 percent of them are already leased. We had some early start-up issues, which basically the Veterans Administration had to get case managers up and working before we could get the vouchers issued. So now that those case managers are in place, we've begun moving quickly to get the vouchers out. And obviously, there's an additional 10,000 that were allocated that will be competing very shortly.

I would say a couple things about why we haven't included them in the budget proposal. First of all, as I mentioned earlier, we were quite concerned that given the leasing level in the overall program that we would need significant increased dollars. And I think it's an important conversation with the committee to understand what's available for incremental vouchers versus supporting vouchers that are already there. And obviously, we want to have that conversation.

There is also, I do have some concern that if we have multiple kinds of vouchers within the program that we may create administrative complexity for housing authorities. And I think the ideal situation, from my point of view, is that an experiment, a model like VASH over two years that we can learn the best lessons. And then we could get housing authorities, not just using VASH vouchers but using any of their vouchers to effectively serve veterans. So I think the opportunity for us is to think of VASH as a good model that can then be expanded to the entire voucher program in a way that's as flexible as possible for housing authorities in implementing it.

Having said that, we are very hard at work with the VA in doing that. We're issuing joint guidance with them. We're actually holding a conference with them, our first conference on HUD VASH to make sure that implementation moves smoothly. And I have been working closely with General Shinseki, now Secretary Shinseki, to make sure that it moves swiftly. I'd be happy to provide more details on it. But I do think it's a very important conversation about what we do in the 2010 budget that I look forward to.

SEN. BOND: Thank you, Mr. Secretary.

SEN. MURRAY: (Off mike) -- okay -- (laughs.)

SEN. BOND: (Off mike.) I'm just warming up.

SEN. MURRAY: He's just getting started. Mr. Secretary, you mentioned getting information more timely and accurate, and that's a goal that I obviously share. It's refreshing to hear that from you.

But I do need to signal to you some major challenges with the transformation initiative proposal that you've put forth.

Under this proposal, you would have the authority to transfer up to 1 percent from all of HUD's programs to that initiative with a total cost that could reach $434 million. Given the magnitude of that, this committee needs more precise information about what you would fund and have more costs before granting HUD that kind of flexibility.

Your testimony this morning does outline some of the priorities. Can you provide any more information to us about how much you expect these initiatives to cost in Fiscal Year 2010, and will that $334 million be necessary this year?

SEC. DONOVAN: We do have more detail about those initiatives, obviously much more than is in my testimony. And I think we've started to provide some information to you staff, be happy to provide more detail on that. As I mentioned earlier, the single largest and most important initiative is the FHA modernization. And our sense is that the full cost of that, not the one-year cost, but the full cost of that is in the range of $110-130 million.

SEN. MURRAY: Is this the next gen technology?

SEC. DONOVAN: This is specifically next generation technology for FHA.


SEC. DONOVAN: So that's one piece of the technology.

SEN. MURRAY: You know how much that will cost?

SEC. DONOVAN: Total cost, between $110 and $130 million. The other, I think, most important system investment that we would want to make is for a new voucher system, as I mentioned. And the total cost, again, not a one-year cost, but the total cost of that, our estimate is that that's roughly $90-110 million. And again, that's over multiple years.

SEN. MURRAY: This year?

SEC. DONOVAN: That's over multiple years.

SEN. MURRAY: (Crosstalk.)

SEC. DONOVAN: These are estimates for five year total costs for those systems.

SEN. MURRAY: Okay. So what we need to see for our oversight and for our appropriations mark this year is what those initiatives are going to cost this year, what you're going to be transferring this year for those programs. So if you could --

SEC. DONOVAN: Absolutely. If I could just make a comment about that, I think I clearly recognize that we are asking for flexibility that's quite different, that --

SEN. MURRAY: No. We always get asked for flexibility, but then we ask, sort of, where that's gone?

SEC. DONOVAN: And I think we have absolutely got to provide complete accountability to you to make sure, if we were to move forward in this direction, that we are giving you a plan that we're regularly reporting to you. And I recognize that that is a significant request. My concern, and one of the things that led to this proposal, is that I see, for example, a dramatic change in the housing market where FHA doesn't have the ability to respond with new fraud system. There's a fraud system we simply couldn't buy this year until the 2009 allocation came out that would have allowed us to get started earlier. And there are unforeseen things that happen because FHA is a market oriented program.

So I'd love to have more conversation with your staff about it. What we're trying to figure out is how we can give you the accountability that you absolutely should have while also having the ability to respond quickly to changes and to more -- another example I would give you. We have many, many different technical assistance categories in our budget. They've come just on a program basis.

But when I go out into neighborhoods, I hear well, you've got this neighborhood stabilization funding, but you've also got your own FHA foreclosures. And we can't get technical assistance in making those work together. And so one of the things we're proposing here is to have more flexibility to be able to move technical assistance dollars across the agency so that we're combining and bringing together our programs with technical assistance that actually make the most possible impact in neighborhoods, rather than just focusing on one program or just focusing on another program.

So there are a range of places where I think this flexibility can help. And if we can figure out a way that you get exactly what you need in terms of --

SEN. MURRAY: Well, as you know, our role is oversight --

SEC. DONOVAN: (Off mike.)

SEN. MURRAY: -- and we're always asked for flexibility. And then we get yelled at for funds that were misused. So we need to come to an agreement. And what I'd like to do is have a year, focus it down with our staffs, both sides of the aisle, and walk through how much you're asking for this year and where that flexibility is and how you intend to use it and what the benefits are, because without understanding that, it's very hard for this committee to trust -- (crosstalk) --

SEC. DONOVAN: Absolutely.

SEN. MURRAY: -- even though I have a great deal of respect for you. It's just a history of this committee that we've seen before. So --

SEC. DONOVAN: I believe so -- (crosstalk) --

SEN. MURRAY: -- we need to know what the specific amounts for this year, as we're allocating for a year-long appropriation bill, what the benefits to you are and what kind of flexibility you're asking for.

SEC. DONOVAN: Absolutely.

SEN. MURRAY: Senator Bond.

SEN. BOND: Thank you, Madam Chair. I was sitting here making notes to myself as you went along, and I couldn't agree more with the chair that with flexibility must come accountability. You tell us you're going to take care of the VASH with the general -- without having earmarks in it. Good luck. That would be ideal. We'll be watching, and we want to see how it works. And I really think that better information is key to that.

I understand that the red tape and the hassle very often really mess things up. So if you can do that, that would be fine. On homeless, we want to see the idea of supportive housing really, which this committee has pushed for a long time -- is now in the law -- is critical. Some time ago I helped reactivate the Interagency Council on Homelessness, because we saw a lack of coordination. Are you getting that coordination? Do we need to give it a kick with legislative language on the Interagency Council? We've got to have all of the agencies working together on this supportive housing.

SEC. DONOVAN: Senator, I couldn't agree more. An update on that, we are interviewing candidates for that to run the Interagency Council. We have convened the first meeting in the next two weeks with Secretary Shinseki. He is actually the acting chair, and I will become the first -- or the next chair for it. And our initial focus, in the first meeting, will be on VASH and veterans' issues. And I think that that is a critical -- I couldn't agree more that that's a critical place to move forward our efforts on the Interagency -- (crosstalk.)

SEN. BOND: And it isn't just for veterans; it's across the whole area of homelessness.

SEC. DONOVAN: I just thought I would also add, one of the most important things you did, I think, in the Recovery Act was the prevention resources, the billion and a half dollars that has really allowed us to take our efforts to the next step in preventing homelessness. And in particular, one of the barriers we've had with VASH has been whether it's a security deposit -- there are very small hurdles that when you add up can stand in the way of a veteran being re-housed. And this prevention money has been very helpful, and we're using in concert with VASH, to make it even more effective. So I thank you for that -- (crosstalk.


SEN. BOND: Well, I've got some rather open-ended questions I'll submit for the record, and you can, at your convenience, reflect on the future of GSEs, the Rural Innovation Fund. I want to ask a specific question. Mortgage issues, I hope, will be considered as a part of regulatory reform. Last year, I sponsored -- I introduced legislation proposed by the Treasury for a Mortgage Origination Commission, because from what we saw in our state was that the bricks lenders were pointing their fingers at the clicks lenders, the people who issued loans out of saving and loans and banks have regulators. They didn't always do a good job.

But the people who were sending in the super sweet, no down payment, low teaser rate loans over the Internet and the fax -- I've tried to be in a do not fax list. I've got all kinds of blocking devices on my e-mail. And they come in, and somebody's got to regulate them. Do you see a Mortgage Origination Commission establishing a state structure or some overall structure for regulating everybody who is lending so we know who they are and what they're doing?

SEC. DONOVAN: I think you've put your finger on one of the fundamental problems with our current regulatory system, is that if we have different regimes for different kinds of institutions. And the vast majority of these subprime loans came from non-bank institutions that sort of fell through the cracks. And so that is absolutely a central piece of what we want to address with our regulatory reform efforts.

We expect, very shortly, to have a full set of principles, including around mortgage originations, that would include clear consistency across the bricks and the clicks, as you said -- (crosstalk).

SEN. BOND: I think that is critical, from what we've seen, and from my own personal experience. Man, I could have signed up for so many 1 percent, no down payment loans if I had just responded. Fortunately, I passed up the opportunity.

Low income housing tax credit, we have heard that HUD may be making changes that could affect eligibility of LIHTC Disaster credit projects, especially in rural areas and/or for our preservation deals for the LIHTC equity gap. Can you look into this with Secretary Geithner to make sure we're providing reasonable roles for disaster credit projects? There are questions about it. We've tried to help the low income housing tax credit issuers like our MHDC in Missouri, and there seems to be more glitches than progress.

SEC. DONOVAN: I'd love to hear more about the specific issues. There are two different resources that were in the Recovery Bill for tax credits. There was HUD's Tax Credit Assistance Program, and then Treasury has a trade in provision. We looked very carefully at whether the legislation allowed us to trade in disaster credits. And we don't believe -- or our Treasury lawyers don't believe that we have the authority to trade in the disaster credits.

But we took a step, which hopefully is very important. I was in Iowa yesterday and heard that it's being very effective, that what we allowed was that if even one dollar of regular credits go into a disaster assisted project, that that is enough to allow our Tax Credit Assistance Program, which is over $2 billion, to flow to that project. We've heard very positive feedback from the housing authorities on that decision which we made just recently. But if there are additional things that we need to do, my staff is actively engaged with Treasury on this issue, and I'd love to hear more details about what the problem is they're facing.

SEN. BOND: The chair and I have worked on that in the past. We think it's very important. That's one area where we can get people -- get housing started, get jobs and deal with the housing problems that we have. Again, I will submit, for the record and your consideration questions on how you're going to eliminate and consolidate 27 programs in the budget.

I have a great interest in early childhood development. And I would like to know how you are assuring that in the assisted housing and in the public housing. There are programs available for these children, families, in those assisted and public housing to get the kind of early childhood assistance that makes the parents better teachers of their children and enables a better development for and pre-formal education development of these children. With that, Madam Chair, I have covered the things that we need to cover --

SEN. MURRAY: Very good.

SEN. BOND: -- publicly, and we will await the responses from the secretary on the submitted questions.

SEC. DONOVAN: Thank you.

SEN. MURRAY: Okay. Thank you very much, Senator Bond. I just have one more comment. President Obama signed the HEARTH Act, Homeless Preauthorization Bill, into law. That legislation requires HUD to develop rules and regulations related to the treatment of homeless children. This is an issue very close to me, near and dear to my heart. So as you move forward with implementing that law, I just wanted to urge you to work very closely with the Department of Education and Secretary Duncan to make sure that we do get poorly housed and homeless kids into housing and get the services they need. I think this is a really important area of coordination. So looking forward to hearing that you will work with him and that we can hear more about this.

SEC. DONOVAN: I'm very glad you mentioned it. It's a very, very important issue, and I appreciate your leadership on this. I've already begun meeting with Secretary Duncan and his aim (ph) on it. There was $75 million, as you know, in the Recovery Bill at Department of Education that we believe can very effectively work with the billion and a half dollars in prevention funding that we have. We're in the process of drafting joint guidance to go out to all of our continuum of cares and to schools around the country to make sure that that gets implemented in an integrated way. And I'd be happy to share that with your staff as it's being developed.

SEN. MURRAY: Okay, very good. Just because a child doesn't have an address doesn't mean they shouldn't get an education, so I appreciate it.

SEN. BOND: And a shameless plug, Senator Murray and I are sponsoring an Education Begins at Home Act to promote home visitation and the Ready to Learn Act.

SEN. MURRAY: (Crosstalk.)

SEN. BOND: So we've got different halves on there, but we'll be watching -- (crosstalk) --

SEC. DONOVAN: There's nothing shameless in that plug. That is a very important plug. Thanks.

SEN. MURRAY: Thank you, Senator Bond. With that, the record for this hearing will remain open for one week so senators can submit any questions for the record. And this subcommittee will stand in recess until Thursday June 18th when we will take testimony from Secretary LaHood.


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