Sens. Tim Johnson and Richard Shelby listening to testimony in front of the Senate Committee on Banking, Housing and Urban Affairs (Senate Banking Committee)

WASHINGTON — Testifying before a key Senate committee, Housing and Urban Development, Secretary Shaun Donovan offered qualified optimism about the state of the U.S. housing market Tuesday, but made clear that significant strides needed to be taken.

“More than 13 million homeowners have refinanced their mortgages since April 2009—putting nearly $22 billion a year in real savings into the hands of American families and into our economy,” Donovan told the Senate Committee on Banking, Housing and Urban Affairs.  “But there is much more to be done.”

A white paper released by the Federal Reserve Board in January stifled confidence in the housing market, showing that home prices are still 33 percent below their 2006 peak and more than $7 trillion in household wealth was lost during the housing crisis. The paper also lists three serious impediments to the improvement of the housing market: a mismatch in supply and demand of housing that led to 2 million vacant homes in 2011, a market hesitant to supply mortgage credit and an inefficient foreclosure process.

“We need a balanced national housing policy that ensures Americans have access to credit for those in a position for sustainable homeownership, assistance for those who feel the strain of high housing costs, rental options near good schools and good jobs, and above all—choices in housing that make sense for them and for their families,” Donovan said. 

The administration hopes to spur refinances at currently low fixed mortgage rates and offer incentives for banks to provide principal reduction in order to ease the burden on homeowners.  Earlier this month, the White House announced a plan to extend the ability to refinance a mortgage to any homeowner deemed responsible, even if their loan was not federally insured.  The administration hopes that its plan can help lower mortgage payments for those who still remain current on their payments without forcing the government to assume added risk of default.

“The focus of this proposal is on borrowers who are paying, who have come through this entire crisis, even though they are underwater, and continued to be responsible and make their payments,” Donovan said.  “Those are already low-risk loans and by lowering their payments on an average of $3,000 a year, we would make even less risk.”

Senators spent much of the time debating the reform of government-sponsored enterprises, most notably Fannie Mae and Freddie Mac, which  insure mortgages issued by private companies and currently own or guarantee 60 percent of all outstanding mortgages, according to testimony by Edward DeMarco, the Acting Director of the Federal Housing Finance Agency, which oversees government-sponsored enterprises.

DeMarco’s written testimony outlined a plan to transition the housing market away from GSEs, allowing for more involvement from the private sector.  But while Elizabeth Duke, a governor of the Federal Reserve, warned that an immediate shift towards the private sector would stifle lending, DeMarco and Alabama Sen. Richard Shelby, the top Republican on the committee, agree that serious reform of GSEs would ultimately help the entire market.

“The sooner we do a comprehensive reform of Freddie [Mac] and Fannie [Mae], the better off the taxpayers are gonna be and the better off the housing market is gonna be,” Shelby said.

But senators and witnesses failed to fully agree on concrete legislative goals.

Democrats hounded DeMarco to lower principal amounts to alleviate loans that have surpassed the current price of the home, with DeMarco explaining that he believed principal reduction was not the best “tool in the tool kit.”  Sen. Bob Corker, R-Tenn., became frustrated at the lack of progress and showed his dismay at the hesitancy of Congress to relinquish some government controls in the housing market.

“Obviously we have no plan, we like to criticize,” Corker said.  “I hope at some point Congress will do its job and reform these entities that I think most every American, except those that serve in Congress, would like to see reformed.”