and 90% corporate tax. and she says if you will cut the tax below 90% i think we can actually not only create more jobs because to stimulate business but he will actually grow the economy and get more revenue at the same time and he added this statement you cannot get a golden egg out of a dead goose. he led in of republicans and senator george led the enough democrats to pass the revenue act of 1945, and the revenue act of 1945 cut the corporate tax from 90% to 38%. imagine that. 90% to 38%. it cut the personal income tax. plus it promised more cuts later. this is the first one. this is all we can get through now and more are coming later. because what was known as the capitol stock tax on every share

of stock that you own a. we eliminated that. eliminated the regulations last federal spending and dramatically which of course you can do. we no longer need the tanks, planes and ammunition, so enormous cutting of federal expense. the end result was a mass of economic expansion. businesses had finally -- we've been under these taxes for 13 years and in the hoover had been mr. shom wasn't good either. we've had a great depression for 15 years. now the tax rates are cut it's time to expand. if you look at that post war economy so much that we take for granted today, you get the holiday in, television, copy machines, all of these kinds of

entrepreneur is and many more come to the floor after world war ii and we see a tremendous growth one of the most exciting statistics is this we had 39 million people employed in civilian employment, non-military. that goes up to 55 million to rid of the stock market increased by 20% in 1946. private gross national product increased 30% for the first and only time it had done that in u.s. history. and furthermore, the experts with estimating i think $31 million into the federal treasury in 46 and maybe 47, we got 31 billion, we had 43 billion. we increased that by more than 25% because the economy expanded so much more than anybody had anticipated. the end result is that we have 3.9% unemployment in 1946, 3.9%

unemployment in 1947. the united states has a burgeoning growth rate and when you're up who is trying the other means to get back on their feet, when they are failing, the united states is able to send tons and tons of food over to feed europeans who at different points in the post war period were dying at the rate of one per second. the deaths were curtailed by the free food that the united states and over after the war. we sent food, the economy to leave the economy recovered and we took the federal deficit during 1946 and 1947 slightly but we did cut it in part because the revenue so much exceeded expectations. so what i'm saying is we have a lot during world war ii that gives lessons for today, what works, what doesn't work in an

expanding economy, the taxes we've come to expect today, the economic bill of rights, the right to education which we've seen for a sample of the student loan program and president obama and changes with the housing to a decent home which goes to urban renewal and then to the community reinvestment act in the 1970's which promises lower interest rates to poor people so they can have homes which accelerates the mortgage crisis which comes unhinged in the last five years, the right to medical care we see with president obama and obamacare so i'm simply saying the politics of today heavily shaped by what we saw happening in world war ii but what we saw happening in world war ii if we study it more carefully as the we got out of the great depression by freeing up the economy and cutting tax rates not by following the prescription to increase and perpetuate the high economic

growth that we've experienced during world war ii. thank you. [applause] estimates before. we will open this up for questions now. please wait until i call on you and a microphone gets to you so that we get everything. i'm going to ask the first question, and that is i read this book and i found it a more straightforward and sober history the and i might have thought from the title have expanded executive power is spiraling the national debt and the civil liberties should america. i wonder if the marketers at your publisher wrote that subtitle. i would just stay there. actually, that subtitle was developed by our simon and schuster publishers but the person who developed it did it on the basis of saying i deduce

this from the content of the book. i think was a very reasonable deduction because we see expanded executive power in the growth of the war production board, the price control, the rationing and all of this, the spiralling national debt. listen, the national debt doubled in the year of roosevelt's presidency or the first two terms of the presidency. then it increased sixfold during world war ii so what you have the end of world war ii is a national debt of $260 billion the interest to pay that is about with the whole national debt was when roosevelt became president. another was we've gone from having an national debt of about 20 billion to having an interest rate of about 20 billion on the national debt that was almost 300 billion, suggesting is the national debt and the growth of that federal spending and the economic bill of rights which was roosevelt hoped would

perpetuate that in the future is a big part of the war and the civil liberties we haven't done as much with. the japanese-americans of course most of you know are in turned. we have roosevelt using wiretapping extensively it's essential for the national defence. enemies might be sending messages and. you grant that and pretty soon he is wiretapping republicans and pretty soon his wife, eleanor. so we see an abuse of civil liberties are as well and so as well as shutting down magazines and newspapers so much so that frances' own attorney general was having to fight him on a lot of this, so that is a fair deduction of the content of the book, even though i have to get our publisher simon and schuster credit for the and the subtitle, we did the main title. i think she got the fdr goes to war. >> questions. yes, right there.

>> my name is steven short. i was a little bit thrown by the title of the book granted the tax rates had reached the pre-war level but the other instances, the rationing of the direction of production to when the war, the consequences of the expending that i'm not at all convinced that any other president would have ended up at the same after the ocean war tariffs but part of our premise is one of the reasons we wound up in the ocean war is because we were so weak during the 1930's. and we have information in fdr goes to war. fdr cut military spending all during the 1930's in terms of the percentage of military spending in the federal budget. and this was on top of the fact

that during herbert hoover' presidency, proceeding president, met three budgets were very, very low. so the american military was just incredibly weak and also just incredibly behind the rest of the world we were something like 17 in terms of military strength and innovation. but fdr as we show during 1940 and 41 before pearl harbor he has already declared mother to the emergency, he's taken over power with lots of executive orders and the thing is he's not putting these agencies under the control of congress or other individuals to get his 15 defense agencies under the president's office. it's called the office of emergency management and it is directly supervised by franklin roosevelt, so we lost some of the grabs for power, and i agree

any president faced with a war emergency has to do certain things to the extent to which roosevelt looked at this as an opportunity to really put his big government ideas into action and especially you get this with taxation. he had been wanting high rates of withholding from a huge percentage of americans for his entire life and he used a the war emergency to get that through to the estimate should have given you a little more of a warning. two things quickly. the standard narrative for the post war boom is the spending bills up this enormous demand, and i think the - that he explained as a counter to that because it centers on the

reduced legislations and tax rates. the question is if truman was so aligned with roosevelt on this matter, do you believe that roosevelt died, had he still been healthy and mumbai in april 45 that somehow she would have managed to do what truman according to you wanted to do but because of political naivete failed to do what roosevelt do you think have done that he and if he had kept tax rates high and pursue the supply side strategy we wouldn't have had the postwar boom would roosevelt have been more likely to continue the new deal programs, the new deal movement than

truman? was it just truman' political naivete? >> that's a good question. roosevelt had vast experience dealing with congress, and fought had enormous confidence that he could get his way on most things. the new deal revival was what we call the new deal revival, his plan for postwar america. of course you point out he died before he could do that. truman buys into this but remember she didn't even know he had an atomic bomb he's sitting there trying to appoint cabinet members and find out what is going on the because roosevelt kicked him in the dark and as a senator he hadn't had that close of access to the branch said he is still learning the job and the essence is because he's still learning the job he hasn't developed the political skills yet to be able to get what roosevelt might have been able to get. then the question is could roosevelt have had achieved this? it's one of these kind of counterfactual questions you think about i wondered if

roosevelt had been able to do it. i'm not sure he would have been able to do so. what do you think? >> i think one side of this that is interesting and we point this out in fdr goes to war is fdr had lost a lot of clout in congress in 39 and 40. his court packing scheme in 38 really incurred a lot of people and then he also tried to of course purge of various members of congress and the senate did one of them was the senator from maryland and if you notice in the book it leads the filibuster to defeat several of the proposals fdr once passed before congress adjourns in the summer of 1939 and he's delighted to do that because he sees fdr as an enemy. some people are very suspicious of him and the way that he manipulated.

>> he was only working 20 hours a day or 20 hours a week. he'd gone from ten atv 20 hours a day to 20 hours a week. his physician simply said the stress and all of this, he had high blood pressure and he couldn't take that, roosevelt was only working half time so it's hard to be effective and you are only working half time. i don't think he would have been able to do it. the other thing is walter george was the subject of a purge. roosevelt tried to get him out of office which is one of the reasons that george was hostile to roosevelt' attitudes in world war ii so george was always quick to be there to oppose him some of the chairman of the senate finance committee opposing you and a large block of republicans opposing you. i think what roosevelt would have been likely not to have been successful but it's hard to say she would have really tried and the thing is every time you try to think well roosevelt can't pull this off, sometimes he gets something on someone and that person ends up being an

ally and he's able to put off. certainly it was easier for senator george dealing with truman than it would have been a healthy roosevelt. >> another political changes the senators that roosevelt tried to purge or democrats, it was the democratic primaries. estimate his own democratic senators, and of course if you are looking at the influence of fdr on truman and other presidents waiting in the wings is lyndon johnson and lyndon johnson is a new member of congress soaking up everything he does in terms of patronage and big government programs and of course as a big help to fdr and the national election of 1940. >> roosevelt has a task of manipulating said liberties which we haven't done as much with. for simple, he wants to put moses annenberg in prison, the editor of the philadelphia inquirer and there's a republican paper that threatens

to bring pennsylvania back into the republican column so you go after an irs audit and it turns out it's vulnerable so in an byrd doesn't just pay a fine he goes to prison and then johnson is guilty of all sorts of misuse of campaign contributions and declaring some of his supporters so the irs is going after johnson, too seven johnson comes to roosevelt so roosevelt has to pull the irs off johnson said he can continue to be roosevelt' man in texas and then to make sure annenberg goes to prison you have faith maneuvering will by fdr he pulled both of those off, so he was someone you are dealing with that the executive branch to be very powerful. >> yes, in the back. >> al milliken. you both united and the way that you viewed economic relations

with the lack of economic relations between the united states and japan leading up to world war ii and has pressed do you believe the united states was by the attack on pearl harbor? >> i think we were pretty united in our view on that and that is something i did the majority of the work on the book for so i will answer first. we do plan out in the book in the early pages in 1933 this is before fdr is even inaugurated as president he is talking with two of his advisers and they're both big new dealers the will be part of his trust. the above columbia professors and the totally believe in the government directed economy and of course the people directing the economy should be intellectuals so there's the recipe right there.

fdr mentions he's always favored china and he thinks the war with japan might work better if it's sooner than later so why not now he had that flem and side to his nature and i will point out he had never been in a foxhole. he'd never been the military to the heat never been shot at. he took all that i think rather lightly, and when you look at the men who died in the pacific and the early days of world war ii i find that really appalling that he let them go into those exposed areas in parts of the philippines with such bad weapons and many of the men that died in the conflict could blame fdr but as far as pearl harbor ghosts, i do think that we cut the japanese off from their resources and i will say an interesting study is to read the papers of ambassador joseph prez

in tokyo pleading to put off the embargo. pleading with them saying there is a peace faction in the japanese and we can build that if you put the embargo off. but roosevelt is determined to in barbaro oil and scrap iron and they make it very difficult for the japanese to receive any of that said the japanese party gains ascendancy in tokyo and then of course plans period harbor. people always say do you think fdr knew about pearl harbor? i think fdr knew that an attack was coming and he knew an attack was probably coming first of december, the first two weeks of december but where was it going to be? almost everyone thought that would be on probably singapore and the philippines. the japanese had 50,000 troops in saigon vietnam something from

french indochina to the philippines or singapore was an easy thing and fdr and general marshall have had the war department warned the bases to go on high alert. the problem is if i had an hour i could go over what happened at pearl harbor. it's a perfect storm of mistakes and everyone there believes they were in command of the win command with the attitude of it doesn't matter any way because we are really not going to be attacked so why bother and that is a very bad way to do it and other commanders had done that but it was 1932 were 34 or 36 and your commander in hawaii, you could have that attitude and you were fine and you could spend two years out in hawaii and not do a whole lot and who cares but in december of 1941, it was a very poor way to run things.

i don't think fdr directly knew would be pearl harbor but he knew an attack was coming, and what i blame him for most is pearl harbor because he had given 1900 anti-aircraft guns to other countries and he given away hundreds of fighter planes and i will give the commanders in hawaii this much credit. they didn't have the weapons either. there were very short-handed >> at marvil richardson got fired and we play this out in the book. he was the pacific fleet commander in 1940 and a realist and i think a very capable officer and he went to the white house finally in october of 1940 and argued for two hours with franklin roosevelt about keeping the fleet at pearl harbor. he said we are vulnerable and we need to move the fleet back to california. finally, he really -- it became pretty heated and he finally told franklin roosevelt

mr. president, i have to inform you that most of the leaders of the pacific fleet do not have confidence in you to lead the navy, and fdr didn't do anything at that precise moment but he wouldn't act on what was said, and he finally fdr was reelected the next month november of 1942 and right after he fires joe richardson so i don't know that a movie is ever going into the life of the admiral or not, but he is backed in the united states on the day of pearl harbor' attack and he's sitting their getting all that news and he knows i warned them over a year ago and still haven't. >> did fdr acknowledge any limits on constitutional limits on the power of commander in chief during world war ii? you mentioned the internment of

the japanese and i also have read historical accounts when he said the military tribunals to try the nazis out tours that some of the historical accounts that i've read said that he's let it be known to back channels if the supreme court tries to challenge my authority to try to execute these people through the three tribunals i'm going to execute them any way. i just wondered if he acknowledged any limit on the power of the commander in chief during wartime whether the bill of rights had any application. >> i haven't seen any. if he did i haven't run across at. he tended not to like to talk about that kind of thing so it's not something he talked about with a great deal of frequency but judging by his actions and i haven't seen any indication he felt they were those particular restrictions that applied. spaghetti are reminds me sometimes work to bill clinton reminds me of fdr because i think both men are really,

really smart and they are careful not to step on land mines as they don't have to so fdr ignored the constitution. spikelet me ask a follow-up on that. we have debated a good bet whether the new deal model getting out of the great depression is a good model for getting out of the great recession today. there's been people on both sides of that. should there be a similar debate on what roosevelt' treatment of civil liberties in wartime is a model for what we've done since 9/11 or should be or is a cautionary model >> roosevelt by putting 110,000 a japanese internment camps has gone way beyond anything we've seen today. but roosevelt keep in mind there's a political angle to that.

not only did the governor enthusiastically endorse doing that, it appears to be heavily political. we would talk up as often because the japanese were such good workers and had been so successful that many of the anglo-saxons felt competitive pressures since if you are to uphold california, you would find there was a majority of the non-japanese that thought if we could get these guys out of the way this is a good thing. roosevelt played to that and put them in the internment camps even though jay edgar hoover said they are not dangerous. let's not do this and he did any way as the attorney general didn't like get but roosevelt enjoyed the political success of removing them not only of the removed and the temple against him, they are removed and those people in california and elsewhere are going to be

voting. he's been to pick up seats in california. the western coordinator is saying why are they still here? face been here for years. they join the army and they are highly decorated people to rely are we letting this group -- you might invite an individual who shows signs of having made overtures that should cause him to be investigated but you're talking about the whole group of people, the six-year-old, all of these people holden to these camps. was atrocious scene of the people in charge of the can say no, this isn't right. and roosevelt keeps it going, keep it going and finally the secretary at meds and says i've been around roosevelt along time. i have a chilling after the reelection things might change and sure enough, the first cabinet meeting after the 4040 election one roosevelt and safely elected the seats have

been gained in california coming and then we work on getting the japanese out of the internment camp so some of it is a civil liberties issue for sure but there are political advantages to roosevelt to choose this and they thought they ought to put the japanese in camps it wasn't just roosevelt but they are suggesting there were many that said no let's not do this and some said let's do and roosevelt said yeah i think i will sign the exit of order. let's put them in there and then he took political the vantage of this and then lifted the restrictions when he was safely be elected. >> we will take one last question here. >> i just want to ask a couple of questions. one is the 90% plus corporate tax of excess profits was that applied across the board to the companies or the progress of corporate tax system.

>> really most companies were caught up to 90% level at least pretty close to it and certainly all major corporations were caught in a 90% level so that was in place for getting people the right to decent home or the right to a good education and the right to a job. >> another question? >> just on the politics of truman. could he have vetoed these reductions and taxes if he wanted to? >> he could have and he didn't. he was in the enthusiastic but he went along with it. i'm not sure, but again, roosevelt -- he's gone and you are trying to think what would he have done. truman was willing at least on this first tax cut to go along

with it and part of it was his his job, congress was urging him to do it, but when further tax cuts were passed by congress in 1946, 1937 he beat it again and again and again calling the tax cuts for the rich it fundamental basis for the 1948 campaign to respond to the book is fdr goes to war. thank you, burt and >> we will have the tv in prime time all this week on c-span2.

>> live now to the brookings institution. edward demarco is the head of the agency regulating fannie mae and freddie mac. this morning he will give us an update on the health of the housing market. the treasury department and others have been pressuring the federal housing finance agency to reduce the amount owed on some of the fan and freddie's mortgage loans to prevent foreclosures. so far, mr. demarco has opposed the idea citing the politics impacts on fannie mae and freddie mac's financial health.

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>> welcome. i'm karen dynan, director at brookings. i'm pleased to introduce today's keynote speaker, edward demarco, acting director of the federal housing finance agency, or fhfa. director demarco has been in his current job for almost three years now, serving as the regulator and conservator of fannie mae and freddie mac. since going into conservatorship in september 2008, these gses

have cost taxpayers $185 billion, and counting. previously, demarco serve as the chief operating officer and deputy director of the office of federal housing enterprise oversight, a predecessor agency to the fhfa. he also served as assistant deputy commissioner for policy at the social security administration. and prior to that served as director of the office of financial institution policy at the u.s. department of treasury. where he oversaw analyses of public policy issues involving government sponsored enterprises and other financial institutions. before that he worked at the general accountability office. perhaps you are noticing a pattern here. i think it's safe to say that director demarco has dedicated his professional life to public service. this is something he takes very seriously. which leads us back to his present position. as "the wall street journal" editorial page noted yesterday, mr. demarco is the career civil service who drew the short

straw and ended up as the acting chief of the federal housing and finance agency. and so director demarco said here today at the center of a controversy, having been labeled the nation's top obstacle to economic recovery, as was being called america's most dangerous man. with some liberal member of congress even calling for him to be fired. director demarco has a tie to brookings which i think it's interesting. he was a doctoral student in economics at the university of maryland and his advisor was hank aaron, a longtime brookings senior fellow. when we asked hank for his recollection of demarco, he said, ed was the kind of got any thoughts would want his daughter to marry. [laughter] hanks went on to say when he thought ed demarco was the name of the person who is in the crosshairs of various groups, he went and checked whether it was the same person he had no, and

he thought quote, it would've been hard to have anticipated that a person as quiet, nice and mild as an demarco would ever become the center of the sort of controversy he is in. i am sure there are many who shared hanks surprise, including perhaps the director himself. getting onto the program, director demarco will speak and then my codirector and economic studies, ted gayer, will moderate a question and answer session. and we will have a panel discussion of the principal reduction issue. with that i'm going to let director demarco take it away. [applause]

>> good morning, everyone. it really is an honor to be here today. i'd like to thank karen for that introduction and welcome. it is a particular privilege for me to have hank aaron here this morning. as part of the audience. i'm very grateful to him for all the support and guidance he gave me and reflecting on what karen said, i can't wait to be done here, call my wife and tell her how lucky she is. [laughter] >> over the past six years many efforts have been launched by the federal government to stem the losses arising from the housing crisis, and to keep people in their homes. some programs have worked better

than others. almost all of them require trial and error, and were more difficult to actually implement than many people had expected. as conservator of fannie mae and freddie mac, the federal housing finance agency has been deeply involved in many of these efforts, and we've seen our share of successes and missteps. today we find ourselves in the midst of a national debate regarding mortgage principal forgiveness. with homeowners, the housing market and the taxpayer be best served by providing outright forgiveness of mortgage debt for certain homeowners who currently own war on their mortgage than their house is worth today. i'm grateful to the brookings institution for this opportunity to offer some perspectives on this debate, and to provide some preliminary findings from fhfa's most recent analysis of this issue. i will not be a announcing any conclusions today. our work is not yet complete, but in view of the state of the

public policy debate on this subject, i am pleased to have this venue to enhance public understanding of this difficult question, and to explain how fhfa has approached the matter. the brookings institution's reputation as a home for thoughtful policy analysis and debate of challenging public policy questions makes this a most appropriate setting for this endeavor. typically, when i begin a speech about fannie mae and freddie mac, or the enterprises as i will refer to them, i set the context by reviewing fhfa's legal responsibilities as conservator. i do so because i believe it is essential for people to understand that congress considered the objectives it wanted fhfa to pursue as conservator. these objectives may not be easy to meet, but they are clear. fhfa's job is to preserve and conserve the assets of the enterprises, and in the current

state, that translates directly into minimizing taxpayer losses. we are also charged with ensuring stability and liquidity and housing finance, and maximizing us assistance to homeowners. today, however, i want to set the context for my remarks in a different way. i'd like to begin with a few words on the human element of this housing crisis. throughout this crisis at each of us know of or have heard about any individual stories of homes lost in foreclosure. one cannot help but have sympathy for those have suffered such misfortune, and surely know what to look at the dislocations in the housing market and not feel frustration at how sony people and institutions failed us, whether through incompetence, indifference, or outright greed or fraud. yet, we are also blessed in this country with people and institutions who care, who are strongly motivated to provide assistance and find solutions. the staff at fhfa has worked

tirelessly since the enterprises were placed into conservatorship to seek meaningful and effective responses to the housing crisis. with the staff at fannie mae and freddie mac, at the treasury department and hud, and numerous financial service companies, fhfa has sought to develop and improve on loan modification and loan refinance programs that bring meaningful options to struggling homeowners who want to stay in their home. in a moment, i will describe these efforts and progress to date. we know we have much more to do in this area, and the strategic plan for conservatorship that we submitted to congress in february identifies that work is one of our three strategic goals. there's another human element in this story that does not seem to receive much attention. clearly, many households got overextended financially. some i.t. related debts they couldn't afford when hours or wages were cut or jobs were lost.

others withdrew equity from their homes as house prices soared. others bought houses at the peak of the market, often with little money down, perhaps in the believe house prices would continue to climb. yet there are other americans who did not do these things. there are families that did not move up to that larger house because they were not comfortable taking the risk. perhaps they had to save for college or retirement and did not want to invest that much in housing. and there are people working multiple jobs or cutting back on the family budget in many ways to continue making their mortgage payments through these tough times. many of these families are themselves underwater on their mortgage, even though they made made a sizable down payment. whichever of these categories any particular homeowner falls into, the decline in house prices over the last few years has reduced the housing wealth of all homeowners. federal reserve is estimated that from the end of 2005 through the end of last year, the decline in housing wealth

amounts to some $7 trillion. six years into this housing downturn, the losses persist. the debate continues about how we as a society are going to allocate the losses that remain. asking hard questions in this debate does not make one unfeeling about the personal plight the situation has created for so many. indeed, the majority of those most hurt by this housing crisis did nothing wrong. they were playing by the rules but they been the victims of timing or circumstance or poor judgment. in short, the human element in this unfortunate episode in our country's economic history standout and commands our attention, virtually every homeowner in the country has suffered a loss. that doesn't make the answers any easier. it imposes a deeper response to build on policymakers to weigh all the factors in seeking solutions, including the long-term impact on mortgage rates and credit availability of the actions we may take today.

but this is backdrop. my goal today is to answer two questions. what do the enterprises due to assist borrowers through these troubled times in housing, and how has fhfa ss principal forgiveness as an option for assisting troubled borrowers? so begin with borrowers assistance efforts. some critics have concluded that fhfa's refusal to allow principal forgiveness raises questions to the agencies and the enterprises commitment to helping borrowers stay in their home. to put the principal forgiveness discussion in context i think it is useful to start by reviewing the enterprises current borrowers assistance programs. fannie mae and freddie mac have an array of foreclosure prevention programs for borrowers that are delinquent or in imminent default, most of which allow the troubled borrowers to stay in their home. for those who are current on

their mortgage, refinance opportunities allow borrowers to lower their monthly payment, or shorten the term of their mortgage. the primary focus of the enterprises foreclosure prevention program is on providing borrowers the opportunity to obtaining an affordable mortgage payment for borrowers have the ability and the willingness to make a monthly mortgage payment. let's look more closely at the foreclosure prevention efforts. i'll start with home retention options, of which loan modifications, principal approach. the enterprises current loan modification programs are designed to help homeowners who are in default, and those who are at imminent risk of default. now, let me say it will be posting on a website a lengthy version of my remarks only making this morning and they go into greater detail about this and some of the other figures and tables that i will be using in his presentation. so i will try to summarize some of this as we go along.

with this chart shows is that for troubled borrower, seeking a loan modification, mortgage service or will first work through with a bar or whether they are eligible for and can benefit from the home affordable modification program, modification. and his chart shows the order of the steps that are taken to reduce the monthly -- the borrower's monthly mortgage payment down to 31% of their current gross monthly income. some borrowers are not eligible for or can't benefit from the h.a.m.p. mott and fannie and freddie have their own proprietary modifications or standard mod that they also offer. and so the second column works through that modification approach as well. but again the idea is to get the borrower into an affordable monthly mortgage payment. you will note in these two columns that they both talk about for bring on principle. with a principal forbearance

modification, a portion of the loan principal amount is set aside your the underwater portion. the homeowner does not pay interest on that portion of the loan. this means that the lender allows the homeowner to defer payment on a portion of the principal until they sell their home or later refinance the home. and during this period of deferral their pay no interest. this approach allows the enterprises to reduce the borrower's monthly payment while avoiding an actual principal right off. interestingly, this is the same approach used in many of the guaranteed loan programs, including the fha program. enterprises also offer temporary assistance. because a loan modification is not always the best solution. for someone who loses their job, has a medical emergency or faces some other short-term issue, the loan mod is not necessarily best. in such cases fannie and freddie offer payment forbearance plans

that allow a barber to make no or only partial payments for a period of time. the enterprises also offer repayment plans for borrowers who fall temporarily behind and just need an opportunity to get caught up and back on track. since the start of the conservatorships in late 2008, fannie and freddie have entered into more than 660,000 such plans. this slide shows there is also non-retention options. most troubled borrowers should qualify for it home retention option if they have the ability and desire to stay in their home. but if the borrower does not want to remain in their home, or his experience a permit and significant loss of income that makes continued homeownership in feasible, the service or is obligated to consider the borrower for a short sale in deed in lieu or a deeper lease. of the short sales of the most common. in a short sale, and enterprise

agrees to allow the borrower to sell their home in an arms length transaction and accept the payment, the proceeds as payment to the debt. importantly, the unpaid balance becomes forgive in principle to the borrower. fannie and freddie have completed more than 300,000 such forfeiture actions since conservatorship. so in short, these instructions are clear. only after all these home retention and home foreclosures forfeiture options have been exhausted should a service or pursue foreclosure. so, let's turn to the results. while mortgages owned by other financial institutions are held in private label mortgage-backed securities have a much higher delinquency rate than those owned or guaranteed by the enterprises, the enterprises have been leading national foreclosure prevention efforts. fannie mae and freddie mac own or guarantee 60% of the mortgages outstanding, but they account for only 29% of

seriously delinquent loans. even though these other market participants then are holding 71% of seriously delinquent loans, and and freddie accounts for more than half of all h.a.m.p. permanent modification. between h.a.m.p. and their own proprietary loan mod, the enterprises have completed 1.1 million loan modifications since entering conservatorship. not only are the enterprises leading efforts in completing loan modifications, the performance of these modifications has been better than that for most other market participants, and i would add probably better than most analysts had expected. this chart here shows various stages after modification, what the redefault raid on the loan modifications have been. mother in many issues involved in decision on whether the enterprises should employ

principal deduction that i will discuss later, data on loan modifications from the enterprises shows that performance on loan mods is no stronger related to current ltd. so take a look at this slide. i'm not a definitive analysis, if current ltd, loan to value had a strong effect we would expect that the more underwater the borrower is, the higher the redefault rate would be. however, fannie mae data that we present in this slide shows that performance on modified loans berries and does not very much at all across the loan to value ratio. so as you can see in this chart, looking at the current loan-to-value ratio at the time of modification, even for those deeply, deeply underwater, the read performance rates on these loan mods have been about the same. so what this tells us is that what matters most here is that

the performance on loan modification seems to be more a function of the payment change to the borrower rather than the loan to value. this slide is showing that decorated the payment decrease, that the barber gets, the better the read performance rates on the modification. collectively these efforts have made a meaningful impact on reducing foreclosures. since conservatorship, the enterprises have completed more loan modifications and foreclosures, and adding all of the foreclosure prevention actions to the loan mods totals for some 2.1 million foreclosure prevention actions that the enterprises have taken, which is more than twice the number of foreclosures that they have completed during this same period. enterprises also offer borrower assistance for those who are current on their loans.

working with the treasury department and the enterprise, fh fa to go to program exclusive to enterprise owned mortgages, harp allows underwater and their underwater borrowers the path to refinance their mortgage without attaining new mortgage insurance, or some other credit enhancement as would normally be required. since april of '09, the enterprises have acquired 10 million refinance mortgages, of which more than 1 million were harp love. so, these results fell short of what we believe we could achieve. consequently, fhfa engaged with fannie and freddie and treasury department in a wide array of market but dispensed identify and resolve impediments to the program. the changes we made to the program took effect last december, and already many of the largest lenders in the country are seeing tremendous homeowner interest in this revised h.a.r.p. program, and we expect the bottom of h.a.r.p. loans to be increasing in the near future.

let me turn now to principal forgiveness. in the original h.a.m.p. program, principal forgiveness was always permitted but was rarely used. in 2010, to encourage greater use of principal forgiveness, for loans with loan-to-value ratios above 115%, treasury supplemented the original h.a.m.p. program with the h.a.m.p. principal reduction alternative, or h.a.m.p. pra. tranninety or a is an investor option, not a borrower option and the have program does not require the later to offer principal reduction, even if the service or determines it to be superior to the standard h.a.m.p. not on a net balance basis. to the take-up rate on h.a.m.p. pra has been low. early this year treasury announced its intention to triple its current incentive

payments to investors who use this approach. while both the original h.a.m.p. and h.a.m.p.-pra focus on a borrower's ability to pay by reducing the monthly mortgage payments to 31% of the barbarous monthly income, pra also addresses a borrower's willingness to pay by reducing the loan balance. the rationale for the reduction in loan balance is that a borrower whose mortgage exceeds the home's value may not be willing to continue to make monthly mortgage payments. in other words, even though the borrower may achieve an affordable monthly payment, the ability to pay, to a basic h.a.m.p. mod, the borrower may not continue to have the willingness to pay because they are deeply underwater. i forgetting principle as part of the h.a.m.p. modification, the lower loan-to-value ratio showed improved a borrower's willingness to pay. in fact, historical data has shown that the probability of

default correlate with a borrower's current loan to value ratio. the higher the ratio, the greater the likelihood of default. so, by forgetting principle and reducing a borrower's current ltv ratio, the probability of default is reduced and hence, losses are reduced. this type of relationship between default and current ltv, supported by previous analytic work, in fact is embedded in the h.a.m.p. net present value model and has been explicitly factored into fhfa's repeated analyses of principal forgiveness. now, some proponents of principal forgiveness would limit eligibility in various ways, such as precluding it for cash out refinance loans or loans that have mortgage insurance. there is no consensus on what such limits should be, nor does the h.a.m.p.-pra option impose any beyond the basic h.a.m.p.

basic eligibility requires. however fannie and freddie might apply principal forgiveness, it would have to be clear and transparent, have any basis in the conservatorship mandate and a general acceptance of reasonableness, if not fairness. and it would have to be clearly and publicly described so that more than a thousand mortgage services could apply these rules the same way. so let me look first at our previous analysis, principal forgiveness. at the most basic level, the comparison between the loss mitigation strategies of principal forbearance and principal forgiveness is related to the goods the upside for both principal forbearance and principal forgiveness, if a borrower defaults enterprises lose the same amount. however, if a borrower performs successfully on the modification, and a principal

forbearance mod, the enterprise retains an upside to the four board amount, but in a principal forgiveness modification, the borrower retains the upside. so that's what this figure tells us here, that the borrower redefaults after the mod, the loss is their it away. us last -- the loss is there anyway. ..

before more fully describing the earlier analysis one key point worth reiterating, any analysis deploying printable forgiveness involves more than looking at mpv results. fhfa would consider the operational costs of implementing the program and the borrower and incentive effects from the program given three quarters of enterprise deeply underwater borrowers today are still current on their mortgage. in the analysis we published in january we did not go beyond the npv analysis because it would produce superior results to principal forbearance. so now let's turn to the latest change to the hamp program. www. the 25 incentives.

fhfa is in the process of analyzing whether the enterprises will offer principal forgiveness as part of hamp with the triple incentives provided by treasury. this morning i will provide some preliminary findings from refreshing our earlier analysis in incorporating the triple incentives and operating model work based on critique that our previous work has received. as i noted earlier in considering principal forgiveness as lost mitigation full besides the npv impact we will also need to consider operational costs and bar were incentive effects. questions were raised about the methodology fhfa and floyd bannister earlier analysis. to address these concerns we made the following adjustments -- we have lower delinquent borrowers credit score is by 100 points to better reflect the current credit standing of the borrower rather than where they

were at the time the loan was originated. we have raised delinquent borrowers housing payment debt to income ratios. those that were below 30% were set at 45% fat and those above 45% have not been adjusted. this time around we have applied zip code level rather than house pricing to estimate what the current loan to value ratio of the mortgage is. rather than doing the analysis simply forbearance only versus forgiveness all we, this time around we used the 0 regional -- we used the full h.a.m.p. pra to work for what the actual payment to the bar would be. again we inc. triple incentive payments that would come to fannie and freddie from doing principal reduction. the original analysis we

produced considered all enterprise loans with a current loan value above 115% not just the lincoln borrowers. this time to provide an estimate of potential h.a.m.p. bar were pulled, limits the analysis to those borrowers that are deeply under water above 115% loan d a devalue and delinquent on their mortgage today. we did allow some portion -- we assume 5% of the deeply underwater borrowers and assumed 5% of their role in to becoming delinquent and being considered for a loan mod. this was not randomly decided. 5% is the role rate we saw from the end of the summer of 2010 to the middle of 2011.

so let's look at some of the results here. this slide shows the enterprise losses on these loans are expected to be almost $64 billion if they are not modified but went through foreclosure so you can see in the two columns the 63.7 there. if we do principle forbearance the model results tell us the losses on these loans would be $55.5 billion. for use the h.a.m.p. print reduction alternative the losses would be $53.7 billion to fannie and freddie. in this analysis principal reduction is better for the enterprises. it reduces the enterprise's losses by $1.7 billion. all right?

the total potential incentive payments from the treasury to the enterprises in this analysis would be $9.5 billion but the expected incentive payments that would actually be paid as much less. it would be $3.8 billion. that is the bottom of the last column. the reason for this difference is that the h.a.m.p. model allows for and predicted good number of the bar workers that get this loan modification are going to default anyway and not all of these incentive payments would get paid because the incentive payments from treasury are paid out over several years. in summary, net present value basis this abated analysis shows the positive benefit to the enterprises of $1.7 billion and treasury incentive payment to the enterprises of $3.8 billion which would imply a net cost to

the taxpayer of $2.1 billion. this does not account to offsetting benefits in terms of greater housing market stability if principal reduction reduces total foreclosures. the npv results alone are not the sole basis for the decision whether the enterprises should pursue principal forgiveness. one factor that needs to be considered is the borrowers incentive effects. some percentage of borrowers were deeply underwater but current on their mortgage the encouraged to claim a hardship or actually go delinquent in an attempt to capture the benefits of principle forgiveness. principal forgiveness. unlike those who can choose where it makes sense the enterprises must develop a

program to be implemented the same way by more than 1,000 servicers. the enterprises have to announce this program publicly and borrow work --borrower awareness will be heightened among enterprise borrowers. as opposed more targeted references of individual lenders where the current capacity of the h.a.m.p. process there's a greater possibility that borrowers incentive effects would take place on an enterprise what printable forgiveness program. it is difficult to borrow these -- what we can do is get a sense of how many current borrowers would have to become strategic modifiers npv benefit provided by treasury incentives to be eliminated. in this context the strategic modifier with the aid borrowers

-- bar were that mrs. two consecutive mortgage payments to qualify for h.a.m.p. and obtain principal forgiveness. if principal reduction was done on 69 -- 6100 borrowers the enterprises would need to get 90,000 additional borrowers strategically modified to wipe out the benefit to them of receiving the treasury incentive payments. that is unlikely. we are not going to get 100% hole through on loan mods offering principal forgiveness. if we were successful on half of the 691,000 we would need roughly 50,000 strategic modifiers and if we only had a quarter pull through, to principal forgiveness we would only need 20,000 current

borrowers to strategically modify to wipe out the benefit to the enterprises and incentive payment. keep in mind in this the enterprises have about two million deeply underwater borrowers today who are current on their loan. in considering whether the enterprises adopt principal forgiveness fhfa must consider operational costs. direct operational costs would focus primarily on not technology modification and improvement. we are still evaluating those costs the they're not revealed. there would be a more indirect costs including costs for launching new programs including the development of guidance to and training for mortgage servicers. indirect costs include opportunity costs of diverting existing resources to fannie and freddie from a loss mitigation activities or from some of the

activities announced in the strategic plan. all these cost factors would have to be carefully considered in coming to a decision to employ a principal forgiveness or not. in closing let me try to summarize all of this into a handful of conclusions and observations. the issue before us is not about whether fannie mae and freddie mac provide support to families having trouble making their mortgage payments. clearly they already do and it remains fhfa's and the enterprise's collective objective to do so. as fhfa makes its decision on whether the enterprises offer principal forgiveness with h.a.m.p. principal -- we will look to the issues are described causing value impact, bar were --borrower incentive effects, whether fannie mae or freddie mac for give principal or not

the universe of enterprise borrowers -- a fraction of the eleven million underwater borrowers in the country today is not about a huge program that will rescue the housing market but a debate about which tools at the margin better balance two goals. maximizing assistance to several hundred thousand homeowners while minimizing further costs to all other homeowners and taxpayers. anticipated benefit of principal forgiveness is by reducing foreclosures relative to other modification types, enterprise losses would be lowered and house prices would stabilize faster but thereby producing broader benefits to all market participants. the far larger group of underwater borrowers could remain faithful to paying their

mortgage obligations are the much greater contingent risk to housing markets and taxpayers. encouraging their continued success could have a greater impact on the ultimate recovery of housing markets and cost taxpayers than the debate over which modification approach offers the troubled borrowers is preferable. a key risk targeted at borrowers is incentive created for the current borrower population to cease paying in search of principle modification. in closing the population of underwater borrowers current and delinquent remains a key risk for fannie and freddie, taxpayers and for the housing market. there may still be improvements to current efforts that can mitigate this risk in a cost-effective way. i want to conclude by saying fhfa remains committed to working with the administration

and congress on these difficult questions because we recognize we all have a shared objective preventing avoidable foreclosures, minimizing taxpayer losses, bringing greater measure of stability to housing markets across the country. thanks very much for having me today. [applause] >> i think -- [inaudible conversations] >> let me thank you for coming. we share with you the ambition to formed the debate. we have a good panel to probe into this further. you mentioned today as you suggested you do every time you give a speech. you talk about legal

responsibilities and one of those is to preserve the assets of properties of agencies that protect the taxpayers. the key question for the new analysis as you alluded to in your sample analysis is how much treasurys change the equation. in the role of your legal responsibility do you -- these treasury incentive payments are paid by the taxpayer. is this in any sense the cost in your analysis or money that is coming from another force and if it is enough to fill hole and make principal -- principal reduction worth it? that is not your problem but a different pile of taxpayers' money so therefore is not part of the analysis. >> we are approaching it as our responsibility to conserve assets to the taxpayer so we're looking at what the costs would be to fannie and freddie. it can help us to be aware that we are conserving assets on

behalf of the american taxpayer. so if we engage in principle -- principal forgiveness we are trying to provide transparency that that is the case. it may make fannie and freddie's losses lower if it takes the overall cost of the taxpayer higher trying to provide clarity to that point we recognize congress gave us responsibility and mandate. it gave the treasury department a different responsibility and mandates and different funding source. t.a.r.p. funds have never been used for fannie or for the loan modifications but the treasury department has determined for the first time this january that if we were to do printable -- principal modifications to fannie and freddie as investors to receive the investor incentive payments, we are

trying to provide clarity about how this works that our responsibility is to that of conservatives somehow affect the net present value of fannie and freddie will also include this other consideration i touched on in my remarks with operational costs of doing this and what are the borrower incentive effect. >> do you have a sense when your final analysis will be including treasury incentive benefits? >> this issue needs to be brought to a conclusion. there is an awful lot of new information. obviously the treasury office is fairly new so we had to take time to go back to this analysis but we are looking to wrap it up in the next few weeks. >> also on your responsibility how you see your role the brazilian mention the affordability. i think in previous speeches you talk about loan modification and

making it affordable for the borrower to make monthly payments. i tried to scribble quickly. you say which tradeability to pay and willingness to pay. unlikely there are under water borrowers who might for their mortgage or you give them principal forbearance they could afford their mortgage but so far under water that they make the decision i am so far under water i will never make this equity up. i would rather walk away from this. i think i got the quote. any principal reduction policy would have to consider, quote, general acceptance of reasonableness if not fairness. if a principal -- principal reduction is helping those people for their mortgage but they opt not to many people may do that, maybe that is what this is a tough thing to pass through legislation but going to your -- how to do that npv analysis and

go forward. from a bottom line point of view for fannie and freddie you have a borrower who will walk without a print of the reduction is better to give them a principal reduction. >> be careful about the kind of incentives. doing that is the point. the point i was trying to make about being reasonable if not fair was in the context of the situation for fannie and freddie in determining to offer principal forgiveness and who it would be offered to is different from individual mortgage servicer to make this decision with their own book of business because the individual mortgage servicer can go through their own book and decide what ever factors it wants to use whether to offer the borrower principal -- principal forgiveness. there is no regularity and that particular service sir -- servicer can do its thing best.

they're working for a thousand mortgage servicers that everything has to be more transparent. we have to write guidance that gets posted publicly that goes to 1,000 mortgage servicers that say a borrower needs a loan modification in order to stake in the house and not go through foreclosure. here's how you go about evaluating that borrower and of offering principal forgiveness you have to be clear and transparent about the decision rules these thousand plus servic servicers are supposed to apply and that transparency, how the rules are applied, it raises the concern for us that makes it easier to be strategically modified against relative to and individual servicer who doesn't have to provide any transparency

to the bar where -- borrowers. >> it may make sense to give bar were a principal reduction but hard which. either both get it or they get principal forbearance. >> that is part of it. to clarify more on principal forbearance, principal forbearance is taking most or all of the underwater portion of the borrower's loan principal and setting aside and there is no repayment against it and it just sits there silently until

the borrower goes into foreclosure if they fail in their mod or successful in facing their home somewhere down the road sells the house. it takes that principle -- principal that no payments are made on and sit there. down the road it is a loan modification successful than the borrower >> reporter: the obligation to pay off that principle amount then they sell their house. that give the taxpayer the opportunity to share in the borrower's upside. if it picks up there's -- allows them to stay in their home and go on that is great. the borrower got that opportunity because the taxpayer provided the loan modification but the taxpayer gets to share in the upside-down the road to

do principal forbearance. the borrower gets the same monthly payment the question is on the upside if over the long term the loan modifications are successful how do we get the taxpayer to share in the upside success of the bar were --bor w --borrow --borrower. >> do you give them a reduction in principal but fannie and freddie future price appreciation? >> it is a less complicated form of it because we don't have a new loan instruments in the operational tracking of this is much simpler but in fact is a form of shared appreciation saying we are setting aside this forborne amount and down the road when prices recover the borrower pays down the mortgage and the investor in this case

fannie and freddie get the upside of to the forborne amount endeavour dollar after that the homeowner gets all of it so it is one form of doing share appreciation. >> you talk about this and it is a useful exercise that size is the impact even if you go full hot on principal reduction with how much this could affect the broader -- a million underwater borrowers and how will affect the housing market. i'm curious. the incentive payments, there's a range and i think the range, incentive payments are lower for people without payment or in the foreclosure process for a longer period of time over six months. those incentive payments are pretty small and if somebody hasn't paid their mortgage in six months even with principal reduction they might not be recovering and staying in their house. and looked up after i saw that

and the latest numbers people in the foreclosure process is something like 11% have been less than six months. that is my question. is this something that will figure into your analysis? you give a number of less than a million. that addressing the issue that lot of people might be too far into this that even principal reduction might not be helpful to them or keep them at home. >> in the preliminary findings we reported assumed treasury incentive payments to fannie and freddie were scaled according to the rules of the h.a.m.p. program. the amount of incentive payments did very and was factored into the model. to your question about the universe we are talking about.

there's a common estimate of eleven million homeowners in this country. estimating this is pretty difficult because it involves using indexes and all sorts of measurement issues with that. taking that as it is, fannie and freddie if we need a zip code level house price data fannie and freddie today have 2.5 or 2.6 million loans that are what we call deeply underwater. the current loan to value ratio is above 115%. so 2.5 million or two.six million. of that approximately two million of them are still paying their mortgage every month. so the group that is delinquent whether it is 60 days delinquent or haven't made a mortgage payment in two years in the order of 600,000 borrowers said is the universe of folks we're trying to reach right now with

the various loss mitigation full live talk about in my speech but it is the two million who are deeply underwater and current that we are concerned about and why the changes we made to the h harp are so important to help people continue to pay their mortgage. >> we will take questions. we have time for a few questions. i think there is a microphone. if you introduce yourself. we are limited on time so keep it to questions. >> i won't stand up. two thirds of all fannie mae loans in nevada are under water and half of them have flown values above 125%. h.a.m.p. mods the temporary. in places like las vegas where

amortization and depreciation may not bring these borrowers back in five years to positive equity do you think the current modifications in these parts of the country are sustainable? >> fair question. i think they are. one thing about what happened in five years is the interest rate not lowered to 2% it starts increasing at that point. if there is principal forbearance it goes to the life of the loan. it does not change at the five year mark. what changes is a resetting of mortgage interest rates so in the h.a.m.p. program the mortgage interest rate can be lowered as far down as 2% and after five years it will go up a percentage point a year so it hits whatever the current market rate was at the time of the loan mod so most borrowers will be 4%. there will be a gradual increase in interest rates to 2% to 4.5%

that will start at the five year mark but the other aspect of the loan mod will stay in place for principal forbearance and the other thing observed about the question is clearly when we talk about the underwater borrowers these are not randomly or uniformly distributed around the country. they are concentrated in certain markets that were particularly experiencing a big housing bobble and a big burst also. most of this is concentrated in a handful of states. >> let's go to read the to. >> 1/2 and analytical question. to what extent did you subject your calculations to the real-estate equivalent of the

bank's stress test, that is to say to what extent would your calculations -- did you build into your analysis that real-estate markets might perform significantly better or worse than the best guess and if so what was the sensitivity of the calculations to such variations? and a related question to that is you stress the fact that the interventions you were discussing were relatively marginal in the larger sweep of delinquencies, but the impact of even marginal shifts in behavior of homeowners on the course of the housing market could have feedback effects on various calculations you are trying to make. so my question is i am asking for the error properties in your

model. >> fair enough. the model itself is home prices a flat. no appreciation or depreciation on prices that are part of it so we don't bank on there being an upside but we are not stressing it on the downside. we do other analyses that do that but in terms of assessing an individual borrower for loan modification that is not what we do but the other part, the incentive effects, that is part of what we are wrestling with today and so that works not complete. the idea that -- this is an economist. on the other hand on the one hand, if principal forgiveness achieves its stated objective accelerating this stabilization of house prices and the feeling that borrowers will say we will not see more foreclosures that

has a positive feedback effect. on the other hand if principal forgiveness offers to borrowers or deeply underwater and stop a mortgage creates a sense across the country of a maltese borrowers who are paying their mortgage that what am i doing this for? i am at 144180 lpg. i see the government is encouraging activity the other way. and certain people -- the government is providing opportunity for certain people who are not paying the ability to get this principal right down. it has a feedback effect that that is very negative. ..

>> i don't believe there's anything i can report on that. >> back there. >> chris arnold with national public radio. could you talk a little bit more about a shared appreciation approach, i guess you described as more complicated, where, let's say there's $50,000 that gets pushed back, no interest is paid on a. how its prices recover, where

the homeowner would get, you know, $25,000 of the upside, fannie and freddie would get $25,000 of the upside. so there's a disincentive for strategic default because the homeowner would be losing some of the potential upside, but enough of an incentive to stay with making the payments because while i'm not giving up all my upside, senator menendez has talked about this at hearings and stuff. is this actively being considered? >> there is a shared appreciation mortgage. if we did a principal forgiveness modification and then wrote a separate shared appreciation agreement, that's a new instrument that doesn't exist today. we would have to figure out what the basis of that shared appreciation would be. operationally, this would be harder to track over time, and then the ability to take this loan, problems and of having to be on the balance sheet of fannie and freddie, which we're trying to shrink.

so it's operationally has different complexities and judgments about the shared appreciation feature that would all have to be worked out. the system, the operational systems and financial accounting systems that are in place today already allow for principal forbearance, and so there's no additional investment, we can do that easily and we know how to track it as it is one way of doing shared appreciation. so the point is with principal forbearance we are, in fact, doing shared appreciation mortgages using the technology and tools that are already in place. we don't have to take time to build and to make these other decisions. >> so i understand, does that mean you're not considering the more complicated one, or you are quick you're running the numbers and georges think it is more complicated? >> i think i will leave it where i have it. spent let's take one more last one right here. >> with all these programs to help the link when borrowers,

when she went through many of them, to what extent do you think of and all the political pressure to a barbarous come to what extent you think a mortgage is no longer backed by collateral? what does that imply about the future, the return of the private sector? >> so, let me say something about the underwater borrowers but i talk about how many are thin and pretty but there's a whole lot better and private-label securities. what doesn't get reported nearly wide enough is that most americans that are underwater on their mortgage, they realize that they signed a contract, they have an obligation to make the payment. and, in fact, they are. so whether we consider this to be a collateralized loan or not or how an investor looks at it, i think the real important point here is that folks that are underwater on their mortgage realize they have an obligation to make their mortgage payment. they are continue to do so, and they should be encouraged to continue to do so. in terms of bringing private

capital back into the market, private capital is going to want to look for a number of things to be fixed relative to the way the market operated over the past decade. and so the strategic plan for conservatorship that was sent to congress in february is one measure of the steps that we at fhfa are seeking to take to fix those problems with the mortgage market. and we think that they are a part of what needs to be done in order to attract private capital back into the mortgage market, but clearly private investors are going to look for, going to take a whole lot harder look at mortgage credit risk, you know, as they reenter into this market. >> i want to thank you again, and also welcome you to stay if you'd like to listen, we have a panel following. but thank you for being here. [applause]

>> [inaudible conversations] >> [inaudible conversations]

>> [inaudible conversations] >> all right. i am very happy to introduce the panel of experts to dig a little deeper on this. there are bios outside, but i would just give a short bio going from the left to my right. on the far left would have mark fleming, chief economist at core logic. he leads the more chick risk and economic team. next to market is executive

director and head of mortgage credit research at nomura securities international in prison is a senior mortgage credit strategist at goldman sachs. on my right is andrew jakabovics, close enough, director for policy develop and research at enterprise community partners, preventing senior policy advisor to the assistant secretary for policy and development research at 20 of our to do is associate rector for housing and economics at center for american progress. and on my far right is professor of finance of the school of management and george mason university and previously taught at university of chicago. so i ask each of them to give at least a brief intro, about five minutes. i will start with the market will talk basically about the state of the housing market and the different options available to address a high level distressed that we see out the. so mark, you can take it away from there. >> i think first i probably need to apologize. i and my colleagues at core

logic are the source of 11000023%, 700 billion-dollar problem that is encircling as he. i think the real issue of this whole concept of principal forgiveness and principal forbearance really focuses on that $700 billion number and what do we need to do about it. i think and very eloquently described all of these issues. it's not really a problem of $700 billion. it means folks are delinquent somewhere between when we look at notices of default in 750,000 of the 11 million. when you look at the linkages were talking about a few million maybe of the 11 million. it's significantly less. we're talking not 709 but maybe a couple hundred billion dollars of those who are delinquent and the truth is the vast majority of these individuals do in fact continued to pay their mortgages. and also this concept of ability and willingness to pay. we build models and looked at this analysis very carefully to try to understand the

willingness component and that is the key, is how do we instant individuals to continue to pay on their mortgage. negative equity is a problem is not going away anytime soon. somebody mentioned in nevada, you know, the problem is five years. negative equity is not going away in las vegas and five it. maybe even not continued. when we studied the concept a couple of years ago we looked at it and said if you assumed house price for gas, and let me be the first to say what house prices are going to do over the next five to 10 years, we are sort of hunting a question on that and getting into two or 3% growth a few years from the. many of these markets are so deeply underwater, even 10 years from now the average underwater borrower will still be underwater. and so this is a problem that is not just achieving with those who are struggling in delinquent but more broadly negative equity is a problem for a quarter of all homeowners out there. what happens five, six, seven,

eight years from now when the borrower who has been paying their mortgage for that length of time needs to move for a job or something like that? that something that will be facing the industry but it has applications but are very hard to measure but i don't think any of us have a good handle on the impact on mobility and influence of creating stickiness of high unemployment rates in the labor market. it is certainly is having an impact on the mortgage market. one of the reasons among others that we see such a low volume of purchases is there's a lot of people out there who are underwater on the home and, therefore, can't sell the house to buy another one. so the turnover in the market is much lower. so again it does get back to this concept of willingness. and we find a willingness is an important factor. much of the research does show that ltv makes a difference. i think that research was done on a paradigm that is very different from today. we are in uncharted territory at the moment in terms of how people behave, but we do conceptually get the idea that someone who was so deeply underwater has less willingness.

that's where concept of shared appreciation at all the stuff comes into play. the point is yes, it's a big problem. there's that a liquidity problem that we're all trying to address and we're making great strides with it. we publish statistics now on completed foreclosures and we're saying look, foreclosures are down. we ran about 65,000 completed foreclosures in february. that's a run rate similar to last everybody run rate of in your we are looking at eight to 900,000 foreclosure in the course of you. that is down from 1.1, two years ago. why are we not for closing on more people? there's a lot of people out there who are in the shadow inventory, and so why aren't these people being processed through foreclosure? when we actually look at, we'll coined the term, foreclosure liquidation, which could be anything, could ever closure, a deed in lieu, a short so, a modification that many of these things, those have been put in the process of foreclosure i a service or, the relative share

of foreclosure liquidation our rights that have been trending upward slowly for a number of months now. so we are doing less foreclosure and more liquidation in the form of all these things we're talking about. so i could say things are getting better, they're getting better slowly but it such a large amount to climb this will take a long time. we should be looking at addressing the concept of willingness for those who are in delinquency, the concept of willingness for those who are courage and not incenting them to go delinquent. we survey don't want that to happen. and also looking in the longer-term what are we going to do about those who behave exactly as we want, yet five, six, seven, 10, 12 years from now are still underwater. thank you. >> great. next up is paul. pol will talk about the star performs of the loans of principal modification and give some investor feedback on various principal modification programs, proposal. i think we have a few slides to draw your attention to as well.

take it away. >> i which is quickly address some of the data that we have seen. more so in the non-agency market where i focus. we will look at performs of various mock programs and the driver of my performance. so first of all, in terms of the historical performs come if you take a look at the top part of the slide on the screen, i would take a look at first of all the performance of principal mod versus rate my. this is the first. to principal mods perform better than rate mods? the issue with this approach is will have about 12-24% of decent data. so the statistic we shall is a 12 month redefault rate both in subprime on the left and prime an alternate on the right for rate mods in red come and principal modifications in gray. in both cases you can see the principal modifications tend to perform better. the difference is much bigger because it attends to a greater share of strategic defaulted or even in the subprime sector

where bar with 10 default more for affordability reasons there is a pickup in performance performance for the performance of borrowers with principal modification. now, keep in mind is principal modifications, the majority of these involved forbearance rather than forgive this. it is impossible for us to differentiate the performance of forgiveness versus forbearance mods, other than people to tell that are better. anecdotal the in conversation with vers mortgage services and a taking a look at specific deals that report this information we do see a modest pickup in performance for loans with forgiveness versus forbearance but it's not massive, it's not minimal. if there is by deal but there is a noticeable difference of performance over the first 12 months. second of all i would say there's other factors that also drive the recidivism rates for modified borrowers in addition to the principal modification decision. so as and was saying before, certainly the timing of when the modification takes place also makes a huge difference. so the bar we did not make payments for two years or more, there used to making their

payments or even if you get 90% of their ballots, they still have to pay more than zero. it is much harder to get a lot of these borrowers who are deeply collaborative starting on the mortgage, were as at a borrower misses only six to 12 months of payments, the success rates are much greater regardless of what type of modification is offered. also the payment cut is a big driver of performance. if you cut a greater percentage of the payment borrowers tend to perform much better. we have the balance reduction which is any different, and the depth of the payment cut, percentage of payment reduction in the different path. the point to make it is clearly both of these matter quite a bit. if you take a look at the right half of the chart, borrowers that have a 30% or greater payment reduction, you can seek any additional reduction in principal balanced and even through forbearance or forgiveness, you don't have a meaningful difference in helping the performance of the borrowers. so this isn't some prime for affordable is a much bigger deal for bar was the one she got

enough, they performed similarly. and a key question though is how do these borrowers performed over the long run? that's the key to the npv question. we just don't have sufficient data to be able to tell whether this affordability issue will continue to drive performance three to five is down the road, and whether these borrowers will be up to refinance or move, as mark was saying. for example, the borrower receives principal mod and their markdown, and if they do a little bit of principal. it's much easier for them to move or refinance in five years. that will greatly decrease lifetime losses for these loans were as if they borrowers causing 124130 ltv in five years who knows what it would be at the time? the other thing to point out is that over the last year, the borrowers -- a lot of cases where hearing from servicers that the borrowers modified payment is less than what the borrower would pay if they're

forced to rent an equivalent property. we did a study for subprime borrowers looking at the average payment that subprime borrowers make in different cities and comparing it against average proxies for rent in those different cities, and average we find modified subprime borrowers are paying about 10 to 20% less than the equivalent rent in those cities. if rents were growing, caught three to 5% a year, only provides a greater disincentive for borrowers to default in some ways if they think about what they would have to pay in rent after they get kicked out of their homes. so this is another factor we're hearing from servicers, are providing a greater disincentive for borrowers to fall. even if they have a great modification. for example, it is possible to rate modification allows them to lock in a lower payment than they would pay in rent. i would say in conclusion just to sum this all up, we see some cases where principal forgiveness would make more sense for borrowers compared with forbearance mods or for a rate mods, but it is small

steps. for example, you have to target the borrowers early in the dillingham to cycle, and would have to look at the borrowers underlying credit and make sure you're not cutting too much principal. in a non-agency said we'd not seen huge pickup immoral hazard risk. winter for modification programs were rolled out, the hamp program, the hamp principal reduction program, but at the same time these modification programs are very specific and was impossible for borrowers to tell which borrowers would receive a principal modification and it was very to servicers specific policy. as tran was one saying it for, this cannot be extrapolated to the gses principal modification programs where policies would have to be more institutionalized. the same time we do see a number of principal modifications being npv negative, compared to rate modifications are prepared to not, for closing on a borrower, just been on the style of modification. and with that, thank you very much. spent i will turn out to into to

a thick make the case for principal reduction, and they also touch on the moral hazard a bit. >> sure, be glad to. i didn't bring any slight. i brought one of these. and so, director demarco talked a lot about cash but, unfortunately, the way the card servicing structure and the mortgage industry is developed, borrowers have absolutely no control over what happens to their servicing rights. i mean, who controls their mortgage. so the way we roll out hamp and the other modification efforts really hedge event, you have no way of knowing when to go into the mortgage with exception of fha where you know up front who will ultimately service your node, or that the rules of the road will be consistent across the board. and so talking about fairness, we have narrowed the box a bit and i think a broader conversation from a policy perspective really needs to get to the point of comment if i look exactly like tony here, sorry, a little more hair and gained several inches of height,

but we are similarly situated borrowers, if you got lucky enough to end up a note that was held on a bank's portfolio, the bank is basically has unlimited access to whatever decision they want to make to modify that no. if however i ended in a note back a celinda lake private-label securities and the investor is willing to principal reduction, maybe i will get it, if they're participating in hamp, and i will get a. fib servicer who is not a hamp participant then i guess i put mike leinbach in my pocket. they are effectively 31 flavors of hamp after, and the idea that from a pure policy perspective that we're going to incentivize or disincentivize borrowers able to access or to suddenly start strategically defaulting, six years after house prices have peaked nationally, you know, i think overstates the likely that we're going to see significant changes in borrower behavior. so i think rather than taking a

categorical approach to the question of principal reduction versus forbearance, i think the individual now applying for the analysis makes a lot of sense. i think it is far more complicated than the average borrower can really unwind, give transparent interprocess. so i think that the risk of increased strategic default once we know, a game if we are clear there of at best half a million borrowers out there who may relative to the other wonderful test get access to some degree of reduction rather than forbearance, as opposed to just a simple interest rate reduction, et cetera. if we build a principal reduction into the waterfall the way it does exist for other services, not already servicing on behalf of lots, thousands of investors, i think the operational complexity again is a little bit overstated, given that there is transparency around hamp and jennifer thomas itself is not public, although the factors that go into the decisions are made known.

but there's enough proprietary in their to expect that borrowers who to this point of not been strategic or suddenly going to start becoming strategic because there's an additional incentive component in a waterfall that is not optimizing anyway. i think is really kind of comment misses the point that there is a tool that is available, even the current analysis that director demarco provided us today, data show that there is a benefit to the and surprises, should they to principal reduction in certain instances. and so not have that too on the table we know that, in fact, private lenders and services are doing it for increasing share of their books of business, why it makes sense to do. so to say we will do an analysis, it will be in tv positive and yet we're not going to take that option come we will do its lightless npv positive, access and give a slight less valuable to us alternative

doesn't make a lot of sense from the conservatives perspective on the. i think their implications as mark was talking about for the long-term stability of the housing market, the idea you're still dealing with severely underwater borrowers even post-modification as a poster print of a reduction where the borrower doesn't need to go back to the link to get approval for a sale, the idea that basically stagnant housing market in places like phoenix or las vegas over the long-term as opposed to allow them to come back into, to allow people to move in that mobility, to allow the next generation of homeowners to buy, i think its broad implications over the long term. while forbearance that short-term benefits, that may outweigh forgiveness out right, i think when you take a longer-term view of stability of the housing market as a whole, i think willingness to pay certainly creates income and think about what the markets might look like in five years, it is certain part of what long-term strategy for the enterprises should be. and i think sort of, i've been sort of a supporter of principal

reduction for the last four plus years, so it shouldn't come as a surprise as advocating for. but i think also if the gses are not willing to do it, you know, there are plenty of investors are buying these nose and full disclosure as a nonprofit of other nonprofits working in illinois with hardest hits funds, does begin to apply to those on the open market during the deep reductions, because economically it makes a lot of sense. there's a lot of upside where these notes are trading. and so if the gses don't want to recapture some of that value i think folks would be happy to take that off your hand. but overall i think the investors also starting to see the opportunity to buy somethings at a discount and are doing the reduction simply because the long-term performance of these notes with the principal forgiveness makes a lot of sense, marking these properties. is putting it in historical context and it's something we did during the depression. as a matter of course, refinance

bars into loans 80% of the ltv, current .tv, and really had a redefault rate of about 20%. and they've rented those properties out before selling. that's another historical, some of the work not being done by the gses today in terms of the rental program. but over all historic we're done this but it hasn't led to additional defaults. there are ways in which you continue to gain it by capping the stargate so no new borrowers can get into, already delinquent borrowers i'm interested to see what your analysis shows a few do not the 5% rate but simply anyone who is 60 days to liquid as of january 1 of this year. you're dealing with a finite pool rather than an infinite poll. i think those are the kind of questions i would love to see as you make your full analysis of able to the public. >> great. and then i will wrap up with tony, his opening comments, the problems with principal reduction and sharing on shared

depreciation. >> thank you. the probably thing the last person on the panel is that everyone has hit all the high points. my talking points were exhausted, but having said that let me continue on anyway. i am the one person probably in the room that was very relieved to hear mr. demarco said we need more analysis of this. what i want to guard against, what i hope most of you want to guard against is what we'll call anecdotal economic policy, the fact that we do hear tales. i've heard them all, that this will help salvage the housing market, principal reductions will end up helping out households which, of course, it would here but the promise we don't don't have enough observations yet. in fact, mr. demarco touched on a. what we're talking about looking at the hamp programs and the fact that you need to get out a certain number of years to see if these things actually work. ..

just that comparison. there are other ways to get rid of this problem. i mentioned a shared appreciation mortgages which mr. demarco deflated rapidly. i'm a big advocate of that, but in his defense i did a study of bank of scotland programs over there, and the problem with those programs is the forecasts are -- if you forecast 2% rise in housing prices, they go up

and down 20% or up 20%, the game is over and everything just turns on its head is a there are problems with that and one reason they were hesitant to do that. but there's also other programs, like bank of america announced a pilot program on the mortgage to a ranch where they are trying to look at households in trouble on the foreclosure and transition transition to the rental market. they believe keeps the asset for media to two years and sells about in the market. but again, there's lots of approaches are different during the principal reductions. principal reductions i would rank as last. we should do loan modifications, forbearance, programs such as bank of america and fannie and freddie can do those as well. reduction should be the absolute reduction of last resort. and here's the other problem. pandora's box. we open this up, and mr. demarco will thankfully keep the lid on it.

supposing every time the stock market crashes and pension funds and retirees are deep trouble and the administration says hamp, the stock market hamp. we are going to be allowed all of the stock market. what kind of behavior would that greed, stock market, you think? i'm going to get bailed out. and even if this is constrained to fannie and freddie, i can picture if they start doing it here and suddenly we are going to mccaul private lenders to the same thing. reduced principal, even though we have no evidence a long run that it works but we are going to force companies, private entities to go through and do this too. again, it's dangerous policy even if it works by the way. so even if he thinks it works, we've been on the panels before. we know each oberst talking points quite well. [laughter] even if it works, it's a

dangerous precedent i would ask you to consider. but we, mr. demarco as stated in number. it wasn't 7 trillion of equity loss, its 7.4 trillion. and my mother last point is whatever we did to lose $7.4 trillion in equity and get into this disastrous mess we are in, can we change whatever economic policies we had to kind of push this down this cliff? thank you very much. >> thank you. i'm going to start with a few questions and open up to you guys for questions. i want to start with something i talked about with mr. demarco. i guess this gets to the size of the question. on the moral hazard issue, the change of behavior, andrew pointed out the way is to base it on historical delinquencies. so if you are delinquent previous to the date of the announcement then you could qualify. but on the flip side i noticed the incentive payments are quite

smaller from people who have not paid their mortgage but meet their mortgage payment and morgan's six months. and the implication there is they may be on hold so we don't want to incentive is it too much because there might be incentive payments going for nothing. so i am wondering, i guess for all the panelists and maybe to start with you, does that leave you with many people if you restrict it to people -- first of all, they have to be fannie and freddie mortgages. secondly, they have to be delinquent as of today or yesterday, which gets rid of 75% of those. and third, they are not really going to help people that haven't paid in more than six months or some of these cases 40% haven't paid in two years. how many are left and how much of an effect does this have? >> they are the ones with the numbers. we have to toss it back to them. but just structurally it still makes a lot of sense. we need a lot of tools to solve the problem.

borrowers, as mr. demarco mentioned, for a host of reasons. and so, we need -- as many reasons we need as many solutions, and we can say principal reduction will not be considered under any circumstance it seems unnecessary that we are sufficiently sophisticated to be able to cross the solutions that take the tests and to account, and the value of principal reduction relative to the forbearance coming and the other put at the end of the waterfall. and it may be if there are half a million gse vara result in the aggregate on this at the end of the day only 50,000 qualified for principal reduction, then those are 50,000 people who are better off because the principal reduction has offered them an alternative. succumbing to the extent to get a free performing asset on the gse' books, relative to the redefault rates and all the

evidence based into the model that everybody is using for hamp and fanny developed. so to say for the deals has to use our numbers that we are not going to i think is somewhat problematic. it gets back to this basic notion of fairness that if every other servicer has access to offer the principal reduction where it makes sense, again, i would love to see as much transparency on investors' decisions and when servicers are participating in hamp are allowing the the borrowers to use the principal reduction alternative. i think you can require the same of the gse without dramatically shifting the behavior in the marketplace. >> sort of a follow-up, i guess looking for agreement. it seems like neither of you say there are no circumstances -- there are circumstances where the principal reduction on an individual basis might be the right thing to do. the question is can policy, given the share of the market

the gse house, can it be nimble enough to distinguish such that you pick the right one. maybe it's 50,000, maybe you are not doing principal reduction for an enormous amount of that behavior to incentivize them. even if it doesn't change the behavior, it would have been less for some of them not to the principal reduction. how do we put policy nimble enough. would that be a critique that shorter might be someone out there we would have an option for if we can target it will. >> already previously said a whole host of households this will not work. if people that are currently making payments on their mortgages and there is no reason to write there is down, people are unemployed, so it's difficult already competing programs have forbeared their payments. we have 14 different programs from the federal government modifications and those are just

administration programs. this doesn't include bank programs and fannie and freddie programs internally. none of these really have worked all that well. and so when we are saying this time it will work. no. i ask you to view more studies, which mr. demarco said he is going to do. how big is the wedge and how effective will that be. and is the government nimble? [laughter] let's be honest, some of the government is about as nimble as a slugger. they are well intended but the move very slowly, and i'm worried about -- >> i think that there's uniquely some growing consensus for all of us in the room. there is a time and a place for all of these choices. principal reduction is one of the many choices. there is also the ability to

develop objective net present value that look at lots of data and to sorts of things in the very object of fashions to begin to try to make those decisions. are the perfect? no. is there any such thing as a perfect model? i would like to find one if i could but no, that doesn't exist. so it shouldn't be excluded. it should be used as one of the many things. we are looking at this and saying there are great benefits that have come out of much of this spigot in the old days was there such a thing as a net present value service when he went 90 days delinquent? there was one choice and one choice only and what was it? we are going to take you to foreclosure. we didn't do deeds and leius. the world is more complicated in response to what happened, and that's actually a good thing going forward for the industry that we are going to be much better about addressing the best way to handle these things. and the problem, we keep talking about the problem. i don't know that there is any

single or even multiples of policy that can solve such a big problem that we have other than time. right now one of the best policies we have is time. right? you know, the economy will get back on track. incomes will grow. and what do house prices to an incomes grow? they grow, too. they will age themselves out. time has to unique benefits as a policy. first benefit it's free. and the second benefit, you can't really go wrong. right? these are two things that really hinder the developing policy today is how much does it cost and where did we go wrong? >> i want to open up for questions. again, six right there. >> my name is bill mehl and i'm an independent journalist. i'm the author of 10 million foreclosures, no saving private ryan this time.

i listened very carefully. there's a gentleman from the chinese embassy and i'm sure he is listening very carefully as well. i hear the analysis to try to solve a problem that is on several skills as difficult and as deep as the great depression in terms of the loss and the gap and the number of potential foreclosures. what i don't hear is any thinking and i don't know whether -- i'm asking for a macronumber since we have backed off addressing unemployment. and you look at the approach was taken at the end of the size and scale of the intervention during the great depression to meet this problem, both directly intervening in the mortgage market as well as putting unemployed people back to work. and i tend to think that's where the answer is and our state of political economy doesn't allow us to get to anything through the microapproach that can satisfactorily deal with this problem except, quote consult healing and time coming and i

don't think it is going to work. >> anybody have a comment on that? thank you. >> i would say we haven't done nothing on a macrolevel. it absolutely -- for the employment in this country is stalled at 15.5%. it's been a place in september september 2009. something needs to be done. keynesian verses austrian. there's different strategies of how to do this. but the one thing i will say is the fed, the federal reserve and chairman bernanke has been very active in trying to help this problem out by pushing interest rates to almost japanese levels, getting down to nearly zero when the liquidity trap, nothing seems to be working. but again, i would caution you that the fed is throwing everything in the kitchen sink and nothing is firing up. i'm not sure what of their macropolicy would do the same thing. it's a tough problem, absolutely.

>> somebody in the back over there. >> i'm from the bloomberg government. other seems to be some consensus that principal forgiveness should be at least one tool in the toolbox. the question i have is should it be subsidized and chosen more frequently than the other tools? >> i think that to the extent we have some of the ama likes and we are going to disagree how good that capacity is in the current time point. i think the numbers themselves would bear out when it makes sense and when it wouldn't make sense. unfortunately it's not in optimization model. it's basically a waterfall approach and you could then therefore decide to make principal reduction first and foremost we just read is principal and let it go. i don't think anybody is advocating for that either. the question is after you reduce the interest-rate and extend the

term, what other options might you do with the residual amount of the value of the note relative to the property to you simply for better or for deutsch, and i think that is where the policy decision comes in. but to simply say that we were only forbeared i think is shortsighted. so from my perspective i think that given the existing waterfall and operational comfort that exists with the hamp process it should be fifth in line if you are 48 and four be in that regard, as that is putting in after some of these other things that are less costly but potentially effective for the slightly underwater while borrowers are delinquent borrowers. but again, you figured out where it fits in the process to appeal the operational and the npv level. >> since we've already talked about the model and p&g versus

the austrian approach, on the welfare economics we talked a lot about what these things cost and we have paid hamas to the fact that there's probably some benefit of their and we've got the idea that your people get foreclosed upon and they are not listening and and that is good for the existing homeowners around the foreclosed property and you don't have the light it neighborhoods. we should say the subsidy should be equal to encouraging the benefit to the society but the same could be said for any kind of modification or any kind of this position to rule that prevents the for pleasure from happening. there should be that welfare benefits to society that would offset the cost. we are stimulating the economy, all about trying to say we believe there's a benefit to doing this. it costs money but there's a benefit to doing it. i think the problem of the land on as we often don't talk about

or measure these benefits and sort of include them in the calculations because it's extremely difficult to know what they are. but we would want to talk about trying to get a better handle on measuring with the benefit of the programs are to the society in the welfare economic framework. as ballistic one final question. >> i wanted to ask how this may play out in this political season with a for example there appears to be republicans against any kind of loan forgiveness and let the market work probably against other programs and the democrats. >> i don't have any political analysts appear. does anybody want to give a suggestion. >> the only thing i will say is a gannet release back to the problem i've discussed before

that the banner headline, administration sources demarco to principal reductions even if there are five out of 11 million i don't think anyone will read the second line of the story. it's a headline in pact they would do. stegano will leave it to the editors to write the headlines. the stories are royte and we have to read a little bit into the details and that is the challenge of all this as we see from a variety of opinions out there of housing is complicated as are the solutions. and so, i think that we are -- the difference you can tell even though he is on the far right and i got situated not as far right. >> i voted for carter. [laughter] i think the real issue is that

the sides are not that far apart, and again, the number of folks we are talking about is not staggeringly large but to the extent as an opportunity to provide the was and available previously of think it is worth getting it right most of the time even if we are going to make some mistakes, and i think the debate is far the mistakes too great or frequent for us to go down that path, and i think the answer is no. >> before wrapping up i just want to ask everyone to remain in their seats. mr. demarco, we want to have him be able to exit first, but i do want to thank the director for speaking here and also for all the comments and also think my panelists for the conversation. thank you very much. [applause]

[inaudible conversations] in all will conversations [inaudible conversations]

[inaudible conversations] [inaudible conversations] if you missed any of this discussion, you can see it on our website. go to c-span.org. we have more life events coming up on the season and it works.

during remarks at a mabus bin institutes andres held here in

washington, d.c. he was referring to the trayvon martin case calling it a marker and where we are as a society and was joined by to the surprise when journalist in the illegal immigrant jose diaz-balart discussing american identity and race relations. this is just over an hour. >> good afternoon. how was lunch, great, wasn't it? a little bit late, but what an extraordinary panel this afternoon and i think you ladies and gentlemen for being here. chancellor of the see the looks schools kaya henderson. khin mai aung is from the asian american legal defense and education fund and former mayor of baltimore and dean of howard u, kurt. thank you very much. we are going to open up for a chat in just a little bit, but we were talking as kind of the

opening comments on education and at the media and, you know, i think that, again, you talked about this there are also the vehicle often misconceptions', stereotypes' of both the good and that all i guess although no stereotype is essentially good that i think as a direct impact on our children, how they perceive themselves, how parents receive their children, and themselves within an educational community. so if we consult with talking a little bit about your line of work which you see and what the biggest misconceptions and battles are. >> i am dhaka director of the educational fund, so a lot of work in this area is covered and influenced by asian-american students and education, and i guess to start off as food for thought with regard to how these

issues impact the community, you know, there is a myth of the asian-american students at the union formally or largely high achieving and doing well in the school system. unfortunately is not the case. there are students that do very well, there's great despair even among ethnicities, by english language lerner status. and in geographic concentrations. and a lot of the work that i do looks at how a lot of these policies that we are going to be talking about today have a certain unintended effect, in particular upon immigrant communities and communities that are not in the bup power to advocate for. >> when you talk about some of those difficulties, the language and cultural as well. >> yes, i think languages a huge issue. >> primary, right? >> i would say there are cultural issues, but i think

that language, the ability to access programs that are needed by english-language lerner students in particular the fact that unfortunately some of these schools that we will be talking a lot today which are very well intentioned and have that great result sometimes are not being accessed by some of the students the most at need about a quarter of asian-american students in public education or english-language lerner's command what we see in new york city is a lot being left behind by some of the reform, even while at the same time certain asian students are often in the schools are very high learning as well as concentrating on the ivy and the selective institutions, so i think the need to have programs that are accessible for the population as well as to have translation.

>> when you were mayor you're also in charge of the school system, and a lot of the proposals and programs that you instituted have been mirrored by other cities. do you think that the rule of politics, the role of political figures in the educational system has been a positive one? >> speaking as a former mayor -- [laughter] it's a good question because the majority as most of the time and the 20th century the chief exhibit officers where premier li the mayors and governor to a certain extent you have a school boards, some elected, some appointed that were the primary policy makers for education, and then you have this national infrastructure that was formerly held education and welfare that

more often to the department of education. but the bottom line is that as we started to move towards the end of the 20th century, mayors started to see education and improvements in education as the key to the quality-of-life in the cities that it was not an issue that you could just leave to someone else. and so, you started to see some structure changed where the mayors were more involved than appointing, trying to appoint the chancellor or the superintendent of the schools having more control over the budgets. so the question that a lot of people ask is that too much political involvement. but i can tell you, education in america is just full of politics. from top to bottom. >> sometimes politics lacks in education. >> the difference between, you know, discussions of policy and politics and education, they blur an awful lot. it's a question of striking the

right balance. i came to conclude that we have very serious problems in the country a system that was so top-down driven that as we would get these mandates from the federal government and in the state would add their little later and the locals were going to implement it, and my view as the mayor in the end in the 12 years i served is that it was my responsibility to provide great educational opportunity for students. was not my responsibility to try to run a particular type of system. >> but there are so many mandates. there are so many federal regulations coming down the pike for you. >> by the time i left office, if you look at the total budget, 35% of the budget went to 17% of the kids because of mandates,

and that's something that -- so it wasn't always that we needed more money. was that we needed more flexibility in how to use that money. i watched kaya henderson and the chancellor' job and doing outstanding but there are constraints on how to spend the money, even if she wants to implement programs for church certain segments of the community a little bit different than with the federal mandate requires the hands are tied. so bottom line, i became a good advocate of the parental choice. i think that that for me became the way in which we would have viewed -- >> what exactly do you mean. everybody has a different description. >> how about the g.i. bill, take to the best of the g.i. bill which gave certificates or

vouchers through returning soldiers and said you can use this and how you can go to the university of maryland, you can go to the catholic university, so on. i mean, you have the choice of where you want to exercise this particular certificate. i think that we should do that for parents. that would bring more competition and would be a better way of allowing to treat parents as customers and allowing for improvements in their child education. >> kaya, i presume that you would agree and disarray with some of the things the mayor has been saying in the sense that you have your deals as the mayor was saying your hands are tied in certain things and can do as far as how you spend and can't spend but, you know, in our community i think parents find

that a very attractive possibility of being able to choose and to help choose where our children are educated and how they are educated. >> i think absolutely some parents find that to be a very attractive option. yes. many, but my concern is that the parent's you actually need to be most vigilant about where people are going to school often don't have the capacity or the time or the education to be able to make good choices. we don't provide education that helps parents become great consumers and so, what we see is parents fleeing just from the for the traditional public school and the neighborhood public school that is failing and choosing an option that quite frankly is oftentimes not much better. >> we agreed. but, you know, sometimes one feels a man of know what i want, but i know what i don't want to the estimate absolutely. >> and sometimes what i get, i don't want to the estimate for

the children whose parents literally can't get up every day or are working three jobs and can't actually go to an application process, they have to be neighborhood schools, public options that are able to provide a good education so that if you are not able to make that choice you still have some place good to go. as an accounting gimmick the existing public school system more in tune with the needs of the minorities. >> i think i am a chancellor of a public school system because public education changed my personal life chances, changed my family life chances. we grew up in a low-income environment. >> where by the way? >> in mt. vernon, new york, and education as a priority. we understood that was the key to moving out of the lower class. and because my mother got a good public education, she went to a good college, got a good job as

a teacher, was the first person to go to college to buy a home and move us into the middle class. i do what i do every day because i know if i am able to provide great schools across the city that young black and brown children, yellow children, white children, polka dot children it doesn't have the option for their life to be enhanced if i do my job well. >> i just want to mention those that dr. henderson and stocking the ideas are not in conflict really. they've they've often been presented as kind of an either or situation. either you are for choice or for the public school. i want to see great public schools. i just don't want to have a situation where any family is required to send their child to a poor performance goal. >> and that your zip code defines what education your kid is going to get. >> and kaya used the term consumer at one point.

we don't treat our parents right now as consumers. they get dictated to much rather than saying give people a choice. and i think that would make a huge difference. >> i don't think that having -- not having doctors necessarily means that you should -- you are going to be limited to the schools that are in your zip code. i think love of public school systems are having a choice within the public school system essentially at a higher grade where you can apply to different schools like we have in new york city. even that hasn't worked out well i have to say for the low-income students of color, even non-american students of color. i fifa what we see even in that situation where we are working within the university of the public school is a situation where the students that are the most need are going to the refugees and need more students -- >> exactly. it is to the parents that interpretation, translation and

don't get it and are able to come in the middle of the school year and don't get a chance to even apply to the most sought after schools so of the students in the been the most challenged schools. now, in terms of what do the schools need as far as a solution i think that we may disagree, but i think that what we need is to create a better meaningful system of choice within the public schools. >> what we are trying to do is to create a portfolio of options to the different children, different families have different types of school needs. everybody goes to the same type of building and gets the same type of education and creating a system whether it fits your neighbor to school or school across town you have options to go to any of them. the sector is another piece of this and that many schools are providing robust opportunities

for some of our most vulnerable populations and our lowest income and minority and are able to do a better job than some of our neighborhood schools and so we are looking for opportunities to partner to colocate but in order for parents to be real consumers, we have to engage them in a very different way. we have to be transparent about the quality of our buildings and we have gone -- >> explain what you mean by that. >> the parents know the neighborhood school is okay but they don't have any quality indicators. people look at test scores because it is generally the only across-the-board indicator of how a school is doing and how they will be able to serve yondah people. we have a school card system really have all kind of data with the schools and we look at the behavior incidents and about the kind of program sitter offered to really look at test scores and other things to show people a full picture of how the school is doing and that way a

parent has more than just a score information to decide whether or not this is the right school. >> we have become so addicted to tests. my goodness. >> but because we do rankings and all this sort of stuff, i see this as the dean of law school now i see the student as they come out of high school and the law school, and so many of the schools in particular get hung up on the ilyse team scores and the application. >> there's a lot of pressure to deal with it. >> they tell you that it's not going to tell you who's going to be a good lawyer. the only thing the lsat is who's going to do well in law school. that is the only predictor. who is going to do well.

and from there it slows down all the way. >> why is it so difficult for other aspects of that? >> we keep looking for easy solutions. but she just talked about, looking at the full range of students, it's tough. sometimes you can't quantify it. it's hard to quantify a kid's ambition. you may get some young man or young woman who has a great vision of what they want to do. they don't test very well on your standard test, but they do great artwork or something like that. it is so difficult to judge that. you need to give the schools a little bit more flexibility and in making those decisions. in a time of an educator and iso applaud what you all do because it is the toughest thing. and yet it really is the most important thing that we can do for our country and our future. let me for one other aspect i would like for the three of you to comment on. you know, secretary of labor

hilda solis often tells the story she's in nicaragua mexican and also first-generation of her family to ever reach high school and go on to college. and when she was in high school, her final year of high school, she went to see an adviser, you know, a counselor and said i have dreams of going on to college and universities and maybe postgrad coming and the advisor, the counselor of the high school said listen, you are a young latino, focus on being a secretary. i always tell her at least she listened to the counselor because she is the secretary. [laughter] but, i say that story because a lot of things we talk about, federal, state, local, if in the schools and in the school system there are people that have the sensitivity about issues of fighting stereotypes the

student's challenge their challenged independent of their intelligence, if there is even a sensitivity, you know, maybe the person or 90%, who knows what percentage of the kids are told be a secretary lose faith in the future and to indian drop. so all of these structures lsat scores and organizations of change and challenge and vouchers moot if there's someone in that school that doesn't see the potential for a nicaraguan mexican child whose dreams of being the first of her family to go further in life. >> it's not just about the sensitivity, it is the expectation. this is the most pernicious issue around race and education as i see it. we have incredibly low expectations for the minority students. >> please we? >> our educational system writ

large. we hear about poverty being and while poverty is absolutely a crushing impact, it is not the end of the story. in fact we see children rise out of poverty every single day when teachers and principals set high expectations for them, and you hear the no excuse movement where people are very clear that it doesn't matter whether you have breakfast or not, whether you are a parent read to you or not, we actually believe what can happen in a school building can change your life will come if we do it well. children rise to the occasion when you set high expectations. but as long as you continue to make excuses about why they can't, they won't. >> if you are not willing to get ahead, don't step on it. you know, and that happens. but you've got the issue. >> i agree different expectations are different.

students can be trucking lower-income students and minority students, and i think we can talk about the resource and equities as a cause as a way to lead to better equalization of the resources to the different schools. and as we are talking earlier, school choice doesn't work as well as it should even in the school districts where theoretically any student in in a low-income community could apply to any school and the district so that just doesn't work. we need to create infrastructures to equalize resources for all the students and i don't think that means -- >> what does that mean -- to give you an example -- >> it means you have access to the finest programs for all students and to prepare all students like the english language learners. if you are a high school student english-language learner you

probably cannot first of all get all the credits you need to graduate on time even if you took all of your class is. >> they just don't offer them to respect they don't offer them and also you are taking a certain curriculum which is great and it's important, but at the same time they are being taught and being asked to test a graduate being given to the students, so i think that all students should be held to the same standards to graduate but i also think the need the right infrastructure and support and resources to prepare them otherwise it is a set up. if you make an english-language learner take a test to graduate that you haven't been prepared for, you are not going to pass. it for you are going to pass it will pass a low level and you will need remediation. so i think it is a way of how we

can apportion resources to equalize the differences in the communities. and i think that we can say that without using poverty as an excuse. you are saying that to talk about the resources and equities in the outcomes. >> i guess for me i'm not real thrilled with the limited choice of just choice within the public system. i like to see a much broader system. but the point above expectations, i think that what i have seen recently on the college of business is young people understanding this of themselves and wanting to become great teachers. and murder of young people -- a number of young people are going to get degrees to become teachers and it's increasing. you can see it a little bit in applications and things like teach for america. many of these folks understand that having a great teacher in the classroom is going to make a huge difference. i certainly agree with the issue

of the resource allocation. weigel we are waiting for that to happen, something else has got to occur. i keep telling people, you know, my child is a ninth grader and you are telling me for years from now we are going to have a change in in the allocation and formula and there's been to be all of this reform. well, my child has only got one time in high school. give me something i can do now for that child that's going to make a difference, and that's why i really press the idea of giving the parents and the family the opportunity to make a difference. >> kaya, tell me some of the things that you have seen that have had an immediate impact. >> with the research says clearly is the the single most important in school factor is the quality of the teacher and this is why we test really hard in washington, d.c. to radically change the caliber of every single teacher. >> how do you start doing that and make it effective? >> change your selection about who you look into the classroom.

we are one of the only countries that what all of our students become teachers. when you look at finland and singapore, you have to be in the top 10% of your class in order to be a teacher. so then a recruiter -- >> there are a lot of freedom are you have structure? >> part of the challenges we haven't been created in terms of maximizing the things that we need to do to get there. we need to evaluate our teachers by taking into consideration and number of things including how the students perform. provide feedback to the teachers come give them professional development, help them learn and grow. when i got to the district, teachers hadn't been evaluated in some 20 years. in any profession that is absolutely ludicrous. how my ensuring that all the best teacher in the class, not providing the consistent feedback and professional development opportunities for the person to get better? and we are recognizing it rewarding our highest performers. we hold a huge event at the kennedy center called the standard d.c. teacher and all of the students are free to

connolly effective which is the top of the evaluation peace. they are set in the grand style like the kennedy center honors and we have -- they get bonuses and prices and we watch videos of them teaching and it's literally like the academy awards petraeus mcginn this is just because i don't know, is this based on like test scores? do the teachers have to, like, for about a test to see how good they are? how do you determine a good teacher other in the kids' education? >> what we look at, we do fight observations over the course of the year. the principal was in the classroom to see what's happening, then what we have is a master educator whose professional teacher, highly regarded teacher whose content expert. as for example i taught middle school spanish. >> really? >> yeah. my principal was a teacher -- >> [inaudible] [laughter] >> mauney principal was a gym teacher. he couldn't assess what was happening in my spanish class room and so if you are a foreign

language teacher we have a master educator who is a foreign language person who comes in to look at you. we look at the five observations. things you do beyond the classroom, because everybody knows the teacher isn't just doing stuff in the classroom. we look at student achievement, what happens on tests you give and the state gives, and we put all that together to evaluate -- >> can i just say, because this is important because we get in an awful lot of discussions and conversations about public education about whether the unions are good, bad or another. but the defenders are describing is something that came about through the revolution. the d.c. leadership and the union got together on that, so that is i think progress for the kids that the leadership of the school system and the teachers unions would join together on. >> again i am just trying to understand better or a fountain of information.

in cuba and the dictatorship there is a saying among the people that the government pretends to pay me and i pretend to work. i presume that if you go into a school where the teachers have been there for 20 years and are never been tested or required to prove how good or bad they are that there may be among that class of teachers you pretend to pay me and i pretend to work some drum. how do you break through that kind of culture this in the culture of the year but it's been 20, 30 or who knows how long. >> have you been mulken and what's been happening in d.c.? it is noisy and crazy. we have had to, you know, it means fundamentally changing the status quo how we interact with teachers, and culture change doesn't happen in a year or two years. it takes years to create in a set of expectations but that's what we did. we effected flee said this is

what good teaching and learning looks like and so this is what we are going to evaluate you on and provide professional development and support. we will show you videos to think what the extent where is and provide rubrics and work with you. some people have gone around kicking and screaming and some of them needed to go kicking and screaming. others have grabbed the bull by the horns and said this is an opportunity for me to provide my practice and reach students so we see some initial results. >> i believe that teachers should be evaluated and i fully agree that doing it with seasoned teachers and principals who are aware of the content of the teachers teaching as well as the special needs of the population and the teachers are crucial. i think this is where we may part ways. - feet to the extent we are taking into account students' test scores and teacher

evaluation i think we need to be very careful because there are so many different factors. i fully agree that we need to do something now before we address poverty. there are things we can do to improve education at the same time. i think that if you have a system that focuses too much on test scores and in particular value added test score improvement your visit the -- >> so what else would you include? >> you would include the ability to work with students, to one portfolio -- >> how do you engage that? >> the same way. using the peer and around principal evaluation but you wouldn't just rely on the test scores. >> the evaluation system right now just relies on test scores, it is the complete peace. but here's what i don't want to write off on. when i got to the d.c. public schools in 2007, 98% of the

teachers were we to this meeting or exceeding expectations and 80% of the people were reading at grade level. so to ignore that and just continue to say that these teachers are doing a good job when our children are not doing a good job is disingenuous and so i think what we are trying to do, districts and states all across the country are crumbling with a student achievement data and evaluation but i think we'll have a point you recognize you cannot say that teachers are goods and the kids are not performing. we have to strike a balance, which is why it has to be weak holiday kaya there are lots of different pieces to the pie of the student achievement has to be one of them. test cost score is not the only way to measure but it has to be part of the pie. >> a quick add on. if you are looking at student achievement in other ways than test scores i think that's good, and i think that in some certain school districts or some states like new york where even if you

theoretically are looking at a firm idea factors in addition to test scores, you often have a situation that test scores can be the determining factor and that, i think is where what i think is really judging the teacher based on the quality of the incoming students scores as opposed to the work they are doing. >> i don't know whether you would agree or not, but the elected officials particularly the governors would say that they are a great catalyst to the movement from the discussion about the state of education in the 1980's and moving into the administration that's particularly of clinton and then when governor bush became president and focused on the education they would say this shows that there's a need for political involvement. the only thing i would say is it has to be kept in balance. there is a role i believe for the elected officials but i don't think that the mayors or

governors ought to be running the school system about to provide some incentive to allow these types of things to over. >> a think the proof is in the pudding. if you have kids that are not in large numbers fulfiling basic requirements to be able to progress there's something wrong and something that needs to be done, yell you handle it with your hands tied as they are by different structures, something needs to be done and somebody has to be held accountable. >> that's right, and it's not the kids. i just want to point that out because a lot of times we all have responsibilities, but, you know, your numbers are striking. 98% and they are not getting the job done. estimate that we have to be creative about how we deal with all this. we don't think the way we used to think, we don't shop the way we used to shop, we don't get information the way we used to -- >> but you're still getting --

>> i get lots of information. >> technology provides some different opportunities for us to be able to reach out to individualize especially with our more struggling young people, and i tanjore going to start to see some very different things in schooling. islamic this brings me to another issue i feel passionately about and i see as i crisscross this country, the digital divide in the different communities. you know, i have a seven-year-old and a 4-year-old daughter and they get my ipad and they go on line and play games and they know how to do things i can't do on the ipad. for-years-old. if my 4-year-old daughter who is excellent goes to say kindergarten and there is a kid

who is 50 times smarter than my daughter but at home doesn't have access to the internet and doesn't have access to the world as we now see it and held information is brought into our homes it doesn't matter. that child is going to be at a huge disadvantage to my daughter that may be 10% as intelligent and may have 10% as good of a future had they both had the same access to technology. and that's why -- i mention this, too because i was impressed with it. comcast, i have to say the parent company telemundo, but not because of it by saying this, comcast is one of the companies that has reached out to the latino community, african-american community throughout the country and said a few, if your child gets a federal lunch program, we will unilaterally go to that community, give you high-speed access to the internet for $10 a month and give you a computer for 150, which you keep.

it doesn't matter how smart and prepared you are, how smart and prepared your parents are, how much they want you to progress in this country. if you are surrounded by a moat of silence in your home and there are millions of people in this country that live in a house without a computer or accessing the internet, we are bringing our children, those children into the educational system at a disadvantage in which i think is almost impossible to surmount. >> i would agree. it goes back to the point of the resource allocation, too. if school systems are allowed to spend the resources the way they wanted to and they could make that judgment about every child is going to have the most advanced information technology, you know -- >> but that's in the school. >> you know, you can't be -- one of the mistakes we made is

trying to be in the home of every child. i mean, we really can't do that yet you mentioned dictatorships. maybe they can, but not in our society. so we have to do as much as we can for the student outside. >> one quick point. in that case where there is a mode of silence in the home it is the child who comes back home and says i learned at school that this is available. and so, it isn't that i am saying let's go in and, you know, to the homes i'm saying the schools are playing a far more significant role in the children and the children's parents by informing them and giving, removing that mote of silence and while they are in school they can teach their parents. >> i got an ipad from my husband and my two and a half year old has completely taken the device away. so we will see. hopefully that will prepare him

for kindergarten in a few years. >> to teach us how to use it. but i agree with you. and i would expand beyond technology. i agree there is a vigil will defy -- digital divide. even if you have a computer, you may not be able to afford. stat you're saying it's expensive. >> there's the internet and there's these other things that fortunately some of our children are able to access and not everyone can. i think that this also applies to early childhood education programs, universal prekindergarten programs, and then once the students are enrolled in the schools to other types of enrichment after-school programs and focusing away from putting so much emphasis and funding on the school testing even though testing is i think there's a place for that, and i am not saying