This discussion is an hour and a half. The Vice President for Economic Policy here, and thank you all for coming. Its an interesting time for the Housing Market. We could have said that anytime in the last five years but things are changing a bit, after more than five years of decline, markets around the country seem to be doing somewhat better. Home prices are going up. And foreclosures are at a fiveyear low. On the other hand, were still suffering from a serious overhang from the crisis. More than four million households have lost their homes through foreclosure. This is, of course, been very bat for families and communities and bad for state and local budgets. On top of that. Home price declines wiped out roughly 7 trillion in household wealth. And left more than 10 million families underwater on their mortgages. In particularly hearterrity communities lice leaves more than half the home owners are underwater and many by half of their homes value. This is creating significant problems. For one thing, underwater home owners are at a much greater rescue of foreclosure, in part because in case of a setback, the borrower has no cushion. And Equity Lending beyond the mark. College students and elderly rely on home equity for collateral, and impacts on aggregate demand and a negative wealth effect. So not much question that underwater mortgages are a serious problem and a drag on the economy. The mull try trillion dollar question is that would do about it . Which brings us to todays plan. The use of emanant domain to seize underwater mortgages owned by private investors, write down the principle, and then refinance the loan at its current market value. This has sparked a heat debate. Not favored by mortgage investors but local governments and consumer groups see it as a last resort for final he finely deleveraging debt. The question is, is this the right policy to fix the problem . I just want to say that cap housing team has frommed with the problem for several years. Last year we released a plan for reducing principle through shared appreciation, and we called on the federal Housing Financial Agency to reduce prims on loans owned by fannie mae and freddie mac. And in the back we have these proposals and other materials we produced on the subject, also you can find them on the c. A. P. Web site. Today, we have a terrific panel of experts, and im looking forward to hearing from them and let me introduce them. Steve gluckstern, the chairman of mortgage resolution partners, a firm that has developed proposals to reduce mortgage principle using emanant domain and is in discussions with me and municipal government across the country, prior to his work, he cofounded alternative asset manage. Firms as a Trust Company llc and capital v partners, as well as the specialty financial rear re insurance. Congressman brad miller is a recently retired representative from north carolinas 13th 13th district. During his five terms as the house five terms in the house congressman miller was a leading champion for consumers in the fight against predator mortgage lending and bad servicing practices. Tom deutsche is the executive director or the american securization forum. It is opposed the call for using Eminent Domain for mortgages. Previously tom was an associate at mckey nell son llp where re worked on structured financial offerings. Jim carr is a senior policy opportunity agent. He was previously the chief Business Owner the Reinvestment Coalition and before that, senior Vice President for financial innovation, planning, and research at the fannie mae foundation. Finally, moderating our panel, c. A. P. s director of finance and policy, julia gordon. Prior to joining c. A. P. She managed a policy team at the federal housing agency. She was previous Senior Council so take it away. Thank you, michael. Everybody ready . What were going to do is were going to start with questions of the panel, and have a conversation up here, and after a while we will open the floor to questions from the audience as well. So i hope youre thinking about what you would like to ask the folks up here, and with that, were just going to start with a dull question here. Im going to start with mr. Gluckstern, how big of a problem is negative equity and for him . That was the first part, where are we . A lot of people think its behind us and were driving forward. I would argue its in fact in front of us. Mike gave the number, four million plus or minus American Families have lost their homes already, but by almost any measurement, somewhere between three and eight million more will lose their homes if woe dont do something. So, id argue, its not in the rearview mirror. In fact its in front of us. Who bears the cost or whats the consequence . Theres lots of consequences, obviously. First and foremost, families who are disrupted and taken from their homes. And its worth thinking about the numbers. Were talking tree or four our five million more families. Thats as many as 20 million more americans. Why its a problem . Mike alluded to. When youre underwater, your behavior changes. You dont spend as much money oning in. The only thing you consume more of is healthcare because are in the stress, look at the numbers, that goes up. So the costs are significant, both the families, and id argue to society, and obviously the communities in which these people live. Foreclosures cost both hard dollars and soft dollars. There are property tax issues, and the consequences felt by all of us. Mr. Miller, do you have anything to add to that . In particular, road blocks to solutions. I dont know whether we have hit bottom or not. One of the rules of economic, if something cannot go on foreign, it will stop, and some of the force pushing down the Housing Market cant go on forever. We have had new households have not been forming, so people are continuing to live we three or four roommates or live in their parents basement or whatever. That cant go on forever or well have some very unhappy families. We already do. Were going to have to replace the Housing Stock at some point. There are some parts of this that cant go on forever. But there is still a lot of very a lot of family pressure, still ten million americans who owe more on their house than their house is worth. That means, as the introduction said, they cant just sell their house if they get into trouble. So we have a lot of foreclosures still in front of us, and the cycle of foreclosures causing equity loss, equity loss causing foreclosures, is something we havent broken yet. The impediments of remains the we have had this kind of problem before. The Great Depression did not begin with the Housing Market. The bubble was not housing but the stock market. But when times are that bad, times are that hard, youre going to have a foreclosure crisis, and they did in the Great Depression. But one of the new deal agencies, the home loan corporation, was remarkably success of the program, putting Arthur Schlessinger of that era. It saved the middle class, and they bought foreclosures, they bought mortgages at a deep discount from the portfolios of failed banks, and there were many of those. And those were in the days before safety and soundness regulation and accounting, and there were plenty of banks quite willing to sell mortgages for a bird in the hand. And so they bought mortgages at deep discounts, which gave. The room to negotiate and reduce a principle, and even though they really managed the agency more like social workers than lenders, when the agency finally closed down in the 50s, it finally turned a profit. So we know we can make this work. The mystery is why it hasnt happened now. The securitization of mortgages, the separation through who owns them and manages them, is probably part of it. The safety and soundness in Accounting Firms are about not willing to recognize losses, is probably part of it. The honest to god incompetence of servicers because of the way theyre paid. They simply dont have enough resources to do the job is part of it. But there has not the people who are affected, who are the investors in mortgages, have not been in a position to cut a deal to limit their losses. Thank you. Mr. Deutsche, where do you think we are as the Housing Market in the Real Recovery . Is neglect testify equity a problem for the market or will the problem take care of itself . A lot of questions. Might be the first negative. The only time steven and i will agree on the panel, is that i think i do agree with steve, negative equity has been a significant problem for everybody involved. The home owners have been certainly devastating to many home owners, so go from buying a house, putting a down payment down, to not owing any money on the house if they were to sell the house thereafter. Certainly for investors who put up money to lend to those individuals, whether securitization process, private label mortgages and a trillion dollars outstanding in private label, or the american taxpayer. Theres 51 2 trillion dollars of mortgage debt guaranteed by fannie, freddie, and ginniemae, and if the underlying loan is less then the value all in all theres been a tremendous loss to the American Economy and to the individuals that have borrowed the money, and certainly to the folkses who have lent that money, whether thats through the american taxpayers or the Pension Funds, mutual funds and the like, who bought and owned private label Mortgage Backed security. 0 to answer the first part of the question, where are we, thats where i disagree with steven. Were clearly not heading toward the maelstrom of the storm but coming out of the storm. As an example, at the opening remarks, San Bernardino county was mentioned as one of the areas you look at as being one of the ground zeros of negative home price appreciation, what we have seen in San Bernardino, just evaluating the number of loans in default in that county, is that in june 2009 it was 31,000. June 2010 it was 25,000. June 2011, 18,000. June, 2012, 12,000. Over the course of the last four years the percentage changed in the default mortgages, in that county, has gone down 61 . The mere fact of that signaled to me that were not in the middle and not going into he heat of the storm here. Were starting to come out. Doesnt mean thats going to be make things better for the person who is challenged to make a mortgage payment. Doesnt make life easier for somebody who has 150 ltv, but does install as an he could and nation were move away from the center part of and it moves towards areas where we have more home price stability. And in markets like phoenix, arizona, you have seen rapid home price appreciation. Its been 20, 25, 30 year after year now, through 2012, where you went from a market that was really going down precipitously, and is now shooting up with the same velocity. Can you talk about the issue from the neighborhood and the municipality point of view . Whats going on, on the ground. I actually would maybe i can be the Bridge Builder between steve and tom a little bit to say we are seeing improvements across all markets, and i think thats a very positive sign. I think the downside is that the damage has been so heavily concentrated in a handful of states and within those states, a handful of communities have been so disproportionately damaged, that even though the numbers are looking positive, in fact in those communities theyre still struggling, and the extensive amount of underwater debt are also contributing to low sales in stores to higher unemployment, unnecessarily so, and for those families getting into foreclosure because of a loss of income or because of a loss of a job of one of the owners. If they could in fact find relief through principle reduction in order to save their home, that would be from a Public Policy standpoint to be positive and would help prohot and stimulate the market faster than the slow recovery its experiencing, even in a market like San Bernardino county. So i would say that i dont see us getting into the abyss. Thats over. But i dont believe we have reached the point where we can say the marks are recovering so we can walk away and let the market do its own thing. The unfortunate part about the conversation is were looking at Eminent Domain, which is one of the most extreme things a Public Entity could do, which is the taking of private property when in fact theres so many things that could be done and could have been done that are not nearly as extreme to actually help mitigate the foreclosure crisis. So we look at things like principle reduction through the hamp program. Fannie mae and freddie mac are not pursuing principle reduction, yesterday the dollars are there. It would be a net positive to taxpayers and would help to recover in communities like San Bernardino. Its not happening. Services have a lot more flexibility than hey pursued in order to modify loans, including principle reduction. Financial has been a leader in principle Reduction Program, and others have not followed their lead, and i theres at a federal level. Would cost the american taxpayer nothing and would allow households to restructure the debt on their family home and keep it. I if you own a luxury yacht, you own Luxury Yachts or rental property, you can restructure that debt but you cant if youre a moderate or middle income household that has a simple home as your principle asset. So the fact we at thely in this kissing unfortunate because many things can happen before we have to good to an extreme measure of Eminent Domain. Let me suggest, does everyone agree that principle reduction is in fact what has to happen . Well keep Eminent Domain to later in the discussion, but we have to agree principle reduction well get to principle reduction, particularly for borrowers who have an able to meet mortgage payments, who have no sign of distress, havent had a divorce, havent had a loss of job, a loss of income. Those borrowers are demon straight an able to pay the mortgage, have done that through the crisis, and are current on their mortgages as your initial plan proposed, dont think those are appropriate borrows to go after principle reduction because they have not signaled an inability thats going to cause them to go into default. So we should punish them with the fact they have been honoring and paying appropriately so that when we go through and provide principle reduction, you say youve been a good guy so you dont get it, but that over there has been a bad guy, well do it for them, is that your proposal . Im not saying were going to put them in a stock okayed and punish them because theyre paying on a mortgage. Im saying they have an able. Show no sign of distress. They have an ability to pay that mortgage. If the borrower loses their job and have an inability to pay, every service should look to some kind of principle Reduction Program for them, and the hopes that get a job, and then resume paying on the mortgage. To say every borrower who is underwater, cut away the mortgage principle . Thats a massive disservice to the 5. 5 trillion the american taxpayers have paid out through fannie and freddie, and the trillion dollars of outstanding mortgage debts that mutual funds and pension founds belong to you cant say we should just give away money these bor bosh bw ers because theyre underwater. It would be useful for folk watching the debate to hear about the proposal and the issues and then we can continue this line of discussion. The first thing, its important for people who understand that tom made a good point, which is americas mortgages are not owned by banks, which is what everyone in the world assumes. Banks own less than 20 of americas mortgages. The bulk of the balance are actually insured by freddie and fannie. Thats only cost the taxpayers a few hundred billion dollars, but theres a segment, 4. 7 million loans owned by what are called private label securitizations. About 4s 7 million borrowers, a trillion dollars as tom indicated, and we focus primarily on that segment, the pls segment, because those bond holders and investors in those securities do not have the best interest of the United States government guarantee on their performance. They live or die by the fact whether you pay your mortgage or you dont. Because of that those securities trade at market. They do not trait at par. Trade at par. They reflect they fact there are huge problems in that community. Right now is the perfect time to put a slide up to frame this. This is one one page in fannie maes Third Quarter 10q. The United States governments view of the pls sector. This is with respect to that portion of the bonds they own. The discussion of why fannie mae owns these bond at all, but they do and under the Disclosure Rules they now tell us what they think about the underlying mortgages, and these are the numbers you want to look at. Fannie mae says theres 28 billion on their balance exposure to mortgages in this sector. They expect a 50 default rate. This is Going Forward under existing conditions. And when it defaults and goes to foreclosure, they expect 66 loss under that mortgage. Half the mortgages, twothirds of the principle written down. So it tells you fannie mae believes there are roughly two and a quarter million more foreclosures coming in just in the pls sector. So in the frame, are we focused on these mortgages . By the way you think that fannie and freddie and the banks have other avenues . All the programs you talked about for reform and for helping home