WASHINGTON, D.C. - U.S. Sen. Pat Toomey (R-Pa.) today questioned HUD Secretary Shaun Donovan at the Senate Banking, Housing and Urban Affairs Committee.

A full transcript of the senator's questioning is below:

SEN. TOOMEY: Thank you Mr. Chairman, and thank you Mr. Secretary for joining us.

I would like to understand better an aspect of the actuarial review. And the question that I have arises from the interest rate assumptions and the interest rate environment that is used for the -- to determine the prevailing view about the value of the mutual mortgage insurance fund -- the single family fund. More specifically, you observe on page eight of your testimony the fact that the lower the interest rate environment the worse shape the fund is to simplify things. You walk through the mechanisms by which lower interest rates, while good for the economy overall, tend to have an adverse impact on the value of the fund.

My understanding is that the actuarial review contemplates a low interest rate environment. And in the low interest rate environment the value of the fund is negative $31 billion. Aren't we in a low interest rate environment today? And aren't we by virtue of what the Fed has said, which is to say maintaining current policy at least through mid-2015 -- so three years or so, at least -- isn't it very likely we're going stay in the low interest rate environment and shouldn't that be the prevailing environment assumption?

DONOVAN: You make a very important point in terms of the fact that the actuarial review was done not today but at a point with economic projections that are primarily in July over the summer. And so it's accurate that interest rates have dropped further than were built into the primary actuarial view.

There are two offsetting factors to that, though. One is that home prices have performed better than were used in the actuarial. And that, based on what we know today, even for this year, the actuarial would be significantly better if it were performed today just on that one variable.

And then the second point is that the actuarial review is a point in time that assumes that we do no further FHA business, and one of the things that's artificial about it, if I can use that term, is that when interest rates go lower, it assumes people pay off faster. That's accurate. What it doesn't take into account is that typically about half of those folks refinance into an FHA loan. So, by the nature of the actuarial, taking a snapshot in time, assuming that you're closing down the funds, there are revenues that will come to the fund that aren't built in.

SEN. TOOMEY: Right.

DONOVAN: All that being said, we will, in the president's budget, include the lower interest rates that you describe. We will also include an updated projection of house prices and at that point will have a clearer picture of how these offsetting factors play. But it wouldn't be accurate to say that the right number is today, the $30 billion or $31 billion.

SEN. TOOMEY: Do you believe that the difference in home prices that prevail today versus at the time that this was done, and the difference in the volume that you refer to, would be enough to offset the lower value that is caused by the fact that we are in a lower interest rate environment?

DONOVAN: The truth is just to be honest, we haven't finished those calculations. We're in the midst of doing that for the budget. What I will tell you is they are both large effects and it is certainly conceivable that they could be offsetting or in the rage of offsetting. But we simply don't have an answer to that.

SEN. TOOMEY: It's a pretty large effect that comes from the difference in the interest rate. Do you know what the low interest rate environment scenario assumes for the 10-year treasury yield by any chance?

DONOVAN: Let me ask my crack team behind me to get that. We'll have that for new a moment.

SEN. TOOMEY: All right. I mean, my guess is, I'm not sure even that assumption is as low as the rate is today with an interest rate, a 10- year treasury of about 1.6 percent, it's shockingly low and we have a Fed insisting that's it's going to keep it this way for a long time. So I'll be very interested in seeing what the net effect of these changes are because we know that the interest rate component is -- will reflect a significant adverse valuation here.

DONOVAN: Yes. But again, I would just point out that there is an artificiality of the point in time because it doesn't -- it presumes every one of the payoffs we have no more revenue to FHA, whereas in fact we know a large number of those refinancing...

SEN. TOOMEY: So you're saying there's a flaw in the model for that?

DONOVAN: No, no. Congress requires that the actuarial review be done in a way that is a -- what we call a runoff scenario.

SEN. TOOMEY: That's static.

DONOVAN: We also in the actuarial look at what if we keep doing business, so we have those projections in the actuarial. That's not the 2 percent calculation but it is something that we could give you more detail on from the actuarial of what the net effect would be with the refinances.

SEN. TOOMEY: Does the modeling assume any recession between now and 2017?

DONOVAN: The modeling does include a range of runs from a mild recession to a very severe recession and through the kind of stochastic nature of the modeling we do look at probabilities for those recessions.

SEN. TOOMEY: But does the valuation, the model that comes up with the valuation of negative $13.5 billion, does that assume a recession?

DONOVAN: It looks at -- it assigns probabilities to the potential for different types of recessions and builds those in. I'm not sure if I'm being clear. But it is not...

(CROSSTALK)

SEN. TOOMEY: What is the average economic growth rate that's implicit or explicit in that valuation?

DONOVAN: Again, I can get that for you momentarily.

SEN. TOOMEY: OK. My last point, the senator from New Jersey made a very important and impassioned argument about the effects of Hurricane Sandy.

In Pennsylvania we had very significant damage but it was exclusively from wind. Almost entirely from wind damage. Millions lost power. But the damage wasn't comparable to the damage that was compounded by the water damage, of course, that was done along the shore. I'm looking forward to seeing a supplemental that is well crafted and I hope properly offset. Because we also have a fiscal crisis of enormous magnitude. So the necessary spending to address emergencies is very real. But it's really important that that be offset. Thank you, Mr. Chairman.