project rebuild is a suggestion from the president, that maybe a viable alternative, but i would think in terms of a simultaneous act of creating jobs for the purposes of addressing housing, and as we stabilize housing prices we're now stabilizing the mortgage market. so -- >> i think that's right. we have to re-establish a stable market at the local level. there are ideas out there that i think make some sense, but there are some perils as well. you mentioned earlier this whole issue of taking reo and moving it into rental. to me the more sensible thing is to, if you're going to have a foreclosure, to let that family rent the home. >> stay. [ applause ] >> not have -- turn this into a business for hedge funds. but let that family rent the home. if you are -- if you're concerned about the issue of principal reduction and if that's the only way that modification can work for that

family, 50%, as i understand it, 50% of the homes that are under water today have second liens. those second liens are called second for a reason. and the largest source of funds for prince pam reduction out there is the $1 trillion of second liens that are there, that instead of their participating -- if the first lien takes 10%, we'll take 10%, in my view i would have a program that combined a foreclosure that got rid of a second lien with a refi for the family so that then they could afford to stay in the home. [ applause ] the foreclosure is legally the way to get rid of the second lien. and so to me you need a policy that works. but i judge how it works, not at this macro level but really at the individual family level, because then you build in the community, and then you build -- housing is a very local

business. but it is -- it was 20% of our economy at the peak. how can you have a recovery in the overall economy if 20% of the economy -- >> excuse me. excuse me. [ laughter ] >> excuse me. >> are you finished? >> yes. >> bless you. >> d.c. pollen, right? >> i think frank was done. >> i was done. >> i thought that was the hook. >> no. it was -- it was -- that was a great point. >> but there's a problem if in limiting those second liens, means that the largest banks in this country are insolvent. and, i mean, that hasn't been the problem all along, that we were kicking the can down the road hoping those banks would come back to solvency. they're too big to fail, too big

to regulate, too big to prosecute. what do we do about that? >> i don't think recognizing that these loans are worthless makes the banks insolvent. i think that the fact that they're worthless makes them insolvent. it is not our recognition of re reality. and, you know, if you're looking around for sources to fund principal reductions, i mean, look to the deals that people made. this is an old-fashioned libertarian idea. >> i agree with you. >> they all signed these contracts. they all said this is a second lien. so this should not be a surprise to them if someone says we're simply going to enforce the contract. and trust me, all these families who are being foreclosed upon are being reminded you signed a contract and you didn't adhere to it and therefore you're being foreclos foreclosed. wishd this be news to those folks who made these second mortgages which are now bad? why should they be looking for someone else to come in and

subsidize them when, if we simply enforce the contracts, all of a sudden you've got the largest principal reduction program you could ever imagine? >> except i actually -- but even if we did all the second lien, i think that only gets us about a third of the principal reduction that we need to get us to precrisis levels. and so we have to also look to the first -- i mean, i agree with you that the seconds have to take it, but that's not sufficient. >> maybe to push -- because i agree partly on that. if you look at the people who have the seconds, they tend to be more under water than underwater borrower who is don't have seconds. my back of the envelope is approaching about $200 billion of the megaequity that is sold in seconds. i 100% agree with frank. these are worth if not pennies, they're worth zero. we need a process for that. one of the unfair things we've seen, and i won't ask joey or anybody else to defend it, but

when you treat seconds and firsts the same that's a violation of what everybody agreed to before hand. you take the risk, you take the loss. >> hubert raised the point, and hubert is not part of the heritage foundation but he expressed the concern that this -- >> i welcome your support. >> -- this could actually make the banks insolvent. and that's certainly something we've heard from many of the financial institutions that if they were to take it off the books and really suffer the actual loss, that they would collapse. now, i don't know whether that's crying wolf or whether that's accurate or whatever, but -- and i heard it from more than one source. >> let me say this. one of the positive elements of the bank settlement is there's a principal reduction component to it. you know, and those of us who push for principal reduction before january 20th, 2009. i mean, our earliest positions on what needed to be done around the housing crisis involved an

aggressive principal reduction to try to reform late the mortgage. and i always use the example of donald trump. you know, when donald trump got in trouble with his real estate back in the 1980s and the 1990s, the banks not only reduced his principal, they gave him four to five years of forbearance on all payments and then some more money to go do some more deeds. so that's the mystery. right? i mean, i think when you think about this from strictly a commercial standpoint -- >> and no one fired him. >> and no one fired him. and, you know, and he says -- he trumpets the fact that after that happened he came back, paid the banks off in full, this is what he said, banks off in full, and was wealthier and more successful than ever. and i think the average person who sits out there is not immune or unaware of what happens in

the commercial space. and i think some of the lessons in the commercial space, principal reduction, reformulating mortgages, reorganizing the payments with a combination of reduction of principal and interest, if we had done some of that early on, maybe we may not have stopped the crisis, we may have been able to abate some of the cascading of the crisis. i wonder what good news is that there's an opportunity for principal reduction and the gentleman sitting to my left is going to make sure everything happens. [ applause ] >> well, we'll see how much of a principal reduction it is, because there's some question as to how deep that can go with when you spread that money around. but we're going to get into that question in a second. what i don't want to leave is this notion of how we could use the market to -- whether it's the banks or the market to

reduce principal. one of the things, when this crisis first occurred, and ncrc, national community reinvestment coalition, went to then treasury secretary paulson and then subsequently secretary geithner, and we proposed something called help now. and it was go in, go to wall street, buy these packages of securities, you can buy them at a discount now, they're not worth as much money because the market has collapsed, buy them at a discount, so instead of, you know, buying mortgages at 100% of the value of the mortgage, you could buy them at -- we thought at the time 60%, 70%. i remember talking to george soros about this. i was in a meeting with a number of people in new york city, and i was in his office. and we talked about this proposal. and he said that's the craziest thing i've ever heard in my life. who the heck would have -- where does this thinking come from? you know, it was a tough moment.

and then just yesterday i was talking to lou ranieri, who is an outstanding republican citizen, a player on wall street, who's now part of his living he's making buying these securities. i told him about this story. he said, well, soros is not always right. but my point is -- my point is neither administration listened to us at the time. but lou ranieri is in there now buying these securities, paying 40 cents on the dollar. so imagine, if you buy a mortgage, you know, a package of mortgages and each one, say, it's a $200,000 mortgage, you know, you're paying less than $100,000 for it. so you're looking for a principal reduction? there it is. it's in your hand. and by the way, investors invest. sometimes they make money, and sometimes they don't. and that's -- you know, somehow what we're trying to do, especially with this idea of fore "barron's," where you're just setting aside some of the mortgage for a while -- and this is of course what's advocated by

ed demarco and fafa -- is set aside a portion of mortgage. talk about kicking the can down the road, okay, we won't charge interest on that mortgage, but you're still liable for it. if you sell your home, you have to pay that back. so the entire amount of that mortgage, even though the investor has lost -- you know, and i want to point to, you know, one of the services, aqua, aqua has figured out that you know what, it's actually more in the interest of investors to principal write-down than it is to allow these properties to fall into foreclosure because more is lost in foreclosure for the investor than it is by modifying or principally writing down these mortgage, and that helps all properties in the neighborhood. right? i'd kind of like to hear people's thoughts about that and why perhaps maybe the government should be more engaged in trying to acquire these mortgages. obviously, fannie and freddie

under the conservatorship and under the direction demarco has to play. and diane pointed this out earlier, it has to play more of a role in principal write-downs. we have a lot of work to do there. it does seem to me that could be something that would really stabilize the market and not necessarily sink the banks at the same time. >> go ahead. >> i'll start with that. despite the fact that i wasn't a fan of it at the time, t.a.r.p. was supposed to buy mortgages, mortgage-backed securities, and modify them. obviously, that's not what was done. but beyond that, i think one of the core problems you touched upon is the mortgages are on the books of institutions that carry them at par, you know, 100 cents on the dollar, and therefore they don't want to recognize any loss on it. so i do think moving and getting these mortgages to institutions who do buy them at a considerable discount, their incentives are far different. they will modify in a way i think the larger banks will not. i think that's an important part. >> but we have to have a standard that goes along with those purchases. >> yes.

>> to ensure what they're not doing is simply flipping these or adding back whatever they saved by -- >> i just want to say -- >> yes, please. >> we're hearing huge stories from the field about people who buy these mortgages and then engage in all kinds of horrific debt collection practices. i mean, there's tremendous amount of room, as john was saying, to modify these mortgages. they're worth 40 credibilities on the dollar, that's a heck of a lot of principal reduction that the homeowner could get. people don't need that much, but they need some. that money needs to somehow go to the homeowners. and the only way that's going to happen is with government-imposed standards. >> part of my concern is that we would be sacrificing the good to try to get the perfect by doing things that would take a lot longer than if we get properties out there, deal with them. there are bad actors in every part of the market. but i don't know if you want to stop the majority of them that are doing some good in getting the properties out there. so, again, it's a tradeoff. i mean, i would rather fix the problem sooner or later.

we could impose standards on people who buy the mortgages, then, a, less people would be willing to buy them, particularly if there's a risk of litigation. the important thing is moving the process along. >> mark made a very good point, and that is how the t.a.r.p. was bait and switch. >> absolutely. >> the original t.a.r.p. that was presented by secretary paulson was to buy the toxic assets and reformat the mortgage, and then it turned into a cash-ejection program, a purchase of preferred stock program. it switched. i distinctly remember. because we evaluated in deciding to support the t.a.r.p. the public statements that were made to promote it and said this would be a good idea particularly if they created an entity, some sort of centralized entity to take on the mortgages, and then you would have somebody responsible for the reformulating of the mortgages. and i still believe that we could have all the standards, but we need a better

organizational mechanism, quasigovernment, that could buy the mortgages and then be responsible for principal reduction and reformatting the mortgages. it would be more organized. it would be a better week. work through this early process of all these voluntary programs. and many of them did not work. and i think there's a lesson to be learned from what was done in the savings and loan crisis, the resolution trust corporation, and the mechanism used there, and there was a great fear, again, ideological, about too much government. look, the boat was sinking. give me an oar. i don't care if it has "g" for government or people/private sector on it. we needed a fix. and the question is could we try something like that. the political appetite might not be there. but maybe it's one of these continuing examples of a good policy.

you know, good policy, lessons learned from the past might be helpful to us. >> so i was at a hearing recently at the brookings institute where ed demarco spoke about principal write-downs and forbearanc forbearance. and i left that session kind of shaking my head, wishing i could understand why he was so diametrically opposed to principal write-down, and then i picked up several papers the next day that said he supports principal write-downs. so i might have been perhaps listening with one side of my head or something. then i looked back and looked at the documents. he is pushing this notion of forbearance as opposed to principal write-down, and his concern on principal write-down is even though he would save the american taxpayer a lot of money, can he sees as his first objective, forbearance would save more. the problem is whether one is more effective than the other.

his other problem was that he thought by principal write-down -- and this is the gentleman who heads the government agency that oversees fannie and freddie who control, you know, hundreds of billions of dollars worth of these mortgages. and his feeling that -- is that the principal write-down would trigger this series of strategic default where is people would automatically go into default because they somehow could get a better deal. i try to imagine, at least the folks we deal with in home ownership, people who are waiting on the sidelines to go into default, destroy their credit history. the 85%, almost 90% of the people in fannie and freddie, for those who don't know, are current on their mortgages. you know? and so all of a sudden there's going to be this plethora of people who are going to somehow change their habit of living up to their contract and their good personal policies of paying off

their own loans and being responsible homeowners, somehow that's all going to change -- >> all you've got to do -- >> go ahead. >> -- is build a fence around who's eligible. see, that's where, you know, sometimes in these discussions people are not completely intellectually honest. i'm not saying he isn't. you could say the eligible debate is as of this date. and therefore, that prevents anybody from taking on a ste strategic default to be eligible for the program. i mean, you can put in standards, controls, and mechanisms to prevent against that. and i just -- i just believe that from the very beginning that the idea of principal reduction and the reluctance to embrace it has made the problem -- you put your finger on the perfect place where the

principal reductions exist, because the secondary market and the revaluation of the secondary market have created the biggest barrier in principal reduction in early days and the investors would oppose it because they'd be afraid to lose the money. but that market has already reset itself. so the principal reduction is absolutely available throughout the chain of the holders of the market, but we need to do something different. >> so i want to bring joe smith back into this discussion, because obviously -- >> i got your back. >> i think he'd be happy to sit there and talk out the rest of the session. but obviously, in the news is this $25 billion a.g. settlement. a lot of questions from a lot of people of how it's going to work. most people didn't realize that

even you as the selected monitor was not official until ten days ago when the federal court here in d.c. approved the a.g. agreement. >> right. >> so -- and i don't think everybody exactly knows what the role of that monitor is going to be, but what everybody is most concerned about is what is going to be the impact. is this really going to hem in the foreclosure crisis. take it away, joe. >> apparently. right? no. the answer -- no, i think it will. and i appreciate the opportunity to be here today. i would like to clarify a couple of things. to begin with, one, there is 5 billion bucks of cash, and i don't have a dollar of it, so i hope i can still have lunch. but i'm not the custodian of the cash grants or the payments to people who have foreclosed in 2008 through 2010 and so forth. what i am is the monitor of is

the remainder of the agreement, which has two pieces. one is the servicing -- new servicing standards for the mortgage industry, and these apply to the five banks involved, they apply across the board. the second thing is the consumer relief provisions, the most common of which has been principal reduction. so my job is to -- what a traditional bank supervisory job in a case where the banks are stresse stressed. i'm agreeing with the banks about a structure they are going to set up to monitor their own performance. and then i'm going to hire experts who are going to work with me to verify. and if we need to do additional testing to confirm what we're

told. and i have every indication that the banks are going to work with me to try to get this thing transacted. i do think it's likely that we will see a lot, for all of you who are interested in principal reduction and other kinds of restructuring, i think there's going to be a frontload on that. so i think you'll see a lot of action on that during this year or 12 months and certainly a lot by year end. >> how do people fimd out about that? how do they get in touch with you so that the groups out there can -- >> okay. i have a way for them to get in touch with me. so glad you asked. i thought you were trying to trick me, but you're actually trying to help me. >> you're on "candid kcamera." >> i have a website. got your pens out, scholars? that website has a consumer section, and it also has a portal for experts like all of you to be in touch with me about a couple of things.

now, first, i can't tell the banks what to do. i monitor what they actually do. i'm going to be working with them frankly to try to get an agreed program to work. but i believe the biggest job i've got right now is to do a monitoring job and have the banks do a compliance job that all of you -- some of you at least are going to believe. and how do i do that? well, we'll do a very thorough and rigorous job of oversight. but the other thing is i need your help, i need confirmation from the real world about what you're seeing out there. and so the professionals web site we're going to have up, we're still two weeks off. and i'm sorry about that. i wish i could say here it is right now. it will be here in two weeks or i'll know the reason why. that will be for you to give me information about what you're experiencing out there, which will inform what we do with the banks as we're supervising going

forward. so i'm hopeful this will be a new approach, shall we say, to regulation, kquasiregulation, where we incorporate market data, this time based on market data you all have submitting. so, again -- [ applause ] thank you. don't thank me yet. www.mortgageoversight.c www.mortgageoversight.com. i think the long-term thing is for the service standards to be implemented in a way that will continue well beyond my tour, 3 1/2 years, four years, 3 1/2 really. i think this will set the industry up to be a better steward of people's hopes and dreams. i hope it will, anyway. that's the hope. >> rather than wait for the website, i'll give you a little firsthand feedback now. >> good. somehow i knew i was going to get that. >> a week after the agreement was reached, one of the large

banks in the group -- and i'm sure they're represented in this room -- sent a modification proposal to a client of our organization. there was $18,000 worth of interest that was put back into the principal and the agreement and $35,000 worth of fees. none of those fees were enumerated. >> right. >> or explained in the agreement with this gentleman. you know, i think those kind of -- to me, what it was was that bank saying so the a.g.s think they did something, huh? >> the a.g.s did do something. two things. actually, one, i do want to know about that. we're going to enforce this thing as a rule based on what we hear around the country. the other thing is, as you know, your client -- there was no way

for the client's legal right to seek redress anyway. i mean, we all would like a situation where, frankly, this stuff doesn't happen. and i'm hopeful we will have it soon. i can't -- i'm not here to apologize or to defend the banks. i am going to try to work with them so that this stuff doesn't happen in the future. that's about all i can say to that remark. i understand where you're coming from. before i took this job, i was commissioner of banks in north carolina, and we had legislation that to the extent -- my last great power trip was to be able to delay foreclosures for 45 days, which we did. our experience, by the way, was that we found that if a distressed borrower could find an adviser of some kind, a lawyer, counselor, somebody who could actually work with them to get their stuff together -- not

always but a lot. i will say the other thing was with respect to our discussion previously, someone who's been in banking itself a long time. i've read the case studies, the write-ups on why people -- where they were in their lives. and it was job loss, health or domestic. right? >> yeah. >> it was the holy trinity. and i hate to say it, and sometimes two to three and sometimes the hat trick. and so i agree with the comment s from before. >> that's right. >> but there are other, more systemic issues with regard to people's lives that we have to address. >> so another question you may not be qualified or want to comment on. you began by correcting me on the $25 million saying well, you're really overseeing $5 billion, not $25 billion. >> no, no.

$5 billion. $20 billion. >> okay. but my point is that this is obviously going to be going to different states. >> it is. >> 25 democratically run and 24 republican. >> right. >> the stories we're already hearing is is that a number of those a.g.s working with their governors trying to funnel this money into things like infrastructure and roads and education and not to deal with the foreclosure problem itself, again, this may not be a question you want to answer. in which case we can punt it to somebody else. but obviously -- i mean, people work so hard on this a.g. settlement, it obviously has to do with real people suffering through the robo signings and the fraud, the abuse. and to have that money go to another source just doesn't seem fair at all. [ applause ] >> it doesn't. so joe said -- >> go ahead. >> i was going to say, the only thing i can say to you as a former officer of the state government is that warts and

all, the governors and legislatures of these states are democratically elected. we may like the results -- you or i may like the results or not like the results. we buy democracy or don't buy democracy with all its manifold eccentrici eccentricities. and so my view is i am not -- i'll answer the question. i mean, as a former state official, as someone who believes in federalism, including the states, and i live and die with my friends, what happens at the state level is between state officials and their citizens. and so the important thing is for citizens at the state level to take action to prevent this. but that's what they have to be at. and we can -- >> so if -- >> this is a very big issue for all of us. [ applause ]

and the necessity for us to focus like a laser on the actions and activities of state attorney generals. understanding that in some cases state attorney generals have never been near a housing program ever before. in other cases, state attorney generals have been intimately involved in seeking redress on behalf of their citizens. and i think our message should be that the state attorney general should follow the letter and the spirit of a settlement which was about housing. [ applause ] not about -- not about asphalt. not about planting trees. some things that i'm for, too. but we need to