HEARING OF THE SENATE BANKING, HOUSING, AND URBAN AFFAIRS COMMITTEE SUBJECT: NOMINATION HEARING CHAIRED BY: SENATOR CHRISTOPHER DODD (D-CT) WITNESS: SHAUN DONOVAN, TO BE SECRETARY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT LOCATION: 538 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C. TIME: 10:00 A.M. EST DATE: TUESDAY JANUARY 13, 2009

SEN. DODD: The committee will come to order. And let me apologize to all of you. This is a sort of a juggling match going on here today. I said downstairs, it's sort of like a New York day. Senator Hillary Clinton is going through. We started her confirmation hearing this morning about ten minutes ago in the Senate Forum, excuse me, in the Heart Hearing Room. So as a ranking member of that committee, I needed to be there for that opening.

Senator Schumer is a very busy person. He's a member of this committee today but also is the presenter of both Senator Hillary Clinton before the Senate Foreign Relations Committee and will be here shortly to introduce Mr. Donovan, the Secretary -Designate of the Department of Housing and Urban Development. What I'm going t do is, to get underway here, is make some opening statements. And as soon as Senator Schumer arrives, we'll pause and allow him to make a formal introduction of you, Mr. Donovan, if that's all right with you.

And then I'd also note that for those as well we have the confirmation hearing of Arne Duncan, the Secretary Designate of Education. So on the three committees on which I serve, Foreign Relations, chairing Banking, and Health, Education, and Pensions, we have confirmation hearings going on simultaneously this morning. So with that said, let me turn, if I can, to an opening comment on Mr. Donovan, and I commend him for his willingness to take this tremendous responsibility of serving as the Secretary of HUD. This is a very, very challenging job, and we're -- I think all of us are very excited about your nomination, I say, Mr. Donovan.

I want to welcome my colleagues, first of all, back to the Committee on Banking, Housing, and Urban Affairs for the first hearing of the 111th Congress. As you know, the committee was extremely busy, to put it mildly, and productive, I might add, in the previous Congress. And I expect this year to be every bit as busy with an agenda that is already extremely crowded.

As my colleagues know, this Thursday January 15th, the committee will hold its second hearing to consider the nominations to the Securities and Exchange Commissions, the Federal Reserve Board, and the Council on Economic Advisors. And we've tentatively scheduled a hearing for the 27th of this month on the Madoff securities fraud issue. I have a distributed a draft agenda to committee members on both sides, and I'm consulting with all members to develop a schedule for upcoming hearings as the committee and the Congress continue to be confronted with a very fragile financial system.

Today, we are considering the nomination of Mr. Shaun Donovan, Commissioner of the New York City Department of Housing Preservation and Development to become the Secretary of the Department of Housing and Urban Development (HUD). Let me point out that we are extending to Mr. Donovan this morning the same courtesy we showed to our colleague, Senator Mel Martinez, my good friend from Florida, for whom the Committee, under Chairman Senator Sarbanes, also held a nomination hearing for the job of the Secretary of HUD prior to the president actually taking office. And I don't think a bad precedent to be setting, given certainly the issues we're facing today, but also to allow an administration to get up and moving as quickly as possible.

It is our view then, and it is our view now, particularly given the urgency of our economic situation, that we ought to help get the president's cabinet in place as quickly as possible. Senator Schumer has arrived. I announced you'd be here shortly.

Mr. Donovan, let me welcome you to the committee. You have been nominated for a job fraught with significant challenges yet, for that very reason, I think there's some tremendous opportunities as well, not only for you but for our country. For the past three or four years, the country has been facing a growing housing problem that had its origins in the scourge of predatory lending that has resulted in record high foreclosure rates.

This housing crisis has been a primary cause of the deepening recession to which none of us are immune. Across the country, between 9,000 and 10,000 homeowners face foreclosures every single day in our nation. Foreclosures in my state are up over 71 percent over last year, and it's expected that we will have more than 13,000 subprime foreclosures in the next two years on top of the 17,000 that have already occurred in Connecticut. And my state is not anywhere near as adversely affected as the states of California and Arizona, Nevada, Florida, others that are facing far more serious problems with the foreclosure rates. Nationwide, cities such as Bridgeport, Connecticut, which had inordinately high rates of subprime loans, are struggling to keep themselves afloat as those loans reset one by one and families find themselves with nowhere or very few places to turn.

I recently met with the leaders in my own state where I heard about the toll this crisis is taking in the minority community particularly. Some say this crisis will result in a net loss in homeownership rates for African-Americans, wiping out a generation of wealth, gains and opportunities. But let there be no doubt that this crisis today affects every American in one way or another. In all, by some counts, we can expect some 8 million homes to go into foreclosure absent some form of additional action.

Unfortunately, the current Administration was slow to acknowledge the housing problem, and when it finally did was timid, in my view, in its response. Even now as foreclosures tear apart neighborhoods and wreak havoc on our economy, the administration has refused to use the authority or funds we gave it in the Emergency Economic Stabilization Act to tackle the foreclosure crisis head on, despite the Congress' crystal clear intent when that law was written.

Surprisingly, and unfortunately in my opinion, HUD has not played a central role in addressing the housing crisis. Frankly, it has been, to quote last Friday's National Journal, and I quote them here "at best, a second string player" end of quote, following in the wake of other governmental departments with far less expertise in housing than the professionals at HUD. Indeed, as the cover page of CQ Weekly says, "The housing crisis remains at the core of the economic woes" end of quote. Put simply, we cannot address our economic crisis until we address the underlying housing crisis. And to do that, we need an active, aggressive, and well-run HUD with leadership that is confident in its mission and unafraid to act. As President-elect Obama has himself said, "HUD's role has never been more important," and I agree with him.

Unfortunately, HUD has been mismanaged and ridden with scandal in the last several years.

Let me be clear that these problems did not arise, I might point out, under the very able leadership of my colleague on this committee, Mel Martinez, who did a remarkable job, in my view, while he was at HUD, understood these issues, came from a background committed to it with his own previous experience in Florida. I would also say that in recent weeks, Secretary Preston, who has been the new secretary of HUD -- a nomination we moved very quickly through this committee, as my colleagues will recall -- I think has done a very, very good job. He's had a short tenure but done a very good job over these last several months.

But fundamentally, HUD has been left adrift at a time when bold leadership and clear direction were never more important. Just last week, I learned about the Wright family in my home state of Connecticut. And every one of my colleagues can share similar stories.

The Wrights are a middle-class, working class family from Windsor, Connecticut, and they're right now in danger of losing their home. Like thousands of families across the country, the Wrights were lured into a mortgage they were assured they could afford but discovered they can't, not because they acted irresponsibly but Mrs. Wright became pregnant with their second child, and she ran out of her paid sick time that she's been afforded as a teacher. For those reasons and circumstances, their income has declined, costs have risen, and all of a sudden that home, which was the source of the great wealth creation for that middle class family is now in danger of being lost. There are literally millions of Wright stories all across this country of ours.

Mr. Donovan, this is the kind of story being repeated in every community across our nation. With the right leadership, I believe HUD can be an effective partner in helping families such as the Wrights. This is an opportunity you have to restore HUD as a leading voice in addressing the crisis facing our country today.

I would say to my colleagues that Mr. Donovan is the most experienced nominee for HUD Secretary this committee has seen in a long time. Certainly, Mel Martinez, I mentioned, did a remarkable job and brought a strong background experience to the issue, as did Andrew Cuomo when he served as Secretary of HUD. But it's important to understand the background of Mr. Donovan, because I think you'll all be heartened by the wealth of knowledge he brings to this nomination.

In addition to degrees in architecture and public administration, Mr. Donovan has run the multi-family program at the Federal Housing Administration and was, for a time, the Acting Housing Commissioner. He has worked in the private non-profit sector as a housing developer and he has worked as a managing director of a large, multi-family mortgage company. Since 2004, Mr. Donovan has been the Commissioner of New York City's Department of Housing Preservation and Development, and in that role managed 2,800 employees and helped develop and manage Mayor Bloomberg's New Housing Marketplace Plan, which I'm sure Senator Schumer may reference in his introduction, one of the most remarkable plans not only in New York's history but anywhere in this country, a very exciting idea.

Beyond the statistics and the numbers that so dramatically underscore Mr. Donovan's accomplishments, I want to welcome him for the kind of leadership and vision I am confident he will bring to the department at a time when such leadership is needed so desperately. An example, as early as 2004, before most of the rest of the country was focused on the subprime crisis and the foreclosures they would lead to, Mr. Donovan told a Newsweek reporter that he was worried about the coming flood of foreclosures. That's at least a year and a half before other people were even talking about the issue at all. And he warned about the impact it would have on homeowners and neighborhoods across this country.

Mr. Donovan sees the role of HUD as being more than a caretaker for physical housing structures or as a mortgage insurance company. Mr. Donovan, I believe, understands the danger of stovepiping within this arena, and sees HUD as the federal government's primary tool to help build communities, an agency that helps to provide housing opportunities for homeowners, for renters along a spectrum of incomes and ages. He also understands, in my view, the need to coordinate housing with transportation, including public transportation and transit, to improve access to jobs and other economic opportunities. We had the chance to discuss this in a meeting we had in our office, and I was impressed that you understood the holistic approach to the housing job and function and the problems that we need to address.

And finally, Mr. Donovan is a man, I think, of integrity who has shown a proven ability to work constructively with all interested parties. We have letters, that I'm going to ask consent to be included in the record, from a wide variety of housing groups, from realtors, the homebuilders, the Low Income Housing Coalition, and many, many others, all expressing very enthusiastic support for your nomination.

So Mr. Donovan, we welcome you to the Committee, the leadership you offer to this critically important department and, more importantly, the hope that you offer millions of families at this uncertain moment. I look forward to your testimony after I give my colleague here, Senator Shelby, the former chairman of the committee, a chance for an opening statement, we'll turn to Senator Schumer for his purpose of introduction. And then we'll get to you, Mr. Donovan. Senator Shelby.

SEN. RICHARD SHELBY (R-AL): Thank you, Chairman Dodd. Thank you for calling today's hearing on the nomination of Mr. Shaun Donovan to serve as Secretary of the Department of Housing and Urban Development. You're expediting it, and I think you should in this situation. I look forward to the committee officially receiving that nomination and having the opportunity to review your record in depth. But right now, I want to welcome you to the committee and to your family the same thing, and I know you'll introduce them in a few minutes.

Mr. Donovan's previous experience, as Senator Dodd has said, at HUD as Deputy Assistant Secretary for Multifamily Housing and in New York City where he presently serves as Commissioner of Housing. I hope this experience will allow you to get a quick start on addressing, as Senator Dodd pointed out, HUD's many longstanding deficiencies. In particular, I'm very concerned about the financial health of the Federal Housing Administration. And we've talked about that in my office a little bit.

While most mortgage delinquencies have been concentrated in the subprime area market, FHA has not been immune and has experienced a similar increase in its own delinquencies. I believe the FHA program poses significant risks to taxpayers and therefore requires diligent oversight by you as the secretary. This situation is one that requires your immediate attention, I believe, after you're confirmed as HUD secretary.

Unfortunately, FHA is not HUD's only troubled program. There are many other HUD programs, including the Section 8 Voucher Program and the Public Housing Program, that are also in need of review and reform. Mr. Donovan, the task of reforming and ensuring the efficient operation of the department presents significant challenges. I believe, however, that the greatest responsibility that you would have as the incoming secretary will be to address, as Senator Dodd has mentioned, the unprecedented crisis in the housing market. The sooner our housing market is stabilized, based on sustainable fundamentals, the sooner I believe we will see a recovery in the market and in our economy. Short of that, I think we're in for some deep trouble.

I look forward to hearing your plans, somewhat this morning, on how to reform HUD programs and more importantly, how HUD can help stabilize -- I know you can't do it by yourself -- our nation's housing markets. Once again, we appreciate your appearance. We look forward for your tenure and helping you along.

SEN. DODD: Thank you very much, Senator Shelby. Let me notify my colleagues that when Senator Schumer completes his introduction I'll be then turning to my colleagues for any of you who would like to make some opening comments before hearing from our nominee. Such a busy guy this morning, we've been running around here, and I appreciate your patience. The cameras -- the sound system may need you to do that. I apologize, sir.

SEN. CHARLES SCHUMER (D-NY): Okay. Thank you, Mr. Chairman. And I want to thank you and Ranking Member Shelby for the honor of introducing Shaun Donovan. And before I begin, Mr. Chairman, I do want to say this. These have been just amazing times for the country and for the committee. And we couldn't be under better leadership than yours. And I really thank you for stepping up to the plate at a time when the country so much needs it. Thank you, and I want to thank Senator Shelby as well for his passionate keeping our feet to the fire through these times as well, which proves a very important and salutary function.

Mr. President -- really, Mr. Chairman, rather, I'm really honored to be here to introduce Shaun Donovan as nominee for HUD. After being relegated to the shadows for so long, housing is now front and center on our national agenda. And at this crucial time, there is no one who has more experience, stronger judgment, and a better sense of balance to take the helm at HUD than Shaun Donovan. In history, there's been a great debate over whether the times make the man or the man make the times. Shaun Donovan is the perfect person for these troubled times in housing, and he will clearly improve our housing policy in a dramatic way, changing the times.

Shaun's career has ensured that he has seen the housing universe from all sides. He's worked for housing non-profits, as you mentioned, Mr. Chairman. He's worked at HUD as the Deputy Assistant Secretary for Multifamily Housing, and as acting FHA Commissioner; in the private sector with Prudential Mortgage Capital, focused on FHA and affordable housing investments; and most recently as one of the best commissioners of New York City's Department of Housing and Preservation Development that we've ever had.

In his latest role, Commissioner Donovan spearheaded the city's new housing marketplace plan, a $7.5 billion effort that aims to build and preserve 165,000 units of affordable housing in New York City. The program, thanks in large part to Shaun's leadership and commitment, developed innovative preservation and new production tools, chief among which is the New York City's Acquisition Fund to create a level playing field for those developers committed to building affordable housing in one of the most expensive real estate and rental markets in the world. And it is so difficult to get things done in New York City. And to build the number of units for people who need help, affordable housing that Shaun has done, is nothing short of a miracle.

I've worked closely with Shaun on a number of preservation projects during his time at the helm of HPD. Together, he and I worked to save the birthplace of hip hop music, a 100-unit affordable apartment in the Bronx. While we were ultimately unsuccessful in that effort, Shaun demonstrated his characteristic willingness to think outside the box to improve affordable housing, taking the unprecedented step of rejecting the sale of the project because the purchase price was inconsistent with the state and city Affordable Housing Program, whose benefits the developer hoped to continue to enjoy. And this is going to have a major effect on helping keep tens of thousands of New Yorkers in their homes.

Shaun's also been a critical partner in our two-year effort to save Starrett City, the largest federally subsidized housing complex in the country. Starrett City was a haven for the working class. And there again, because the Section 8 and other certificates expired, developers were going to come in and just change the total nature of it, eliminating 5,000 units of affordable housing so desperately needed in New York. This complex was almost sold for a dramatically inflated price, and it would have left 14,000 tenants out in the cold. I worked with Shaun day in, day out for two years through intense negotiations, all sides, tenants, developers, community people. And as a result, the owners recently announced they have chosen a bidder for a preservation sale of the complex, keeping those units going. Again, this was an amazing and complicated job that couldn't have been done without Shaun's leadership.

And finally on the most pressing issue of the day, housing and foreclosure crisis, Shaun has led New York City's efforts to find and comprehensive counseling, legal services, and education center to help struggling homeowners to avoid foreclosure. And under Shaun's leadership, HPD has also demonstrated that home ownership for low and moderate income people is not an unachievable goal. Of the more than 17,000 new or preserved affordable homes that HPD has created under its plan, 17,000 affordable units, only five owners have lost their homes to foreclosure, a number that barely registers when compared to the 2.2 million homeowners who entered foreclosure. To take that model that we used in New York City and expand it nationally would be a blessing for the Wrights and many others throughout the country.

So I look forward to working with Commissioner Donovan on these and many other housing community development issues during his tenure. I know that he is the best possible steward for this crucial agency at this moment in history. And I thank the committee for the opportunity to introduce him.

SEN. DODD: Senator, thank you very, very much. Chuck, we appreciate immensely your leadership as well. I've said to others through this last two years, this committee is -- and I sent around to all the members sort of a background of what we've been through. It's an awful lot, and I want to thank every member, and certainly Senator Schumer. You've been tremendously valuable in this process. And I know you're busy with the Joint Ag and the Joint Economic in a leadership role and on Finance, so an awful lot going on. So we thank you immensely and thank you for introducing the Secretary Designate.

And I will now turn to Senator Reed and then Senator Bennett and we'll go down the line for any opening statements my colleagues would like to make about this nomination. And then, Mr. Donovan, we'll hear from you. Jack.

SEN. JACK REED (D-RI): Thank you, Mr. Chairman. I would ask that a statement be included in the record, and I'd like to make just some brief comments. First, I think this is a superb selection. I commend the president. I've had the privilege of working with Mr. Donovan in many capacities. His experience, as illustrated by Senator Schumer, and his temperament and his talent, as demonstrated by his success in so many other areas of endeavors in the housing area, particularly, commend him immensely to this committee and the Congress. And I wish you well in your daring point and task.

You have a responsibility for some of the most vulnerable families in this country. In addition to that, you are one of most -- really one of the most significant figures in the financial situation of our overall economy, with the huge role that the mortgage agencies play, the huge role that HUD policy plays in our economy. And in those two areas, you will be challenged, but I think you are more than capable of meeting and exceeding these challenges.

In the last several years, your budget has not been, I think, adequate to the task, particularly in terms of the managerial expertise and skill that you need. Many of us have reflected upon the issues facing the Federal Housing Administration. Some of them are basic, about having the computer systems, the personnel, the ability to operate as a sophisticated financial institution in a very complicated world. So you'll have to face those challenges right off the bat as you start your preparing the budget for the forthcoming year.

As all of my colleagues have alluded to, this foreclosure problem is absolutely crippling. It cripples the hopes and dreams of families, their confidence to participate in the economy. Unless we can get a footing, some traction with respect to these foreclosures, I don't think we'll begin to see the economic expansion that we're all hoping for. And your role is going to be absolutely critical in that, along with your colleagues and the president's team.

There is one issue too that is consistent in the good times and the bad times, and it's an unfortunate reflection upon this country, the homelessness issue. We have had soaring homelessness problems in the boom of two or three years ago, and now they're even more exacerbated in this deplorable situation we face financially. We have all worked together. We have bipartisan legislation that has been supported by the Bush administration that is ready to go. And we hope that something -- at least I hope that you can tee up and help us get through in the next few months.

Again, I think the president has chosen wisely. And I'm looking forward to working with you, and I wish you. Thank you, Mr. Chairman.

SEN. DODD: Thank you, senator, very much. Senator Bennett.

SEN. ROBERT BENNETT (R-UT): Thank you, very much, Mr. Chairman. Mr. Donovan, you and I had what I consider to be a very useful exchange in my office, as you know how I feel about all of these issues. I won't take the time of committee to go through them again. But I add my welcome to you and my tribute to you for your willingness to undertake public service at a time when sometimes that's not the most financially remunerative thing you can do, particularly with somebody with your background and your potential.

And as you will discover from editorials, editorial cartoons, comments made, maybe not the most psychologically rewarding thing to do.

SEN. DODD: We know that, don't we?

(Laughter.)

SEN. BENNETT: But if you can rally the personnel at HUD behind you in your enthusiasm for the job that you have and lead those folks in the direction that I know you want to go, when it's all over you can look back on it with a great deal of satisfaction. So I salute you for your willingness to undertake it, and unless something amazing unforeseen should pop up, I pledge you my vote in confirmation and support. Thank you.

SEN. DODD: Thank you very much, senator. Senator Menendez.

SEN. ROBERT MENENDEZ (D-NJ): Thank you, Mr. Chairman. Mr. Chairman, with your expertise of Irish history, I would have pronounced the commissioner's name "Donovan." But I keep hearing you say "Dunovan," and I'm going to defer to the chairman and say "Dunovan" for the purposes of this hearing.

(Laughter.)

I'm sure if it assures his passage, he won't quite mind whichever one is the correct one.

SEN. DODD: I don't know. What do you say -- (crosstalk)? What is it?

SHAUN DONOVAN: I say "Donovan" actually.

(Laughter.)

SEN. MENENDEZ: Well, I always say the chairman's right, so in any event --

(Laughter.)

SEN. DODD: You're going to start calling yourself "Dunovan" -- (crosstalk).

(Laughter.)

It might lead you well, at least for the hearing. (Crosstalk) --

SEN. : Senator Menendez, the chairman is always right.

(Laughter.)

SEN. MENENDEZ: I thank my esteemed colleague for reaffirming what I thought was the case.

(Laughter.)

Commissioner, I just came a little while ago, along with the chairman, from Senator Clinton's nomination at my other committee assignment. And while HUD never seems to gather the press attention as other agencies do, to American families your future role at this agency might be far more important as it relates to their lives. And I agree with those who say that HUD has been sitting at the kids' table, and it is time for that to change.

I grew up in a tenement building in Union City, New Jersey. I understand first-hand, the value and importance of our housing programs. These programs are more than dollar signs in our budget and more than paperwork they often entail. They are about providing a place to call home. I believe that every family, every man, woman, and child, deserves a place to call home. Home is where you are brought to when you are first born. Home is a place in which you are nurtured and grown, the place where you live through the good and the bad. It is the place that you start your day and end your day. It is the place where you leave from to go get married and come back to with your family. It is a quintessential part of the American ideal.

Unfortunately, we have seen a real toll on the notion of home taking place over the last several years. Regulators fell asleep at the switch. Foreclosure rates have spiraled out of control, and now we have a snowball effect as families find a padlock on their homes and often find themselves without a place to call home. So as homelessness increases and families struggle to make ends meet, the need for housing and all of its related elements that your department are going to be able to pursue are going to be even greater.

These programs can be better, and Americans expect them to be better. So now is the time for great leadership within HUD to get our housing programs back on track. I appreciated your visit with me. I appreciate the comments I have read in your testimony and agree with you when you say that housing was at the root crisis that we are in, and it must be part of the solution. And I hope in the question and answer period, between jumping between committees -- this new report by Financial Week that talks about the FHA being ill-equipped to stop the migration of predatory of subprime lenders to the rapidly growing sector of U.S. backed home loans raising respective another cycle of lending abuse -- is something we can talk about and something that you'll look at.

And finally, I do think, having lived -- living right across the river from where you presently are the commissioner, that your experience in New York prepares you well for this role. And I look forward to hearing your thoughts today on such issues as foreclosure, the elements of how we need to challenge the public housing that exists today, Section 8; Hope 6; Fair Housing, and some of these other issues. These are tough times for American families, but I believe HUD, under your leadership, can be a place for hope again to have a place to call home. Thank you, Mr. Chairman.

SEN. DODD: Thank you very much. Good statement. Senator Martinez.

SEN. MEL MARTINEZ: Mr. Chairman, thank you very much and Shaun, welcome. I am so pleased to welcome you to the committee and to congratulate on your appointment. And I look forward to your confirmation. First of all, I can't help but reminisce about eight years ago almost to the day, sitting at your table and my youngest at the time was the same age as your youngest is today, six-years-old. By now, he was already out of the room. So I congratulate you on that.

(Laughter.)

Anyway, the fact is you are unusually qualified for this job. And I would dare say, Mr. Chairman, in spite of your graciousness, I do think he's far more qualified than I was or perhaps even the Attorney General of New York was at the time. I think Mr. Donovan brings some unusual qualifications to this job, and so I think it's an excellent choice by the president-elect.

There are a number of troubling issues. You and I had a lengthy discussion on them and I should also say, by the way, that at the time that I went to HUD, Shaun Donovan was there and my recollection was that I tried mightily to keep him there, but he chose to go back to New York, understandably, and go home. I'm glad that you're back to HUD, even if eight years down the road. But, it is a better job than the one I was offering you, actually. So, you have moved up.

The housing crisis -- I will only echo what others have said -- is questionably at the very root and the very heart of the economic crisis our country faces today and until we solve the foreclosure problem and the home ownership problem and the mortgage crisis, we're not going to really come out of this recession. No where is it worse perhaps than the state of Florida where we are facing tremendous problems economically; all related to the situation with housing.

Unemployment is up, housing unemployment is dramatically up, more and more families are threatened with loosing their home and we have just not done enough -- in all that we have done -- to attack that problem aggressively and I am just hoping that you will have, as my colleague Senator Menendez said, not a seat at the kids' table but a seat at the main table; insist on it, be there. That is where you belong and that is where you need to be to help solve these very vexing problems.

I'm concerned, as I mentioned to you, and I'll hit on just a couple of these issues, about the role of FHA; whether FHA is up to the task at hand, whether it's properly staffed, whether we need to focus on more funding. I also concern myself about the viability of FHA. I've always believed risk based pricing may be part of what they must do. But, they have been getting an increasing share of the market place as every other vehicle has vanished and I think it's important that FHA be up to the task so they can be part of the solution as we seek to get out of this current crisis.

I'm also very interested in what you might believe is the future of the GSE's. Unquestionably, HUD has a role in their regulation. One of the more frustrating aspects of my tenure at HUD was my inability, along with that of others, to get true and serious regulations of the GSE's in a way that only recently occurred, but almost a little late.

We now have to deal with what is the future of the GSE's. How should they be structured and what is the mechanism by which they, perhaps, should be completely private or just how they should be handled.

Something that I also discussed with you privately and I want to make sure that I mentioned to you is RESPA reform. There is no question that if we had had better disclosure and better information as it relates to home ownership today, we would not have the problems we have. More and more American families are finding today (as the resets?) of their mortgages comes about, what the rest of the story really is.

So I believe RESPA reform is something which time has come. I commend the current HUD secretary for having made some efforts in this regard; much more needs to be done and I commend it to your agenda.

Lastly, I'll mention something that I think has been one of the real remarkably good stories at HUD and that is the issue of homelessness. The effort to end chronic homelessness led by Phillip Mongano(?), the fact that we brought all of the agencies and entities of the federal government to working together to try to end chronic homelessness, has in fact yielded great results. I'm very proud of my embryonic role in that but I also believe great credit goes to those who have continued the battle to bring this to a national focus.

I know you have some expertise in what New York has done in this regard and I would hope that you can continue the passion for an issue that has very, very small constituency. There are no votes to be gotten among the homeless. It is just the right thing to do for a compassionate country like ours.

So, anyway, I thank you for your willingness to serve and that of your family and look forward to working with you in your new capacity.

SEN. DODD: Thank you very much.

Senator Akaka.

SEN. AKAKA: Thank you very much, Mr. Chairman. Thank you for holding this hearing today.

I want to add my welcome to Commissioner Donovan and congratulations for your nomination to the Department of HUD. And I also want to welcome your handsome family, Liza and Milo and Lucas as well, to this hearing.

My state of Hawaii suffers from a severe lack of affordable housing. The national Low-Income Housing Coalition's Out of Reach Report ranked Hawaii as the most expensive state for housing. Having a job is not enough to ensure access to adequate housing. It will take long-term, coordinated federal, state and county efforts to expand access to affordable housing.

Commissioner Donovan, I look forward to working closely with you to help improve access to affordable housing and I smilingly would greatly appreciate it if you would take the time to visit Hawaii when you're secretary of HUD. It would be helpful to see the work being done there by our Department of Hawaiian Homelands.

The Native American Housing Assistance and Determination -- (inaudible)-- programs administered by DHHL in Hawaii provide essential housing assistance and homeownership opportunities to native Hawaiians. DHHL raises the standard of living of all residents by increasing the number of affordable housing units available statewide.

In addition, I'm greatly concerned about our nation's homeless; in particular, our homeless veterans. Veterans comprise approximately one-third of the overall homeless population. As chairman of the Committee of Veteran's Affairs, I have worked to enhance and improve VA services for homeless veterans. Permanent, supportive housing is one of the most effective ways to end homelessness.

I hope that if confirmed, you would work in conjunction with VA to expand this program and make it available to more veterans. In addition to continuing to work with my colleagues on both this committee and Veteran's Affairs Committee, I will work with you, Commissioner Donovan, to help homeless veteran's find and maintain adequate housing and support services.

Mr. Chairman, I would ask that my full statement is placed on the record.

SEN. DODD: We'll do that for all members.

Senator, I was hoping that you might suggest the entire committee go to Hawaii for a hearing on that. Sometime next January maybe? (Laughter).

SEN. AKAKA : I would extend that to the committee too.

SEN. DODD: There would be no interest in that hearing.

Let me, if I can -- what(?) I do, Mr. Donovan, is to swear you in. So, I will ask you to stand and raise your right hand.

Do you swear to affirm that the testimony you are about to give is the truth, the whole truth and nothing but the truth, so help you God? And do you agree to appear and testify before any dully constituted committee of the United States Senate?

MR. DONOVAN: I do.

SEN. DODD: I thank you for that.

Welcome to the committee and we're prepared to hear your opening comments.

MR. DONOVAN: Mr. Chairman, Senator Shelby, and distinguished Members of the Committee, thank you for the opportunity to appear before you today. I would also like to thank Senator Schumer for that kind introduction. Before I go any further, I would like to introduce my family: my wife, Liza, and my two children, Milo and Lucas. Without them, and their constant and steadfast support, I would not be here.

I am honored and humbled by President-elect Obama's decision to nominate me as Secretary of Housing and Urban Development -- an agency with a critical role to play as government partners with the American people to overcome the greatest economic crisis we have faced in many decades.

I want to thank the Committee for the speed with which you scheduled today's hearing, and the time you have made in your busy schedules to visit with me, and share your thoughts and views regarding housing in the United States.

Throughout my career, I have been committed to affordable housing policy and development. In my line of work, we often talk in terms of numbers of units and dollars spent. That is our common language. But it does little to convey the reason I am in this field.

America's homes are the foundation for family, safe neighborhoods, good schools and solid businesses. A home represents and confers stability: a base from which to raise our children. These things have not changed, but the world has. I am here before you today because I hope, should you confirm my nomination as HUD Secretary, that I can contribute to restoring this vital sector to health and making quality housing a possibility for every American.

My first job after graduate school was at the Community Preservation Corporation, a non-profit lender and developer of multifamily housing. While there, I saw firsthand the difference that effective public-private partnerships can make in developing decent, safe and high-quality housing.

In this, the federal government was often a valued and an essential partner. But I also experienced the headache of trying to navigate regulatory barriers or having deals fail because of inflexible programs.

Later, in my work at the Department of Housing and Urban Development I saw how government can work to catalyze effective community development. While I gained an appreciation for the benefits of well-crafted and responsive government programs, I also saw a need to untangle and streamline policy and programs that too often led to missed opportunities.

Because of these experiences, I believe that the best way to ensure access to safe, decent and affordable housing is through strong partnerships among the government, private and non-profit sectors. Government can play a unique role in incentivizing the other sectors and removing barriers to the development of quality housing. That is why when I became Commissioner of New York City's Department of Housing Preservation and Development in early 2004, I engaged the agency in a top-to-bottom strategic planning process. This resulted in new and innovative policy and programmatic solutions, a more appropriate alignment of staff with mission, and better measurement of results.

Let me give you two examples: with contributions from our non- profit and for-profit partners, New York City created an Acquisition Fund that leveraged significant philanthropic support. In one of the most competitive real estate markets in the world, this pool of funds enables housing developers to acquire land and create affordable housing for hard-working families. We also changed land use policy to respond to the challenges posed by the New York City market.

In order to incentivize the creation of more housing for low- income families, the City undertook a series of rezoning that will allow the development of up to 500,000 units of housing and crafted an inclusionary zoning program that will generate 6,000 affordable units. I believe that together we can create programs that will spur the development of affordable housing in our cities and towns across America.

In the past, owning a home was emblematic of financial success. Sadly, we know that the landscape has changed. Clearly, the most important public policy decision facing Congress and the new Administration is how to best ease the economic pain that millions of American families are feeling right now because of our unsteady housing markets. As President-Elect Obama has said, the housing crisis has shaken not only the foundation of our economy, but the foundation of the American Dream.

It is estimated that approximately 2.2 million homes went into foreclosure in 2008. One in ten American families who owns a home is in financial trouble. Housing is at the root of the market crisis we are now experiencing and HUD must be part of the solution. President- Elect Obama is committed to working with you and your colleagues on an economic recovery plan that helps strengthen our housing and mortgage markets.

We must ease our foreclosure crisis by helping Americans stay in their homes. How we structure this assistance is important. We certainly do not want to pursue policies that encourage irresponsible behavior from lenders or homeowners. But as President-Elect Obama stated, if my neighbor's house is on fire, even if they were smoking in the bedroom or leaving the stove on, right now my main incentive is to put out the fire so that it doesn't spread to my house.

That is why helping a family avoid foreclosure not only keeps a roof over their heads, but also protects the value of surrounding homes and prevents the deterioration of our neighborhoods. Keeping families in their homes means keeping our communities safe, healthy and strong. These are very complex undertakings that will require a cross-agency, broad-based approach. HUD needs to work with the Treasury, the Federal Housing Finance Agency and the Federal Deposit Insurance Corporation to help stabilize our housing markets.

At the same time, we need to make sure our mortgage markets, and other financial markets, are transparent, open and fair. We need to work together to reach a bipartisan consensus on how to reform the outdated and often overlapping regulatory system that failed our citizens in the run-up to the current crisis.

If I am confirmed, I look forward to working with the Committee as it examines how to proceed, not only in my capacity as HUD Secretary, but in my oversight roles with regard to the (TARP?) and the Government-Sponsored Enterprises. If HUD is to help fix the cracks in our economic foundation, we also will need to implement reforms within the department itself.

As you well know, there are challenges and persistent management issues facing HUD, including modernizing IT systems, overhauling sluggish human resource systems and strengthening contract oversight. If confirmed, I will be open and honest about such challenges and will work with you in effectively addressing them.

There are three particular issues I would like to highlight today. The Federal Housing Administration has capacity issues that require immediate attention. FHA's share of the single family mortgage market has grown from 4 percent in 2005 to 21 percent today. In fact, for new home purchases, FHA now has a 35 percent share according to the most recent, albeit, preliminary data.

Second, there have been significant budgetary issues regarding the renewal of expiring Section 8 rental subsidies, for both the tenant and project based programs. Approximately three million American families are served by these programs. It is HUD's responsibility to make sure that it is delivering rental subsidies in the most cost effective and efficient manner possible. I look forward to working with Congress, this Committee and the Committee on Appropriations toward that goal if I am confirmed.

Third, there are a series of steps that could strengthen the department overall. We must foster a culture of excellence and innovation. I have had the opportunity to work with some very talented professionals at HUD and they deserve the tools to succeed. It is critical that we restore HUD as a respected research institution. Both you and I need to know what works, based on objective analysis and reliable data, so that taxpayer dollars can be spent wisely and effectively.

I pledge to make management reform a high priority. Only in this way can we meet the enormous housing challenges facing our country. Through HUD, we can catalyze the creation of a market for energy efficient homes, lower the utility bills of families and decrease the subsidy costs of the government.

Here, the Department can lead by example; by making efforts to green its own portfolio of public and assisted housing. HUD can help develop communities that are livable, (walkable ?) and sustainable. By joining up transportation and housing, HUD can give families the choice to live closer to where they work and, in the process, cut transportation costs.

HUD can help low-income families gain greater access to security and opportunity by expanding fair housing efforts, extending resident choice and using housing programs to help families become self- sufficient.

I also pledge to you to make HUD a model of evidence driven government. As I have in New York City, I would set goals and metrics for each of our priorities, so that we can clearly and openly show what we have done well and where we can do better. We can leverage the agency's vast national network of state and local governments, along with non-profit and for-profit real estate partners, to stimulate the production of workforce and mixed-income housing, and to help preserve our existing affordable housing stock.

HUD does not build homes; our partners do. They share our passion, and have the talent and capacity to do this work.

I would like to conclude by saying again how honored and humbled I am to be before this committee. I have worked with HUD's programs from both the inside and the outside and am intimately aware of the challenges facing the Department. I have also witnessed the positive impact that HUD's programs have on neighborhoods and people's lives and if confirmed by the Senate, I look forward to working with you to build a HUD that exists to do the people's business that is responsive to current market challenges; and that ensures decent affordable housing for millions of American families across the nation.

Thank you and I look forward to your questions.

SEN. DODD: Excellent. Excellent opening statement.

Thank you for the willingness to do this too.

This is not an easy time to be in public life and public service and I think Senator Martinez made the point that deserves to be underscored; your willingness to take on these challenges -- and let me take advantage of the Chair's position here to underscore something else that Senator Martinez said, and I'm confident that the in-coming administration will hear this -- I want you at that table.

So, I'm going to be insistent that you be at that table as these debates and discussions go forward so when the so-called principals are meeting about our economic conditions, and if I hear you're not there, I'm going to be terribly disappointed, because we really do have to have this integrated approach on these issues.

Too often, not to include HUD, --(inaudible)-- one of the reasons may have been in the past and some may have been absolutely legitimate; there is no longer any legitimacy to that (point?) at all in my view. So, I hope you'll insist upon it, but I want you to know you have an ally here that will insist upon it as well.

We have been joined by Senator Casey and Senator Tester and let me ask if either one of you would like to make a brief opening comment at all here. I know we've all got busy schedules as well, but Senator Casey, any comments?

SEN. CASEY: Mr. Chairman, I'll be very brief and I'll submit a longer statement for the record.

Mr. Donovan, we're honored you're here. We're grateful that you have put yourself forward again for public service. I know we'll have a lot of questions; mine will focus not just on today but throughout what is your long tenure, on foreclosures and the challenge we have there as well as an equally, urgent challenge of making sure the troubled asset relief program is operated in a way that gives the American people confidence that it is going to improve our economy; there are some doubts about that now and we have to take steps to improve it.

I know you're not the sole arbiter of how that works, but I know you play a role and I'm glad that you recognized that in your opening.

Finally, just as we go forward; priorities that pertain to Pennsylvania of course, that we'll be paying attention to. I'm not sure we'll get to all of that today, but we're grateful to for your work already leading up to this nomination, and we certainly hope that your confirmation goes well -- I'm sure it will -- and we're honored you're here.

Thank you very much.

SEN. DODD: Senator Tester?

SEN. TESTER: Thank you, Mr. Chairman and I want to thank you, Mr. (Kennedy ?) for being here and your family, and I appreciate you all being willing to do this job, put yourself up.

I too am going to be very, very short. I'll just say this; I appreciate you coming to my office last week so we could visit about some issue with housing in rural America and in Indian country. I appreciate your openness to those challenges that we face and my questions will revolve around that mainly.

Most of all, thank you all for being here. I really appreciate you putting yourself up for public service in this venue. It's a very, very important job and I know you'll do a great job once confirmed.

SEN. DODD: Thank you very much, Senator.

I'm going (have?) the clock on for 10 minute rounds; we don't have a full (compliment?) here, so I'm not going to be too rigid about that, but we'll try and give everyone a chance to move along on this.

My intention would be, I say to my colleagues, assuming we're complete here today; my hope would be that by the end of the week, I'd be asking us to convene for a business session -- maybe even off the floor of the Senate -- to vote on the nomination of Secretary Designate Donovan.

So, if you'll keep that in mind -- maybe Thursday or Friday depending upon the floor and the schedule of the floor.

Let me begin, if I can Mr. Donovan, with a -- in my opening statement I mentioned that if you're confirmed as secretary you'll be confronted with some enormous challenges, and all have said that here this morning. So I'm going to be pushing you from the outside issues -- we talked about those obviously, and some will come internally as well; getting the institution, the Department back on its feet.

So, let me open with sort of a broad opening question here for you, to give us a sense. As someone who has administrated a significant department in New York City, how you will determine your priorities as secretary, with so many pressing issues? Second, give us a sense of your management agenda at HUD as well.

It's a rather open ended question, but I'd like to get a feel for how you'll approach those two issues.

MR. DONOVAN: Senator, first of all, let me say I think there's no question -- you heard it in my opening statement today, you've heard it I think from every member of the committee -- that the foreclosure crisis that's facing the American people, American families, American neighborhoods, is job one for HUD and that we must immediately, should I be confirmed, moved towards addressing that crisis. I think you've heard President-Elect Obama say very clearly that his administration will put forward a bold and comprehensive plan that will address this crisis.

Clearly, HUD has a very important role to play in that crisis. The Federal Housing Administration, through the Hope for Homeowners Program and a range of other initiatives -- the Neighbor Stabilization Program -- will have a key role to play in doing that; so, that will clearly be the first priority in terms of addressing the issues facing the country.

I also want to make clear that rental housing must continue to be a critical part of an overall national housing policy and I think, perhaps too often, we have tended to overlook at the federal level, the possibility that rental housing can be an important and critical opportunity for people across the country as well and that we need to have a balanced housing policy that addresses both sides of the housing market.

So, I will pledge also, should I be confirmed, that I would focus on the improvement of, and the importance of, HUD's rental programs as well.

Finally, on the management side, I think there's no question that there is much that needs to be done; whether you look at the systems, the information technology systems that exist today at HUD, whether you look at the personnel systems, training, the resources that are available to staff at HUD, or a range of other issues, they clearly are critical pressing issues.

At the center of my management style though, I think if you talk to my staff, I drive them crazy. I'm a numbers guy. I'm somebody who always wants to know -- I meet monthly with every single team within my agency, I have a series of critical indicators that demonstrate progress to me or where we're not making progress in the agency.

I feel both internally at the department, but also frankly, should I be confirmed, in my relationship with the Senate and Congress more broadly, you have not had the information that you need to be able to make judgments about how the agency is running, whether we're making progress, whether the budget is the right budget for the agency; I pledge to you, should I be confirmed, that I will do everything that I can to make sure that you have all the information that you need to be able to work with HUD to set direction for National Housing Policy.

SEN. DODD: I thank you for that. in fact, you anticipated a point I was going to make, and that is on a monthly basis, I'd like to arrange for the members of this committee or their staffs, to meet with HUD (whether?) you would designate, to go over and share with us as current a set of numbers and statistics we can have on this foreclosure issue and the number of rental housing units and so forth.

So, we're not just relying on the occasional hearing when you show up here, but have an ongoing basis of information so we can -- (inaudible)-- during this crisis and be kept very well informed as to what sort of progress is being made or where there are areas where we need to pay more attention.

Let me if I can, mention two issues. One, I'd like to hear you comment a bit more specifically about the foreclosure issue. I point out to my colleagues -- all of this committee is more than aware of all of this -- we began this committee in 110th Congress in the first week of February -- literally two years ago the very first hearings we had were on the foreclosure issue. I think we had like 30 of them over the last two years, plus some efforts we've made in this area.

It was not always easy, obviously. There was a lot of resistance to some of these ideas, but nonetheless, this committee paid a lot of attention to the subject matter.

Sheila --(inaudible)-- and others have made some suggestions on how more aggressively to deal with these numbers; the eight million homes we're now talking about that could be facing foreclosure in the country. I wonder if you might share some thoughts on those ideas.

Second, in rental housing -- again, I want to thank Senator Shelby and the members of the committee because when we passed the Housing Bill last summer, one of the things we included was a permanent affordable housing program that you may have watched. We're relying on funds coming out of Fannie Mae and Freddie Mac to support that effort on a permanent basis; obviously, that's changed.

I raised the other day, the possibility that as part of the stimulus package these two trust funds which Senator Jack Reed has been so involved as others have, that we might get some this assistance to help out in that affordable housing area. In my state of Connecticut, the average two bedroom apartment -- you've got to make $21 an hour to afford it.

I don't need to tell you that pretty much excludes most people that need rental housing and I'm sure the numbers around the country are close to that or certainly reflect that kind of pressure with the lack of stock and with more people going into foreclosure, obviously the number of people seeking rental housing is increasing simultaneously.

So, I wonder if you might just put a little more flesh on the foreclosure issue and then on whether or not you believe -- and again, I realize that the stimulus package has a lot of hands on it. The administration is listening to a lot of us up here on this -- but whether or not you think there's an argument to be made, including some of these --(inaudible)--

Given the fact that so-called -- I don't really like this expression because I think it excludes too many other things -- "shovel ready" -- tentatively, there are "shovel ready" projects in affordable housing that could put people to work but also deal with a legitimate housing need.

MR. DONOVAN: Absolutely.

First, to address your question about some more specifics about the foreclosure issues; as you know, there have been already early discussions with the transition and yourself, leadership (in the ?) Senate and the House on the disposition of the next round of the TARP funding. The current administration as well as the transition have had discussions about the potential for moving that funding forward.

We believe a significant effort to try to keep homeowners in their homes using some kind of modification program is an important part of an overall comprehensive plan. We also are looking carefully at the data coming out of that plan in terms of what numbers of folks are re-defaulting, trying to understand that data to make sure that any plan could be structured to make sure that we have incentives for long-term success for homeowners and that we don't end up with the government just protecting loans that otherwise might go bad. So we're trying to balance those incentives very carefully in thinking about that.

I would also say that, more specifically, I think, two extremely important efforts, specifically under HUD's responsibilities. One would be the HOPE for Homeowners Program that I mentioned earlier. I know that you and others have ideas, which I think are very important to look at in ways to improve that program, to look at the fees, the loan-to-value ratios and other aspects of that program. And should I be confirmed, I look forward to working in more detail to make sure that program is a very effective alternative for foreclosure mitigation. Initially, 400,000 were the number that had been expected. There were just over 100 applications in the first month for that program. So I think it's clear to everyone that there need to be some changes to make sure that program is effective.

And then finally, I would mention the neighborhood stabilization program. Now, there was $3.9 billion that was part of the Housing and Economic Recovery Act passed this summer, as you know. We worked very closely on that, and I think arrived at a very good compromise in terms of how to address the program. The situation specifically of the effect that foreclosures are having on neighboring homes is a very serious one.

From my own experience in New York where my agency at one point owned more than 100,000 apartments taken through tax foreclosure. We saw very directly the importance of stabilizing that housing and making sure that renovation of that housing can have a positive impact, not just for that home but for the surrounding community.

And so making sure that that $3.9 billion is effective, that it gets out quickly, and that it's used effectively is absolutely critical. And I think there, one very important aspect is going to be making sure that HUD provides the technical assistance necessary to localities that are dealing with this problem because for many localities it is a new problem and a very, very severe problem.

SEN. CHRISTOPHER DODD (D-CT): Well, thank you for that, and as I mentioned, Jack Reed just walked back in the room and is our leader on affordable housing issues, and I'm sure he'll raise the issue as well about the two thumbs and whether or not something the stimulus package could be included in those. So let me turn this over to Shelby.

SEN. RICHARD SHELBY (R-AL): Thank you Chairman Dodd. Mr. Donovan, the roots of our current mortgage crisis, and I think we have to go back and learn something from what went wrong. The Federal Government as you already know and you'll be a big part of, is already tried a variety of interventions in our mortgage and our financial markets. Most of these have demonstrated, up to now, little success. In some ways, we may have actually made the situation worse some people argue by injecting further uncertainty into our markets.

I've argued myself that any efforts to fix our financial system should begin with an evaluation of what exactly went wrong. If we don't know what went wrong, how are we gonna fix it' What do you see as the causes of our current financial crisis from your perspective'

MR. DONOVAN: Senator, that's a tough question. And it is, as you said '

SEN. SHELBY: But it's important one.

MR. DONOVAN: Absolutely, I agree. It is a very important question, and I think it's one that deserves a significant amount of study as well in terms of understanding it. Let me say, frankly to you, I think there is blame to go around.

SEN. SHELBY: Sure.

MR. DONOVAN: And I think, as you've seen, President-elect Obama is someone who is not one to say it's this or that. He's somebody who can say, 'let's look at a problem and understand all the different issues' and to say 'we can all take some responsibility' and we ought to look at all the various causes.

SEN. SHELBY: So shouldn't we find out what went wrong'

MR. DONOVAN: Absolutely.

SEN. SHELBY: I mean we're not up here today to say 'I've got you, and I've got you,' and this and that. I mean gosh, we got a housing crisis on our hands, which is probably the root cause of a lot of our financial problems '

MR. DONOVAN: Yep.

SEN. SHELBY: Are tied into it, so if we don't deconstruct what went wrong and how to fix it, we'll never fix it, will we'

MR. DONOVAN: I agree with you that we need to understand the causes of the problem. And again, I think that there are issues that occurred in the market really in every part of the market, and that we need to look comprehensively at it. And that means we need to understand the incentives for lenders, for brokers, for a whole range of different players, rating agencies. It's a very complex system, as you know. We also know, frankly, that there were homeowners who got loans and ended up in homes that shouldn't have, and I don't think that we should take an approach that it was one side or the other. We should look comprehensively at the issue.

And you have my pledge that, should I be confirmed, I would absolutely work closely with you to make sure that we understand those issues. I also would say that, looking forward, we do have a major challenge. And this is also to go back to Senator Dobb's question, Chairman Dobb's question. We have a major question of what the future of our mortgage finance system will look like. And that again is a complex question that will require much study and much discussion, which, should I be confirmed, I look forward to having with you and all the members of the committee.

This is something that we must make sure that we have a system that is transparent, that is open, that is fair, and that is flexible that continues to harness the power of the private sector in this country in order to be able to drive innovation and change and entrepreneurialism. But at the same time, we have to make sure that consumers, as we've seen over the last few years, have all the information that they need, are protected, and have the ability to make choices of programs and lending products that work for them. And I think we've seen that in New York City in the work that we've done that you can ultimately help low-income and moderate-income homeowners successfully become homeowners.

SEN. SHELBY: FHA, we touched on this earlier, and we all know that they're playing a larger and larger housing role than they were. The crisis in our mortgage markets has not been confined just to the subprime market. Over the last two years, we've witnessed increasing delinquencies in FHA single-family business. In '08 alone, the economic value of FHA's insurance fund failed by over $14 billion, a decline of almost 70 percent of the fund's value since '07. At this same time, FHA's presence in the market has increased dramatically.

Is it possible, in your judgment, that we could see a continued decline in FHA's financial health potentially wiping out the fund's remaining value if we're going down this road that we've been going'

MR. DONOVAN: Senator, this is a critical issue and one of the very first things, should '

SEN. SHELBY: But you'll have to deal with it.

MR. DONOVAN: I be confirmed, that I will have to understand in detail. What we know at this point is, as you said correctly, that the market share has gone up dramatically from roughly 4 percent in 2005 to 21 percent today close to roughly a third of all new home purchases are financed by FHA today.

There are recent studies. One of them showed recently that the reserves in the FHA have declined to roughly 3 percent and, as you know, 2 percent is the required reserve level for FHA, so clearly an issue of concern, a decline from roughly 6.5 percent to 3 percent just over the last year. What I would also say, given the work that I've done thus far with the agency review team, I do not have the full information that I need to be able to tell you today '

SEN. SHELBY: I understand that.

MR. DONOVAN: Whether we're looking at something in the short term or long term that is a serious concern. We also know that the scores, the credit scores, under the FHA program have actually increased somewhat. So there are different signs in terms of what we've seen within the portfolio.

And what I would pledge to you today is that one of my first priorities would be to look into exactly what has happening in FHA, ask for a full accounting of the health of the MMI fund, and to come back to you as quickly as I possibly can so that you can understand the full import, and so that, should I be confirmed, we could together begin to shape the future of the FHA to make sure that it continues to be a contributor to the recovery of the mortgage market in the U.S.

SEN. SHELBY: Fraud in lending, big problems always, on several occasions, HUD's inspector general has raised concerns regarding FHA's lax approach to reducing fraud in its mortgage insurance programs. For instance, the Inspector General reported last year that FHA does not consistently refer potentially fraudulent loans to the inspector general's office. I suspect you've had to deal with the issue of fraud before, both at HUD and your present job. Could you share with this committee briefly some of your efforts to eliminate fraud in the programs you administered on behalf of New York City, and how will that help you here'

MR. DONOVAN: Absolutely, I think this is a critical issue as you think about the increase in volume that we just talked about at FHA without a corresponding increase in staff or changes in the systems. That is clearly an issue that needs to be addressed very quickly to make sure that there is increased scrutiny of the lending going on in the FHA programs. In terms of my experience in New York, this is something that has to be a top priority, not just within FHA but for HUD overall, is to make sure that every dollar of assistance gets to the people that it is intended by Congress to serve.

So a few things that I would say about our efforts in New York City, first of all, we run the fourth largest voucher program, Section 8 voucher program, in the country at HPD, and we have gone to enormous lengths, working in partnership I will say, with HUD to try to get access to the very latest systems and data about exactly program incomes for participants to make sure that there are regular checks on those income levels within the programs. And frankly, I will tell you that the level of terminations that we've seen under my tenure in the Section 8 program in New York City has gone up significantly as a result of increased scrutiny to make sure that those dollars are serving the recipients that they're intended to serve.

At the same time, we do a lot of work around new housing development or renovation of housing. I work very, very closely with the Department of Investigation in New York City and the commissioner there to make sure that we screen and check very closely all of our partners within the programs. And I have a record, I hope you would agree, that I can stand on and that I can be proud of in terms of the way that we've operated those programs in New York City.

SEN. SHELBY: One last question, HUD's role in disaster relief, that's a huge role that HUD has played. We witnessed in New York City after the 9/11. We witnessed it in the south, including in my state of Alabama, after Hurricane Katrina. In both instances, HUD has been tasked with helping to rebuild. I know that rebuilding efforts in my state of Alabama have been mixed, and probably in Mississippi and Louisiana too, at best. Often, funds have not reached those in need nor have they been distributed in a fair, timely, and equitable manner by HUD. You've had experience in this relief. How would you rectify that, Mr. Donovan, as Secretary of HUD'

MR. DONOVAN: Senator, again you've raised a very, very important issue for HUD. The numbers that I've seen show that in terms of just the two terms, recent terms, last eight years at HUD, HUD has been tasked with distributing close to $30 billion of disaster assistance during that period. That compares to less than $2 billion in the prior eight years before that.

So there's been an enormous increase in the level of disaster funding that's run through HUD. And frankly in terms of the systems, in terms of the personnel, in terms of a range of management reforms, there needs to be a very significant effort to transform the way that HUD responds to disasters. So this is clearly a top priority in terms of what I would be facing should I be confirmed.

SEN. SHELBY: Mr. Chairman, I think you've been generous with my time. I just wanted to say I look forward to supporting this nomination, working with the secretary, and I have a number of questions that I'd like to submit to the secretary for the record that I'm sure you would get back with me about.

SEN. DODD: I'm trying to do that, and let me just encourage that. That that's the case, being mindful that we'd like to, if we could, get the nomination moved '

SEN. SHELBY: Sure, I wouldn't hold the nomination up.

SEN. DODD: OK, fine. That'd be '

SEN. SHELBY: I would just submit them to the '

SEN. DODD: OK.

SEN. SHELBY: I feel it is important as well.

SEN. DODD: Senator Jack Reed.

SEN. JACK REED (D-RI): Well, thank you Mr. Chairman. Calling up, obviously on the Chairman's point about the Housing Trust Fund, again, we've communicated that this is a very useful and effective way to stimulate the housing markets to build affordable housing, and despite the gains that may or may not have been made over the last several years, there's still a dearth of adequate affordable housing. So I would reinforce the chairman's point about working hard with your colleagues to incorporate something like this in the stimulus package.

The other point, in listening to Senator Shelby whose excellent questions raise the issue of FHA, their increased market share from 4 percent to 21 percent is, I think just for the record, a function of, frankly, the collapse of a lot of alternative mortgage issuers. That's fair to say, you know, from you.

MR. DONOVAN: Absolutely, and in fact, if you look at FHA's market share combined with the GSE's you're looking at over 90 percent of the current mortgage originations in the U.S.

SEN. REED: So I mean essentially, and I think this was a conscious decision of this, the Bush Administration with Secretary Preston, without the mission to FHA and then Fannie and Freddie to go out there, the mortgage market in the United States would be more abundant. We'd be in a more precarious position at the moment.

MR. DONOVAN: Absolutely Senator and I want to make sure I'm clear. My point is that all of the efforts to make sure that FHA is running its programs in the most effective possible manner would be directed at insuring that there continues to be a stable, open, fair, reliable mortgage system in the U.S. and that there is access to credit.

And in the long run, obviously, making sure that the broader market returns and that private lenders do return to the market in significant measure is a top priority. In the short run, we have to make sure that FHA and the GSEs are contributors and are ensuring credit is available to American homebuyers while at the same time protecting taxpayers in terms of the quality of those loans and the nature of the programs.

SEN. REED: And one of the ways that I think we have to protect taxpayers is ensure that FHA has all of the tools they need, the computer systems, the resources, the qualified personnel. And my distinct impression over the last several years is that that has not been a priority in terms of resources at HUD, and I would hope that you'd be able to alert this committee very quickly as to what you'd consider the needs, technical needs, so that in fact we can avoid fraud, we can ensure that the benefits of FHA are directed to those who deserve it, we can ensure that the companies that participate in the FHA programs are legitimate, bona fide, and principled members of the mortgage market. I hope you'll do that.

MR. DONOVAN: Senator, you have my commitment; should I be confirmed, I will absolutely do that.

SEN. REED: One of the other areas, and you're very familiar with this from your work at HUD previous, it is not just affordable housing. It's safe and affordable housing, and your work had lead paint exposure. Again, just your thoughts about how some of these programs, weatherization, lead abatement could be incorporated into the stimulus package not only to provide stimulus, obviously, but also to ensure that the housing stock that taxpayers are supporting is safe and healthy to children and families.

MR. DONOVAN: One of the things that my agency is responsible for is removal of lead paint. On an inspection front and a housing code enforcement front as well as in terms of the renovations that we do on privately owned housing and it's a critical issue. I'm very proud of the record that in New York City lead poisoning has declined by about 80 percent over the last 10 years, and I think HUD's programs have been an effective help in terms of declining lead poisoning around the country. And so, I do think through a range of programs there is an opportunity, whatever that funding vehicle may be, to make sure that lead poisoning is, as close as we possibly can, eliminated as a threat to our children around the country.

SEN. REED: Thank you. There is another major responsibility you'd have; that's public housing. And they have traditional, been running significant backlogs of capital fundings necessary to make improvements like energy efficiency. Last fall, I was in Providence where we had one of our housing units, which was kicking off an energy efficiency program that is going to save the housing authority hundreds of thousands of dollars over the next several years.

Environmentally, all of it's smart investment, and I'm just wondering, specifically with respect to these types of programs but more generally, how are we going to support out public housing programs with real resources'

MR. DONOVAN: Well, Senator, this is something that if you look at the estimates, and I know this directly from New York City, but look at the estimates nationally, some of them are as high as a $30 billion or even higher backlog in terms of public housing capital needs. And I say to you we are looking closely at this as an issue, particularly in terms of the ability to get renovation going quickly, to generate jobs as part of the recovery package. I will also say that I believe strongly that investments in the short term in this kind of renovation can lead to longer term operating savings.

SEN. REED: Mm-hmm. (In acknowledgement.)

MR. DONOVAN: And that that's a very important balance that we need to look at in terms of how we make smart investments today for longer-term savings. It's something that has been a priority in New York City, recognizing that close to 80 percent of the carbon emissions in New York City come from our buildings, and that number is about 40 percent nationally. Renovating our building stock with leadership from HUD on that issue is a critical priority and can really be smart investments that lead to savings in the long term.

SEN. REED: Well, thank you Mr. Secretary. Again, I look forward, with great enthusiasm, to supporting your nomination and to working closely with you on behalf of the people of this country.

MR. DONOVAN: Thank you.

SEN. DODD: Thank you, Senator, very much, Senator Martinez. Welcome, Senator Corker as well and '

SEN. BOB CORKER (R-TN): Thank you sir.

SEN. DODD: And Senator Johnson has joined us as well.

SEN. MEL MARTINEZ (R-FL): Thank you, Mr. Chairman. Obviously, we discussed and have throughout the hearing the current housing crises and the problems that I describe to you during my opening comments about the situation in Florida, which are indeed rather dire. And I was wondering what you could tell me about your thoughts on how HUD can engage in this problem, and specifically if you would address your thoughts on the proper implementation of the funding provided by Congress for the Neighborhood Stabilization Program and your thoughts on how HUD, beyond the HOPE for Homeowners Program, or even with that program, what we can do to prevent foreclosures and keep people in their homes.

My experience, and what I've heard on the HOPE for Homeowners Program, is that banks just don't participate. They don't want to take the pain. It just hasn't worked. So how can we make that program work' What else do you think that you can bring to the table from a HUD perspective and the neighborhood stabilization program'

MR. DONOVAN: First of all Senator, I'd say clearly this program has to work nationwide, but very specifically, it needs to work in Florida because the latest estimates that I've see are that roughly 50 percent of all the foreclosures are in California or Florida '

SEN. MARTINEZ: That's right.

MR. DONOVAN: As we're experiencing today, so absolutely critical and as we talked about when we met last week, there are great organizations on the ground in Florida that are beginning to address this. Given the scale of the crisis, however, what I would say is that the capacity right now nationally is uneven and that I think it's very important that HUD begin to focus on technical assistance making sure that there's the infrastructure in place to deal with the foreclosure problem and the effect that vacant, deteriorating homes are having on neighborhoods and on the values of all homes.

In fact, I think we would all recognize that stabilizing housing prices is key in terms of an overall economic recovery. And so, I do think technical assistance would be a key piece of making sure that the neighborhood stabilization funding is effective as it's distributed as quickly as possible.

HOPE for Homeowners, again, I look forward very much to hearing your ideas and the ideas of the committee about that. From what I have heard and seen in terms of the way the program is operating, clearly the fees, the loan to value levels, I think Secretary Preston has proposed that the LTV be raised from 90 percent to 96.5; I believe it is. And that certainly seems like it could be an effective piece of an overall solution. This is something that I would want to look at and get to resolution fairly quickly on a comprehensive set of changes to the program and would look forward to your input on that.

SEN. MARTINEZ: Well, we can deal with this in more detail down the road, and I'm happy to do so. I hope you have met with Secretary Preston because I think he should '

MR. DONOVAN: I have.

SEN. MARTINEZ: Have some ideas on what has worked and hasn't worked, but we have two models out there right now that I can see. One is the model that the FDIC has been employing and the Indymac workouts, which seems to have not only worked but continued to work, and the projections are that it's going to help hundreds of thousands of homeowners. On the other hand, we have the HOPE for Homeowners Program, which essentially has maybe helped a couple of hundred families. That seems to me a pretty dire contrast, and something is happening that is different in one as opposed to the other, and I think it's a willingness of the financial institutions to really step to the table and do the right thing, which is really ultimately for the benefit of the communities, and everything else, to find a way to keep people in their homes.

Obviously, your work at HUD, subsidized rental housing was a big part of what you did, and particularly in this economy, we're finding increasing numbers of people who need rental housing in order to fulfill their dreams of a safe place to live. And my question really is what do you think HUD's role is in the continuing are of assisted rental housing on Section 8 modernization or revamping of the Section 8 program.

You know, I was always very frustrated about the unused vouchers that went unused to housing authorities that year after year got an allocation of Section 8 vouches well beyond what they could use. And we knew when there were gonna be incentives that they weren't going to use them all. And at the end of the year, there they were. So utilization of the vouchers in a more efficient was as well as the role of the GSEs in this current environment where frankly there are very few private sources for financing rental housing.

MR. DONOVAN: Yep, a couple of points I would just make on that. First of all, clearly HUD has not been a good partner with you and particularly the appropriations committees around providing clear, timely information about budget renewals. And this has to be a top priority because right now on the ground, and I see it every day, owners are unsure about the length of the contracts that they're going to be able to have. It's leading some owners to decide to get out of HUD programs, even though they'd like to stay in. The effects on residents and families are substantial, and so should I be confirmed, you have my commitment that one of the first priorities would be to make sure you have full information about the programs, the costs of those programs, and the renewals.

A second thing I would say is that there is a world of energy and innovation that has been happening over the last generation at the state and local level. As a local housing official, I see creative groups on the ground, but also in my work nationally, I've seen it in Florida. I've seen it in many other states around the country, and frankly, HUD's programs are in many ways a generation behind.

They have not kept pace with the changes that we're seeing on the ground, and I think the opportunity whether it's through incorporating the low income housing tax credit into what's being done on a very simple level or more broadly, creating the flexibility to allow local innovation to take place, looking at opportunities like the National Housing Trust Fund, which was mentioned before, which President-elect Obama has been a supporter of through the campaign and through the transition. All of those things need to be brought to HUD, and there needs to be a new spirit and a new energy given to support local efforts on rental housing.

Third and finally, I would say, we can't forget the renters in the foreclosure problem. If there is any innocent victim of what's happened out there it's renters in two or three or four family buildings that are being displaced, that are being evicted, and we have to make sure, whether it's on neighborhood stabilization or in other programs, that we're ensuring that those renters are kept in their homes as much as possible, or that we have alternatives for rental of homes that are being foreclosed to make sure that we do as much as we can to stabilize housing markets.

SEN. MARTINEZ (?): I hope you won't be shy about looking critically at programs that perhaps time has passed, well intended when began, but frankly have not fulfilled their mission and perhaps shouldn't be done at HUD. And, perhaps, they should be more aggressively done at the state and local level with assistance run programs perhaps, but not a government run out of HUD directing local people how better to do things which, in fact, I find often is not what really takes places. Local sometimes knows best.

One last question with the limited time I have left is on RESPA and you and I discussed RESPA a little bit. I just wanted to make sure that I had your answer on the record as to whether you plan to carry through with the implementation of the regulations that have been put in place recently by Secretary Preston and whether you support those and intend to carry through with them? And, perhaps, given a broader look at RESPA reforms that might come during your tenure?

MR. DONOVAN: First of all, I'll just say your work on this issue, I think, was really a model of leadership and I think that very, very important efforts to make sure that, as you spoke about in your opening statement, transparency, clarity, the ability of families when they're making what can often be the most important financial decision in their lives, to know what they're getting into, to have full information is absolutely critical.

I do know that there is pending litigation around the implementation of the new rule and, obviously, that's something I would need to look into should I be confirmed in great detail. So I can't give you a detailed answer on that. What I can say is that I think there, obviously, needs to be a balance. HUD should be interested in lowering the costs to homeowners of that transaction and that's critical, but I think we've also seen over the last few years the results of a focus exclusively on lowering costs or providing everyone a loan that they can get into without really focusing the affordability, the transparency, the full information that's available. And I think there can be simplification while, at the same time, greater protection for consumers to make sure that they are not just becoming homeowners, but that they can be successful as homeowners in the long term.

SEN. MARTINEZ (?): Thank you, Mr. Donovan.

I look forward to voting for your confirmation, hopefully, in the very near future and really wish you the best and hope you will stay in touch, if I can be of any help to you.

MR. DONOVAN: Thank you. I appreciate all your advice.

SEN. DODD: Senator, thank you very much. Senator Akaka?

SEN. AKAKA: Thank you very much, Mr. Chairman. Commissioner, in Native American communities, affordable housing development on trust lands requires unique and innovative approaches. Programs authorized by the NAHASDA have been vital to increasing access to affordable housing. Hawaii's Department of Hawaiian Home Lands, the DHHL, effectively utilized and leveraged Federal resources. Hawaii's housing costs are the highest in the country and homelessness is too prevalent. Despite the effective use of resources and severe need for additional affordable housing, the Bush Administration proposed reducing the budget for native Hawaiian housing programs. How soon do you anticipate reevaluating budgetary priorities and will you work with me to try and improve access to affordable housing for native Hawaiians?

MR. DONOVAN: Senator, first of all, let me say you have my commitment that, should I be confirmed, I will be as open and communicate with you as regularly as I possibly can about these types of issues because one of the things that I've seen, frankly, as a local housing official in, like, Hawaii, one of the highest cost markets in the country, if not the world, is that too often HUD's programs and, frankly, government programs in general are designed for the average place. And the types of housing problems that are faced and the challenges in Hawaii are not the same as they are in the rest of the county and, certainly, New York's challenges are different as well.

One of the things I've come to appreciate as a local housing official in New York City is that HUD's programs need to be more flexible. They need to be able to respond to the differences that we see across this country because the housing challenges are so different in different places. And so, one of the things that I feel would be a critical set of reforms to HUD's programs more broadly is to have the flexibility to deal with whether it's rural housing issues, whether it's issues in the homelands that you're talking about in Hawaii, or frankly, the issues that New York City is facing that don't fit neatly into the box of typical HUD programs. And so, absolutely, that is something that you have my commitment on.

SEN. AKAKA: Mr. Commissioner, I am concerned that too many working families were steered into mortgages that they could not afford or effectively understand the potential risks associated with products such as Adjustable Rate Mortgages and you've spoken about informing the people about this. What must be done to ensure that working families have the financial literacy skills to be better prepared to purchase a home, select an appropriate mortgage, and remain in their house when challenged with the potential financial hardships?

MR. DONOVAN: I'm very glad you mentioned this because this is a critical part of the overall comprehensive solution to the mortgage foreclosure crisis that we're facing. One of the things that we've seen in New York, but I think we've also seen it around the country, is that, too often when a family is facing foreclosure, the shame that they feel, the confusion that they feel, or even the anger that they feel, honestly, at the situation that they're in, they haven't been able to make the connections to their servicers to organizations that can help them, and so, it's absolutely critical, first of all, that there be outreach and education efforts. It's something that we've done aggressively in New York City and set up a program, a new 501©- 3 organization called, "The Center for New York City Neighborhoods" which has done exactly that kind of outreach and education. We also have to make sure that, frankly, all of the programs that we've talked about, whether it be the FDIC or the Hope for Homeowners, there needs to be the kind of education about those alternatives on the ground because they're only as good as the amount that a homeowner knows and can be educated on those options being available.

And so, making sure that we have the funding, the resources, available to do that outreach and to connect homeowners to the options that are available, whether it be a modification or a new mortgage or any of those other efforts. Those are critical pieces of making sure that low and moderate income homeowners can be successful.

And, finally, I would say, in the long run, that's something that we need to make sure is incorporated into the home buying process to begin with is full education, full transparency in the process.

We have seen in New York City with more than 17,000 homeowners through our New Housing Marketplace Plan only five foreclosures and I think a big part of the reason for that is the work upfront that we do to make sure that a homeowner can be successful. And the kinds of programs that you talked about are absolutely central to making sure that happens.

SEN. AKAKA: Mr. Commissioner, as I mentioned earlier, we have been working to improve the VA services for homeless veterans, since veterans are an approximate one-third of the homeless population. How do you intend to reach out to veterans who have unique needs in order to help them access services? Also, how do you intend to collaborate with the VA in order to provide support of services and case management to veterans in permanent housing provided by HUD?

MR. DONOVAN: Senator, first of all, I would say, as you know, President-Elect Obama, during his time in the Senate, was a champion of this issue. He worked closely with you and others on drafting legislation around this issue, and so, you can rest assured this will be a very high priority for the Obama Administration.

Second of all, I'd say, from my own personal experience in New York, this has been an issue where, as part of a team and I don't lead the efforts around--the Department of Homeless Services in New York City is the leader on arranging these issues, but I've worked very closely in terms of the construction of supportive housing and the provision of services in supportive housing, including with veterans.

As part of the team responding to this issue in New York, we have built a partnership with the Veterans Administration that has focused on the needs of veterans. You're absolutely right to say they are unique needs and, with supportive housing, I think what we've seen is that there can be a range of responses for individuals, for families, for veterans, for populations that do have specific needs and that we can tailor supportive housing and the range of responses around homelessness to meet those specific needs.

I feel very confident, with the progress that's been made in areas all over the country on this issue, that we can forge a deeper partnership with the Veterans Administration to ensure that we significantly reduce the number of homeless veterans that we're seeing in this country.

SEN. AKAKA: Thank you very much for your responses, Commissioner Donovan. Thank you, Mr. Chairman.

SEN. DODD: Senator Akaka, thank you very, very much. Senator Casey?

SEN. CASEY: Mr. Chairman, thank you very much. Mr. Donovan, I wanted to reiterate what I mentioned in my opening comments about the challenge that foreclosures present to the country. As you have said, it's been--I'm paraphrasing, but this problem has been at the root of our economic challenges in the country, really, the crisis we're living through.

I wanted to get a sense from you on a couple of levels. One is the kind of priority you will place upon this challenge? Secondly, also, how you evaluate certain initiatives that are already either on the table, so to speak, or in process and how you think we can improve on some of the initiatives that have been set forth already?

One thing that I think has been missing from some of the efforts or lack of effort by the prior administration is what--I was just looking at a news clip from January 8, a Wall Street Journal clip where President-elect Obama was quoted as saying, "I do think that the FDIC and Sheila Bear have had the sense of urgency about the problem that I want to see." That's consistent with what I believe that there has been lacking a sense of urgency, especially with regard to the Treasury Department under the current administration.

So I'd ask you, as a threshold question, (a) what are specific steps that you can take, actions you can take, in your first couple of months that you think will improve how we deal with foreclosures? And, secondly, related thereto, if you could evaluate the FDIC proposal, they way they've dealt with Indy Mack, in terms of their own kind of real time and current experience? If you just take those two questions first.

MR. DONOVAN: Clearly, this is something that has to be job one for HUD. There are both questions within HUD and FHA and then, more broadly, across the administration. The FDIC program is a very good example. I think that making sure the 'Hope for Homeowners' program is effective. The types of changes that we've talked about that are being considered by Congress at this point in discussions with the transition; that absolutely is an important piece of it. I do think that the FDIC program, as you rightly point out, has been a promising model and it's one that we're looking at very closely as part of a more comprehensive solution.

The latest information that we're seeing from it is that it has reached a significant number of people as was pointed out earlier by one of your colleagues, a larger number than the 'Hope for Homeowners' program and I think making sure that the incentives are structured correctly so that we minimize the re-default rate in particular is something that I'm looking at with the economic team to make sure that any program that encourages modifications is structured in the best possible way to maximize the success of the program, but also, to minimize the cost to the taxpayers. That's the kind of balance that we're looking at right now around the FDIC type program which, as you rightly point out, I think is a promising model.

SEN. CASEY: With regard to 'Hope for Homeowners' where do you think the problem is there? Do you think--of course, you've seen this from the perspective of running a major operation in New York and you've seen it in preparations for your confirmation, but is it one of implementation, the problems with 'Help for Homeowners' or is it one of the mechanics of it or the statutory unpinning of it or is it both or is it something else?

MR. DONOVAN: Senator, let me be frank with you, one thing that's very important to me is that I not give you more information than I can based on the limited amount of detail that I've been able, over the past few weeks with the agency team and with the existing administration, I will compliment Secretary Preston on his openness and the work that he's done with the agency team to try to make sure we have as much information as possible. And so, I can't at this point nor would I would want to give you a detailed final answer on that when, in fact, we're really looking into that information and getting more data from FHA and trying to understand all the details.

SEN. CASEY: It would help after the fact that, once you're there and you have a sense to evaluate more fully, if you could supplement the record or provide committee members--because when you have a program that's supposed to help 400,000 people and it's helping--what was the number?

MR. DONOVAN: It was, I think, 111 loans in the first month.

SEN. CASEY: A hundred eleven, not 111,000?

MR. DONOVAN: That's right.

SEN. CASEY: I think it helps us to maintain that sense of urgency to be able to evaluate that kind of an effort.

MR. DONOVAN: Absolutely. And we are looking at it closely now. Clearly, the upfront fees, the loan-to-value ratios, and a number of other parts of the program are things that we're looking at.

SEN. CASEY: I want to move -- I have just a few minutes left -- to the Troubled Asset Relief Program. An awful lot of frustration in the company that is hard as people, here, work to deal with an urgent situation that involves our credit markets and to help to stabilize our credit markets and, therefore, not only our economy, but to help stabilize the world economy. We did the right thing when we passed legislation in October. The problem now is there's a real concern about and, frankly, beyond concern, frustration and anger, about how it's been implemented.

I wanted to ask you a question about the Troubled Asset Relief Program as it relates to foreclosures. One thing that I've said and insisted on, as others have, is that any grant of further authority with regard to funding for that have as a central feature of it foreclosure prevention dollars and tens of billions, frankly, be made available.

What is your sense of, if you have an opinion now, you may not, but if you have an opinion now about how the TARP program has been implemented and, if you believe it has been implemented, poorly or in a way that's been lacking, what would you recommend to Treasury? And you're, obviously, part of this discussion. What would you recommend to the Administration as to how to fix it in terms of accountability and reform so that people don't get a sense that tens of billions of dollars go to banks and nothing happens; credit doesn't improve, lives are not improved in terms of foreclosures or other challenges the American people face?

MR. DONOVAN: Senator, it's an absolutely critical question and, in fact, as you know, discussions have already gotten underway between the current Administration, the transition, and the Congress and, in fact, yesterday, a letter from Larry Summers went to the leadership of the Congress to talk about the principles under which that next installment of money under TAR could move forward. And so, clearly, the transparency and the accountability for the use of the money, clear reporting, ensuring that there are clear restrictions and conditions for the institutions that benefit from that funding are all part of the commitment that was made yesterday in writing to Congress on the way that President-Elect Obama would utilize that funding.

One of the specific points in there was also, and I quote, "To launch a sweeping effort to address the foreclosure crisis," and so, we believe strongly as I think Congress does that there must be, as part of the next funding under TAR, the bold comprehensive effort that President-Elect Obama has talked about on the foreclosure crisis. And the elements of those, some of which we've already talked about, looking at the FDIC plan, making fixes to some of the FHA programs, those are all elements that we are looking at and that, should I be confirmed, I look forward to much more detailed conversations with you and your colleagues about in terms of what exactly the elements of that program would look like.

SEN. CASEY: Finally, I'm out of time but I'll put this on the table, not by way of a question but as a preview to a question I'll submit to you, on the Neighborhood Stabilization Fund.

We've heard a lot of feedback from institutions in Pennsylvania, government agencies, really, like the Department of Community and Economic Development, a major state economic development agency, with regard to the almost four billion in funding, the statutory language has been interpreted rather narrowly thereby constraining the discretion and ability of local decision makers to have the full benefit of this program.

We will present that to you in a more detailed form and hope we can work together to try to remove some of the constraints of that discretion, but I'm out of time. Thank you very much.

MR. DONOVAN: Thank you, Senator. As a local user of the Neighborhood Stabilization Program in New York, we've had some of the same concerns and I look forward to having those detailed discussions with you.

SEN. CASEY: Thank you very much.

SEN. DODD: Thank you very much, Senator. Before turning to Senator Menendez, let me thank Senator Casey for raising the question on the 'Hope for Homeowners'. I'm going to thank my colleagues here as well. This was a--we started late last spring trying to fashion some relief program and I say this respectfully, but to put it mildly, we had a lot of resistance from the Administration about intervening in this area other than just sort of a jawboning on the question which, obviously, was not producing much at all.

What you saw on the 'Hope for Homeowners' was sort of a creation created by a committee which isn't always the best way to operate by trying to fashion something that would gather sixty votes in the United States Senate to get us through and it's regrettable that it has not performed, but I think all of us understood in the beginning that, looking at it, there were so many hoops to go through, the piggyback loans and a variety of things were going to make this difficult, so I want to underscore Senator Casey's request because this is important.

I happen to agree with you. I think the FDIC approach is an interesting approach.

I don't know if, in response to some of these questions, whether or not you want to comment on the bankruptcy idea where Citigroup has just announced its support of in terms of making primary residences available through a bankruptcy judge to encourage workouts as a way of maybe getting more aggressively at the issue that can come before us, but we clearly need to go back and revisit either the FDIC idea or the 'Hope for Homeowners' as a way of getting something right here. We'd urge you and your team to give us some thoughts on that as quickly as possible so we can respond to it if, in fact, congressional action is necessary.

Senator Menendez?

SEN. MENENDEZ: Thank you, Mr. Chairman. Mr. Donovan, I appreciate the answers you've already given on public housing and Section 8 so I won't go over those, but I do appreciate those answers. Let me ask you, you know, the impact of the housing crisis and the foreclosure crisis is being felt across the country, but there is a universe that has no ability to protect themselves from the results and those are children.

There are about two million children who will be impacted by the foreclosure crisis; 330 school districts already reporting enrolling more homeless students in the first three months of the school years than they enrolled in all of last year. And, of course, this creates developmental delays for young children, it creates more difficult challenges for older children to stay in school, it makes it harder for enrolled students to succeed.

We've worked very hard. I know that we worked with the Chair in getting provisions here to try to help the school districts and I think there's something that we're trying to work on in the stimulus in the McKinney-Vento but, as HUD Secretary, would you commit yourself to working with those of us on the committee who are interested in this, particularly the needs of homeless children? And would you address family homeless to such mainstream HUD programs as Section 8 along with ensuring that HUD's McKinney-Vento Homeless Assistance Programs maintain the current incentives that penalize local efforts to address homelessness for children, youth and families?

MR. DONOVAN: Senator, thank you for asking a very important question because this is a troubling trend, frankly, that we're seeing in New York City and across the country as a result of the current crisis is an increase in family homelessness.

And so, there is a range of things, I think, as you correctly point out, that we need to do to respond to this.

One of the early promising efforts that I think can be addressed and you alluded to it in your question is how do we craft HUD's programs and responses to make sure that we have an effective prevention effort as well as the longer term supports like Section 8 vouchers and others for affordable housing? It is cheaper and, frankly, a much better result for a family to be able to stay in their existing home and it's one that we've begun to see some promising efforts in, in our home-based programs in New York City, so I think it can be an effective part of an overall response to family homelessness.

The only other thing I would say is that I think the good news here, if there is any, is that there has been a dramatic really movement across the country over the last decade or so that has focused energy around the problem of homelessness among individuals and that we've made an enormous amount of progress on that. And so, I think if we can focus the same kind of energy and partnership that we've had at the local level, and organizations in your state and others have been leaders on this, and partner it with HUD, we can make the same kind of progress on family homelessness that we have on individual homelessness. And part of that, frankly, is we had data and research that really showed the results.

One of the reasons why we've been able to make progress--I was part of a negotiation between the city and the state where we committed a billion dollars of new funding for ending homelessness. The reason that we could get such consensus is because we could demonstrate the fact that it actually saved money. That investing in supporting housing reduced the costs, rather it was of jail stays or shelters or a range of other more expensive and, frankly, much less humane approaches to homelessness. So I think we can bring that same kind of effort and energy to the issue of family homelessness as one that needs attention as you rightly point out right now.

SEN. MENENDEZ: Well, we look forward to working with you on that. Secondly, I mentioned in my opening statement about this report that just came out that the Federal government may very well be ill- equipped to stop the migration of predatory, subprime lenders to the rapidly growing U.S. backed home loans and raising the spectrum another cycle of lending abuse is something we definitely don't want to see.

HUD officials told our colleagues on the other side of the Capital that the FHA lacks the sufficient staff, the adequate technology, and the legal authority to screen questionable lenders who seek to participate in the issuance of Federally-backed loans. They went on to say that their oversight shortcomings aren't limited to lenders. Its reviews of appraisers are not adequate to reliably and consistently identify and remedy deficiencies. Talked about an audit found that the government's rosters of appraisers included over 3,400 with expired licenses and nearly two hundred that had been disciplined by the states and on and on and on.

So the last thing we want to see is a continuation of what happened in the private side of the marketplace move to the government side of the marketplace. That's something that you will be focusing your attention on when you --

MR. DONOVAN: Absolutely, Senator. That has to be a top priority at FHA.

SEN. MENENDEZ: And lastly, forty years after the passage of the Fair Housing Act, a big part of our country remains highly segregated. Of more than four million estimated Fair Housing violations annually, only 27,000 complaints are processed. Of these, HUD's Office of Fair Housing and Equal Opportunity only charged 31 cases and has failed, in my view, to address the continuing systemic discrimination nationwide.

As HUD's secretary, would you reform HUD's Fair Lending programs to ensure that discrimination in lending is addressed, and how do you view the role of HUD in addressing discrimination and segregation as we move forward?

MR. DONOVAN: Senator, thank you for asking that question because I think this is a very important piece of HUD that, frankly, too often doesn't get the kind of attention that it deserves.

And let me just say, personally, one of the reasons I do the work that I do is because when a family chooses a home, be it a renter or an owner, they choose, often, a public school for their child. They choose a set of services, how good is the policing in that area. They choose access to jobs. They choose so many things that affect the very fabric of their lives. And so if we can't ensure equal access to housing, I frankly think we can't fulfill the promise of opportunity that this country holds out. And so we must make sure that fair housing is a real priority at HUD.

And you quoted the numbers that those 31 cases are down from about three times that number in 2001 and about four times that number from the height of HUD's efforts. So I'm significantly concerned about the needing stronger enforcement of fair housing. And you have my pledge that I will look at that.

I also think that there is a very important report, the (inaudible) report that, as you know, I think, has some very important conclusions that I think HUD needs to look very closely at, in terms of understanding where it's fair housing efforts need to go.

SEN. MENENDEZ: Well, I appreciate your answers and the answers you gave me personally when we met, and I'll look forward to supporting your nomination.

MR. DONOVAN: Thank you.

SEN. DODD: Thank you very much. That was an eloquent answer, by the way, I must say to the question posed by Senator Menendez.

MR. DONOVAN: Thank you.

SEN. DODD: Senator Chester.

SEN. CHESTER: Thank you, Mr. Chairman.

And I recall back the last two Banking Committee hearings we had. One was four and one was five hours, so we've got plenty of time here and all that.

First of all, I want to thank Senator Akaka for his comments on veterans. I can tell you that in the state of Montana, we have far too many homeless veterans than anything your agency can do to help solve that problem, and it is a problem. We'd be much appreciated and would look forward to working with you on that.

You have said, Mr. Donovan, that you're a numbers guy. A recent survey indicated that housing adequacy in rural America is at about -- its inadequacy is at about 1.7 million or 6.3 percent, which is slightly above what it is in metropolitan areas. What steps do you, through HUD, think that you can do for rural America to help reverse that trend?

MR. DONOVAN: Senator, first of all, I must say, I really enjoyed the time that you gave me this past week and really appreciated hearing, very personally, the kinds of issues that Native Americans are facing in your state and elsewhere around the country, and it really made an impression on me. So I appreciate your taking that time.

One of the things -- while I do happen to be the commissioner in New York City today, the very first housing that I worked on -- HUD housing that I worked on in my career was rural housing in Oklahoma, in Kansas, in Louisiana, in Alabama, and in Arkansas. And I saw, literally at my very first experience, the kinds of unique issues that rural America faces.

And then, in my first experience at HUD, working with the Department of Agriculture on the Farmers Home program and a range of others that are really equally entwined with the programs -- Section 8 and other programs -- at HUD, HUD has a very important role to play, in my mind, in rural areas of the country. And so this has to be a significant issue.

One of the things -- and we talked a little bit about this when we met -- that strikes me as a housing official in New York is that there is not nearly the kind of flexibility in HUD's programs that there need to be to be able to respond to issues in rural parts of the country, and frankly, not an understanding that whether it's voucher programs or certain other programs that HUD has, that they don't work in the same ways in rural areas as they do in other parts of the country.

Give you a very specific example. One of the things I was faced with when I worked at HUD the first time was a series of opt-outs in properties in rural parts of the country, where the standard response was, "Well, we can issue vouchers, and they can go find another place to live." Well, if that place is 50 miles away or 100 miles away, you're asking that person or that family to leave their community, along with leaving their home, which is hard enough. And so it's just one example of the types of things where, you know, in very specific parts of the HUD programs, we need to be mindful of the differences that folks face in rural markets and to respond to them.

SEN. CHESTER: Well, I look forward to working with you on increasing that flexibility and in helping anybody that wants to try to understand it better, do that.

As long as you brought up Native American housing, I'll ask you a few questions on that.

As you know that we have a unique trust responsibility -- well, I think we've got seven major reservations in Montana. There have been court decisions, executive orders, treaties signed -- all sorts of good stuff that talk about obligations to provide adequate housing. We talked about the disparities in my office. I guess the question is, is how do you envision helping address the disparities in Native American housing. How can HUD step up to the plate and help solve the problem? Because in many areas of Montana and Indian country, it's nothing short of third-world.

MR. DONOVAN: Senator, I -- one of the things that I think you and others that I very much look forward, should I be confirmed, to working with you on is to hear your ideas about that. My sense at this point, in terms of what I've looked at, which, to be honest, I need to, should I be confirmed, do more -- understand more about this and more -- understand more about the specific issues that you're facing. But one of the things that I've seen is that there has not been adequate, either flexibility or the ability to utilize the block grant funding that has been available in a way that has been effective in Native American communities, and that is certainly something that I look forward to talking to you more about, should I be confirmed, and to hearing your ideas about.

SEN. CHESTER: A couple things, as long as you brought that up. And I know you're very busy and Montana's two plane rides and a couple thousand miles away from here, but one of the things that I think would help is if you, in particular, saw the conditions firsthand. If you'd be willing to do that, I'd be willing to help make that happen, too.

The other thing that I think you could do that would help educate you even more than I would be to visit with tribal leaders. And it doesn't have to be in person, although it'd be better if it was. But it certainly can be over the phone. They have a lot of good ideas and suggestions that I think you might be able to incorporate into some of the programs you have. So I would also encourage you to do that.

The hope -- you know, you talked about several programs, and you know, I don't need to go through them. But you talked about education and outreach, which is pretty easy to talk about. From my perspective -- and I hope you have a different one -- sometimes it's hard to educate and teach people about programs and -- so what -- how do you plan on doing that?

MR. DONOVAN: Sorry. Are you asking specific --

SEN. CHESTER: I'm talking about specific -- there were several programs you listed off. Hope for Homeowners was one.

MR. DONOVAN: Yeah.

SEN. CHESTER: We're going to work on that to make that program better. There were FDSU programs. There were other programs that -- any program within your purview --

MR. DONOVAN: Yeah.

SEN. CHESTER: -- where you can educate people about what's going on, how do you plan on doing that?

MR. DONOVAN: Yeah. Well, I guess the answer to that -- let me talk a little bit about my experience --

SEN. CHESTER: Sure.

MR. DONOVAN: -- over the last five years. One of the things that I think has really been a hallmark of what Mayor Bloomberg has done is to make information accessible to the public and to make government systems more responsive to the public through a range of means.

In particular, we set up a call center -- a single number, 311 -- that responds to any question any citizen in the city has about government services. So you no longer have to know 800 different numbers and different -- you don't have to know which program you're calling about; just to call and say, "Look, I've got this problem, and how can you deal with that?"

So to me, there is a critical element of this, which is making programs open and transparent, whether it's through web-based services, whether it's through telephone contact, and a range of things. So that's on the response side. That's the reactive side.

And then, there is a proactive side that needs to happen, which again, in New York, we have tried to make sure that we have language accessibility. I have 400 inspectors that speak roughly 30 languages. They carry a card that would allow them to immediately identify a language that they don't speak and connect to a translation service that offers 170 different languages.

And at the same time, to make sure that we can get to people where they are. And so through, for example, our Center for New York City Neighborhoods, we have begun to use advertising on bus shelters, going door to door, a whole range of different ways, depending on the community, to reach out and to make sure that folks are aware of the kinds of services that we're offering to help them, you know, whether it's a modification, to get a new loan, whatever might be the right thing for their situation, and frankly, to provide the resources to fund that kind of counseling and education, as well, with local community partners that know the issues the best.

SEN. CHESTER: The other thing that I would like to ask is, in regards -- as around the jobs recovery stimulus package that we're going to be taking up here shortly. Have you been part of those discussions, and do you anticipate, when that package comes out, that HUD will be a part of the solution to what's going on in housing through that package?

MR. DONOVAN: Senator, I do. And I've already been part of significant discussions, and I do think HUD has an important -- and housing has an important role to play in that.

SEN. CHESTER: Yeah. No doubt about it.

The last thing is -- and this is just pretty much common sense from your position. There's been a lot of questions about whether it's Hope for Homeowners or how we got into this mess. I value your judgment. Even though you're not from rural Montana, you have a good life experience, and I -- and I would -- I value your judgment on what went wrong and how we can prevent it from happening again. I think those kind of -- that kind of information is going to be critically important for me as a policymaker to make good decisions down the line. So appreciate any of those things you can come forward with to the committee.

I want to thank you. I want to also thank your family again. I mean, this isn't a solo endeavor here. It's -- it takes a family to make this thing work, and I hope you pass that along to your wife. Thank you very much.

MR. DONOVAN: Thank you.

SEN. DODD: Senator, thank you very, very much. Good -- good questions.

I think the last question, particularly dealing with the communication stuff is so critically important. And while, there's never the -- obviously, the President is the primary spokesperson on many of these issues, every person, including yourself, can play a very important role.

One thing I've noticed, I think, in all of this is the failure to communicate effectively with the American people why this is happening, what the answer we think is, how it should work, and how they'll be benefitted by it. And the lack of any kind of communication there has, I think, has created an awful lot of the hostility, the frustration that people are feeling about this stuff. I was impressed with the number of languages that New York City is providing. English would help in a lot of this.

And so my hope is that you'll take advantage. You're a very good communicator. I met with you personally, but I've been very impressed this morning with how articulate you are and how clear you are in describing situations and what they mean, and I don't say that lightly to you. But I think is very important that you utilize those skills and find means by which you can be heard because that -- just the absence of people understanding what's going on contributes to an awful lot of what we're facing today in this issue.

You know that I mentioned earlier, President-elect Obama was talking about the house on fire. I've used this analogy maybe 100 times in the last few weeks, describing that when Franklin Roosevelt was describing the lend-lease program -- a highly complicated program in the late 1930s and providing assistance to Great Britain during their big attack, obviously, by the Nazis -- that he used that very analogy. Your neighbor's house is on fire, you have a hose, you lend it to them. And millions of Americans understood lend-lease in those few sentences.

And we've lacked that kind of analogy and communication to describe why this is being done, what is TARP, why is it designed, what's it intended to do, and how does it affect not just those who are getting the money on Wall Street, but how does it affect the proverbial Main Street people of this country, whether it's rural Montana or a foreclosure tsunami that's occurring in Bridgeport, Connecticut. And that has really been missing.

I've said this over and over again. More than almost anything else, we need to have people who communicate about these programs so the American people understand what's happening.

With that, I thank you very, very much. We'll move as quickly as we possibly can. Obviously, I'll stay in close contact with Senator Shelby and -- a ranking minority member of this committee so we can move you forward. As well, there are probably some additional questions I -- but I -- you've done a good job here this morning. I think you've impressed all of us with your background, your knowledge, and your determination to roll up your sleeves and go to work, and I can't begin to tell you how much we welcome that.

So congratulations to you.

MR. DONOVAN: Thank you for your eloquent words, and I will be officially changing my name to Donovan.

SEN. DODD: You're going to have a great career.

Committee will stand adjourned.

Copyright 2009 Federal News Service, Inc. All Rights Reserved