Donovan: Congress needs to pass refinancing legislation

Legislation is urgently needed to help more homeowners refinance their mortgages, prop up the housing market and boost the economic recovery, a top Obama administration official said Tuesday on Capitol Hill. 

Housing and Urban Development Secretary Shaun Donovan told lawmakers that there is a small window of opportunity to help potentially millions of homeowners refinance their loans into lower interest rates. 

"There’s a real urgency here because interest rates today are at the lowest level they have ever been for a 30–year mortgage," Donovan told the Senate Banking Committee. 

"But as the economy continues to improve, the expectations are this window of record low interest rates may not last for a long time."

Senate Democrats are circling around several pieces of legislation, all backed by the Obama administration, that would make it easier for a wider range of underwater borrowers to rework their home loans into historically low rates. 

"While we have made substantial progress and the administration has taken action administratively to make millions of Americans eligible for lower interest rates, more needs to be done," Donovan said. "But these additional steps require Congress to take action."

Panel Republicans, including ranking member Richard Shelby (Ala.) said any proposals need to go through the committee to ensure there is bipartisan agreement and to shake out any potential knots. 

Democratic Sens. Bob Menendez (N.J.) and Barbara Boxer (Calif.) are planning this week to introduce a measure that makes changes to the Home Affordable Refinance Program (HARP) to provide streamlined financing for homeowners who are current on their payments and have loans through Fannie Mae and Freddie Mac, which were taken over by the government in 2008 and have survived on nearly $190 billion in taxpayer support. 

Menendez said according to a preliminary analysis by the Congressional Budget Office the measure would stop bailouts for Fannie and Freddie and save taxpayers' money because few homeowners will default and end up in foreclosure.

"I think this is a slam dunk," he said. 

Sens. Jeff Merkley (D-Ore.) and Dianne Feinstein (D-Calif.) also are crafting legislation to remove other barriers and expand refinancing opportunities.

The Merkley proposal would allow underwater borrowers whose loans are not government-backed to refinance into new mortgages with the Federal Housing Administration (FHA). The bill would give all underwater homeowners a chance to apply their savings from refinancing into rebuilding their equity, require Fannie and Freddie to pay closing costs and require loan terms of no more than 20 years so homeowners can "get their heads above water faster," Donovan said. 

The Feinstein bill would tackle another problematic area and provide refinancing for homeowners with loans on their primary residence that aren't backed by the FHA or Fannie or Freddie. To be eligible, borrowers must be current on their loans, have minimum credit scores and have loans no larger than the current FHA conforming limits. 

The proposal also would restrict refinancing to loans up to a loan-to-value ratio of 140. That means lenders interested in refinancing deeply underwater loans would need to write down the balance of these loans before they would qualify.

Under the measure, the FHA would create a separate insurance fund for the streamlined refinancing program. 

Donovan said legislation that is under construction could help between 1 million and 12 million borrowers, saying the changes could easily help many more than the lowest estimate. HARP has helped more than 1.1 million borrowers although it was designed to reach about 5 million. 

In October, housing officials revamped HARP to help underwater homeowners modify their loans to get lower monthly payments but Donovan said because those changes aren't enough, Congress should move forward.

He said the four largest servicers are processing 750,000 refinancings under HARP 2.0, saving borrowers bout $2,500 a year.

Donovan stressed that nationwide refinancings up more than 100 percent in March from a year earlier and he expects the numbers to continuing rising especially when fees are dramatically cut next month for FHA refinancing.

High fees charged by mortgage servicers, sometimes upward of $15,000, can make it more difficult for homeowners to refinance and that with more competition those fees can be reduced, Donovan said. 

Obama is headed to Nevada, one of the hardest-hit states during the housing crisis, to discuss the need to expand refinancing efforts, Donovan said. 

White House spokesman Jay Carney has said said the measures should be able to gain enough support to get through Congress and to the president's desk. 

"These are the kinds of initiatives that traditionally enjoy bipartisan support," Carney said.