yes when i say all the schools are like that. there are some. as i said earlier, i do not care of their charter, public, private, parochial, whatever they may be. it is about the children. it is up about the buildings. it is about the children and how we get those kids educated. that is all we should be focused on. above all the other nonsense to get involved in. also, what is the longest school day? what because a kid does not have a program in the summertime, there was a whole parade of not having programs in the summertime. it is not easy but all mayors want to be involved to a certain degree. i am fortunate. there is a citizens' group that every time there is an appointment, they give you three names.

i pick out the three names. 5 i did not know when i walked in the door. i take seriously the appointment of the school committee. that is where we are. >> do you have a question for your colleague? >> you are supposed to start off by saying i am wonderful. and let me tell you why i am great. don't you agree? [laughter] here is an example. i will throw this out to the group. there is -- education is the most important thing.

i have come to a different place and i want to see what others think. my new phrase is, the most important decision is who has the parking spot closest to the front of the building. we kind of what the hope of the principals who have the ability to hold teachers cipals have and prinici the same union rates but i am puzzled because they are management. we're not filling potholes. you hold them accountable and hold a leadership to the department accountable. we're looking at ways that we can change the culture.

my daughter is working in the city in new york, there is a building that was about to be closed 10 years ago and they cipal.t in a new printer he changed the outcome of the school. he did not change the demographics. we need to let that level of leadership -- to not need to let that level a little schipske by with no accountability. >> you cannot have a great school without a good principl als. you give them the autonomy to choose the educational program, the economy to how to reward and recognize teachers and the economy to hold parents and

students accountable, you will have an entirely different environment. a great principle will pick great teachers. they will create an environment where teachers are part of the equation in that triangular dynamic and you will not have a great school without a great principle. -- principal. >> everyone is unionized in massachusetts. we have to turn around schools they have the right to hire the the of staff and the schools and some of our schools brought in new principals and they are the boss. they talk to the teachers and

talk to the students and have been there for a while and they will tell you, the atmosphere has changed, the educational process is going on and the kids are enjoying the classroom. teachers did not enjoy school. they had a hard time going there but there is a new principal. they are the bosses and we have the ability of changing those principals in the schools and we need to fight the unions -- we try to fight the unions. their first obligation should not be to protect people. it should be the protection of the educational process and we have a very militant teachers union and they're trying to block everything we tried to do in education. i fought with the firefighters' union for five years.

we will get our things done. theyns have to understand thei have responsibilities to the students and parents. it is so unfortunate they do not understand that. i have previous -- a previous president of the union. of tough guy, we understood where he had to move on issues. this broke a lot of management rules. now we have the president of the union who says i want to maintain everything i have and i will not give you everything. you have this the first decision making going on and the national organization of teachers cannot move. >> do you have a question? >> i will ask a question by the size of your

city? >> it is slightly under 40,000 and there are numbers at 38,500. we are down. >> your general fund? >> roughly $18 million to $20 million. >> $230 million general fund. >> over 600,000 and the budget is 2.4 billion. >> we have over 500,000 and our fund is over 500 million. here is my quick question. you talked about the twin cities. give me a thought in what is the competitive advantage to have in your particular city as you think about a regional approach? >> minneapolis and st. paul have

been historic rivals. they have fought more than they have gone along. everybody is saying it is nice that you are getting along and by starting to have a dialogue and starting to look at approaches from a regional perspective as we have gone out and looked at funders, we have had an opportunity to say we're not trying to isolate this piece of the region or that piece. we're looking at the strategies of transportation and housing and education and workforce development. from a regional perspective. the greatest thing we have, we have a highly educated work force and we have 21 fortune 500 companies. we have these incredible assets but instead of selling those, we're trying to say to not look

at that side of the river, look at this side. do not pay attention. the light bulb went on and we said, why would i not sell the fact that the minnesota twins are in a beautiful ballpark? that is a beautiful asset. the development they have done their at the museums and theaters are the best in the country. if i was not selling those assets when i was trying to sell st. paul, i was missing out. i like living in that region. all of our strategies have changed and shifted focus. we have the regional council of mayors, bipartisan, it is saying let's stop fighting, let's stop competing and start competing against singapore and other parts of the world. >> we have time for just a parting thought from each of you, if you can keep it to one minute or less.

what would you like to leave us with? >> i feel better than 9today thi did when i first got here. i knew he would bring up the boston celtics. i played in nba from into -- from 1988 to 2000 and i liked coming to your city on that day. >> whoa, ok, pal. [laughter] a lot of this conversation we have had this afternoon, one of the things is mayors have a difficult job. it has been easier by folks like yourself working with us to solve our problems. nobody mentioned what this does

for our cities, improving the quality of life. we had a brazilian neighborhood announcement. that is one of the greater productprojects. that brings people together to improve some of the most troubled neighborhoods. the other part i like as we met with staff and they worked with us and how we create that resilience community. that is what it is about. we have a lot of brain power and experience. we know how to work together. the word today should be collaboration and how we collaborate to achieve the common goal of making this a better place to live. i hope we leave you here today. how we work together is so important we work together to make this a better place. some other folks do not care

about us anymore. >> i will expand on that and we do not have a professional basketball team in minnesota, so we would not know about that. [laughter] yeah, we do. i will expand. the city is under assault on like anywhere before. there was drugs and crime and all sorts of things. we are starting to -- it is unfortunate because we are at a point when we will change what is happening in this country.

the work at the brookings institute was heightening the importance of the reaction. let's try to take the money away from cities. we have to change that. it is community-based groups that will help us fight that fight and regardless of what happens. we know how important it is and we cannot be deterred from our work. >> the last word. >> recently, the smaller communities are being involved and i would like to say thank you. even now we are smaller, we may not have this large of a budget, we may not have the same population, but we do have many similar problems. after this conversation, not only do we understand each other

better but we understand we can learn from each other. urban can learn from rural communities and we can collaborate to understand better the issues that our people do with and understand how better to solve them. gooden powerful things come out of small places. -- good and powerful things come out of small places. [applause] thanks for involving us in the conversation. >> we have talked about problems and challenges. there is every reason to be optimistic. please join me in thanking our panel. [applause]

>> one of the four mayors on the panel, kevin johnson come what you will have a chance to hear hamas -- kevin johnson, you will have a chance to hear him on education. >> they will discuss academic ofparities between academistuds different races and why they think achievement has worsened despite the doubling of

spending. >> it is all of us doing our part. whether you have kids or not. there is too many kids languishing in schools that are not doing well. there is kids that live in nice neighborhoods and their schools are not serving them to the degree they need to as well. >> i concur. we're in a position right now in this country where if you were to tommy this of code a child lives in and the race of that child, we could with good accuracy tell you what their academic achievement levels are. that is one of the most un- american things i can imagine. it is betraying the ideals by which we live as americans. >> what this event from the university of arkansas tonight at 8:00 p.m. eastern on c-span. >> tonight on c-span2, the

former chilean president discusses her position as the new -- part of the new entity for women's empowerment. see her remarks tonight at 8:00 p.m. and that is on c-span2. the white house will hold a classified congressional briefing on the house floor next wednesday on libya. secretary of state clinton, defense secretary gates, the chairman of the joint chiefs, the national intelligence director are among the obama administration officials who are expected to address next wednesday on the house floor. on another issue, the administration last month announced a plan to reform federal housing finance programs. it was released by the treasury and the housing and urban development departments and included plans to end fannie mae and freddie mac. housing financial analyst at the american enterprise institute

released their report on reforming the housing finance system in response to that plan. this is one hour. >> we want to welcome you to this discussion of our white paper on housing finance. there is a history here that i would like to review. we first came out with a preliminary draft of this paper in late january. we did it at that point as the draft because we were waiting for the administration's proposal to come forward. when it did, which was on february 11, to our surprise, they included in option one the ideas that were in our original draft. that give us the sense there was a possibility here of an agreement. between those of us who favor free markets in general and in

the housing finance area and the administration. the republicans in congress would be a major element of any such agreement. in responding to what the administration did on february 11, we prepared a final version of this white paper and that is what all of you have. it is on the website at aei and it is available to anyone who wants a copy. we also discussed this white paper, this final version with people in the administration and i have to say that there were no showstoppers. we tried to respond to the concerns they expressed in their initial proposal about free market system for financing houses and we responded in a number of different ways. we explained how the system

would work. we addressed all the issues they referred to in their paper. and the that i think soft, at least from our perspective, solve the problems they have suggested and in our discussions with them, we did not find they said we had not addressed any of these issues satisfactorily. that does not mean they are supporting it. it means we have met the objections at the first order. i will talk a little bit about where we are and talk about the white paper and i will ask my colleagues to speak about specific parts of the white paper. i have to say that alex pollock will have to leave a little early so we will go out of order based on how the white paper is organized. will we have is a comprehensive

plan for a housing finance system that does not involve the government. as in other countries, it relies on the quality of the mortgages to produce a sound system of housing finance. our system, which began with quality mortgages, had somehow become a system where it only seems to work with the government's backing. and most of the industries involved have become addicted to government backing. it will be difficult to back the government out but that is what we're going to try to do. we have set up our plan on four principles. the first is that housing finance system like any other system for financing any other part of our economy and it is important, the rest of our

economy runs without government backing. we do not see anything about the housing system that requires government backing. much of our discussion, our first principle is, we can run our housing system without the government, let's make every effort to get the government out of it. the next principle that we talk about is the question of how you assure that prime mortgages, good quality mortgages are available for the american people and the housing system and we will be discussing that after i am finished. let me talk a little bit about this idea of getting the government out of the financing

system. there is a reason for that. that is the government can never get out of -- adequately compensated for the risks it is taking and we have seen this happen again and again with the savings and loans 25 years ago, today with fannie and freddie the government will be taking enormous losses and that means the taxpayers will take enormous losses. many of the benefits we think we got from a system in which the government is actively involved turn out not to be benefits. they turn out to be detriments and eventually, the costs come back to bite us. in -- no matter where the support is applied from the government, it comes out the same way. whether it is at the company level with fannie and freddie, where they have the implicit backing of the government or perceived that way in the market, or whether it will be as some people have suggested only on the mortgage-backed securities that might be issued

by companies that would be authorized to do so, where for the government backing is put in place, moral hazard is created and as a result, eventually, the losses become enormous, they are hidden because of moral hazard and the backing of the government but eventually, they and have tofoure be paid for. we have heard arguments about why government backing is important. we would not have a 30-year fixed-rate mortgage without the government's backing. that is simply not true. if you go on to the internet, but i and 34 -- put in 30 year fixed-rate jumbo mortgage and to get offers. jumbo mortgages is a mortgage that is not back in any way by

the government and it is not issued or guaranteed and that is why it is jumbo. you can find such mortgages. the question is the price. that question devolves into the question of why the government ought to be supporting a 30-year fixed-rate mortgage. the reason the price would be lower for fannie and freddie as the government is backing it. when you think through what a 30-year fixed-rate mortgage actually achieves, you can see that although people can once such a mortgage, there are tax advantages in it, it is not the policy for the government to be backing it. what it does is it keeps people from accumulating very much equity in their homes for the first five or seven years and on average, people sell their homes and move in seven years. what we're doing with a 30 year mortgage is we are doing exactly what we realized was one of the

problems with the system before we have the recent crisis. we are creating more leverage for homeowners just as we created too much leverage in the market in general. after our first principle that we get the government out of the mortgage market, the third principle and i will leave the second principle to bed and alex will take of the fourth which has to do with fannie and freddie. the third principle is the what we do about low-income borrowers and we believe there can be and should be a system for low income borrowers, to get them into owning homes if they are qualified, if they have the credit scores necessary, if they

can produce something of a down payment. this is a social policy for the u.s. government and that means the taxpayers should be supporting that. it does not have to run on private sector ideas or incentives. it is a government-backed system but we have to be sure that it is on budget and is cabined so taxpayers will not suffer excessive losses. we have a description of the non-prime loans that should be available to people under such a system and that would provide the kind of government backing with risk-taking by the taxpayers. for prime loans, for people who want to buy homes other than through a government program or cannot afford to buy homes that

saved the down payments necessary to buy homes, that can be done entirely through the private system. as i said, alex pollack will have to leave early and will talk about principle four, what happens to fannie mae and freddie mac. >> thank you. fannie and freddie will, over time, sees to exist as gse's. it is clear that if we want to get to the overall housing finance sector which we should have which is mostly a private market although it does have a government elements in it. you are either a private company

or you are explicitly the government and there is nothing which tries to be both at the same time. no fannie and freddie in their gse form. the huge losses and the consequent government taxpayer bailout has brought this to everybody is attention. at a deep level, we note the presence of these gse forms is consistently distorted credit at credit pricing and house pricing and it is trying to transition away from this demonstrably unsuccessful form but as we know, they represent half of all mortgages outstanding and a good bit more than half of current production. it has to be a transition. we suggested should be a five- year transition in which fannie

and freddie continue to operate on a declining basis, at the end of five years their charters would be revoked and would sunset and there would be a privatization of their ongoing business assets and a liquidation of their old government guaranteed debt and mortgage-backed securities guarantees. as we all really knew all along, the so-called implicit guarantee was a real guarantee and all of us are paying for that now. what would this five year transition look like? there would be a scheduled regular reduction in the conforming loan limits for fannie and freddie so that they would be reducing overtime and we suggest that schedule might be 20% of the previous year's

limit, each year, so it goes down. the reason it is so important to lay out such a schedule is we want and the country needs for the private sector to expand and takeover the field of mortgage finance, but nobody can compete with a gse. that is the problem of the history. lowtse's had outrageously capital ratios and now they have no capital whatsoever. nobody can compete with them today so you have to move the gse, fannie and freddie, out of the field to allow the private competitors to come in and replace them and we suggest you do that from the top of the market, the bigger loans and bigger houses, moving down. that is the first point.

second point, fannie and freddie have accumulated very large investment portfolios. people have suggested various kinds of limits for how you bring a limit down and make those portfolios go down. we suggest a simple idea. it would be easy to implement and effective. it would be to put those portfolios in the runoff. it has the assets mature and they would not be replaced. we would not jump into the market but let them go down through natural runoff. third and important, immediately raise the capital requirements to equal those of national banks. one of the biggest problems with tse's and as i said before, was there outrageously low capital requirements. they were hyper-leveraged and much riskier than anybody

intended but it created a capital arbitraged so assets will tend to flow to where you do not have high capital requirements, and we should equalize across the financial system these capital requirements. make it clear they will be the same as national banks and a well-defined set of requirements and correspondingly, we have what we might call the mortgage private sector adjustment factor where fannie and freddie should be pricing their guarantees as if they had, they do not have the capital, as if they had that much capital and their prices have to reflect the way a private company would have to capitalize the business and create return to it. we further suggest that starting in 2014 as we're going through this transition, the government should start explicitly charging

for its credit support of the remaining time of fannie and freddie. 30 basis points a year on their outstanding debt and mbs guarantees would make sense. all the affordable housing goals and special taxes or fees on fannie and freddie which are stealth public policy charges, should be repealed and replaced to the extent that congress decides to do with explicitly appropriated and approved programs. at the end of five years, the gse charter would expire. fannie and freddie would be divided into a good and bad bank as part of a receivership. of necessity for the holders but of necessity, the holders of equity are junior to the senior preferred

stock would be wiped out which they are already. the bad bank which is all the things that are guaranteed in the way of liabilities and such assets as are appropriate go into a liquidating trust, the good bank would become a private company, could be sold to private investors and go on in life but not as a gse and the assets, all those could be auctioned off and the proceeds would reduce the taxpayers' cost of this second bailout. i want to stress peter's point. in one generation we have had two massive bailout of government designed to housing finance systems.

two strikes, it would be good to have a true market system and avoid the third strike in the future. a five-year transition with the end as described and at the end, we would have a system which is mostly a private system but also has the government in it but in the system you would be private and nobody will pretend to be both. that is to say there will not be any gse's. thank you. >> thank you. the second principle in our set is insuring mortgage quality and fostering the accumulation of adequate capital behind housing risk. this is the key question. how do we create the system in which prime mortgages are the principal way that housing is financed and for that, i will ask ed pinto to address the

various elements in our white paper which go to that question. you'll also find a set of standards for a prime mortgage as ed will talk about in appendix one. >> we have outlined an approach that goes -- relies on the tried and true. one of the questions i am always asked, a lot of people say we have a nationalized market system. 90%, 95% is guaranteed. we philosophically agree or economics won a one tousles we need a private market. how do we get there from here, given that we are at 95% government guarantee? the answer we think, we laid out in our white paper quite fully

and in a robust fashion and provides a path that will be very noticeable that capital moving into this market and as that moves in and as fannie and freddie moved out along with fha returning to their traditional role, the market will move and turn into a private market which is perfectly doable because the principles that we applied and the approach is tried and true. built around a definition of prime lun. return to burrs having the skin in the game. we got to a point where the policy was to do with down payments and we got to 0 downpayments with zero amortization. interest on the loans. we had many people taking

interest only loans. in 2006, we have a situation where 20% of repeat borrowers put no money down. that was unheard of five or 10 or 20 years before. people would have put 30% or 40% down because they had equity and ended up with a fair question. it was never anticipated that second and third time home buyers would be putting no money down on the purchase and many bought two and three and four homes that way which compounded the problem. we need to return to practice where they preponderant our prime and while it may be hard to see that was our past practice, as recently as a generation ago that was the practice and we had a net in our white paper that demonstrates that. we suggest that you allows securitization only for prime loans. it appears that when you start

putting non-prime loans in securitization, the buyers of those loans do not look at the underlying assets. they're looking at the ratings are the guarantees or whatever it is and they say, i will buy on the basis of a government guarantee or the rating. the buyers of fannie mae's loans did not care what fannie mae was doing because they assumed it was guaranteed and they were correct. by limiting to prime loans, we get rid of that part of the moral hazard and people know what to expect and that does not say you cannot have non-prime loans elsewhere. they do not going to public securities. use of the existing mortgage insurance industry rather than creation of new entities. many of the proposals have two

flaws. one is they all rely on some type of government guarantee. that reopens the questions of moral hazard. secondly, virtually every proposal requires -- proposes to create a new set of entities, many of which have the same characteristics as fannie and freddie. they are just knew. over time, they will marfan to gse -- morph into gse's. the implicit guarantee is not something of a government bestows. it is something the market this does. fannie mae in 1992, congress passed a law that said a legend had to be placed on every single instrument that was sold by fannie and freddie that was -- it had to say this is not

guaranteed by the government, there is no taxpayer liability. they had to put it in certain sized print. it was ignored by both politicians and by the market. politicians relied on the fact that fannie and freddie would be able to sell their debentures and mortgage-backed securities. why did they treat them in the first place? congress would not allow fannie and freddie to fail. they would ultimately be guaranteed by the government. we also rely on the existing securitization process and the existing process with the changes we propose to is a system that makes sense and does work as long as you do not stuff it with non-prime loans. as long as the collateral you are securitized is prime.

we believe that capital will be attracted to securities and to a private market that is backed by a high quality collateral. we have been meeting with investors and they tell us this is a 11 trillion dollar market, the housing market market. that is larger than the credit- card market, the automobile loan market, the multifamily market, the commercial market, the hotel market. you put that together and it pales compared to the $11 trillion mortgage market. they cannot have a market that they ignore it. that is that large. it is private, they will treat it like they treat the other markets that are not guaranteed by the government. a common sense one page disclosure form that alex has developed and is getting interest in regulatory circles

because of its simplicity. it says in one page, you need to understand what you're getting with this mortgage. the alignment of economic interests that is necessary between the various parties to this mortgage market and that is one of the bandages we see with the mortgage insurance companies. there will have their interests aligned with bondholders and with investors and loans. we think that is positive and many of the provisions that come with this approach have built in countercyclical policies. i had done a survey of government policies going back to the 1980's and i found 15 or 20 every single one was pro- cyclical. when the market peaked and started coming down, they forced the market to contract faster.

they were always going in the direction the market was going. you need countercyclical policies which squirrels know how to do. it is saving of acorns for the winter. that is a countercyclical policy. we seem to have a problem with that in the mortgage finance industry and we tried to line up properly. also provide market transparency and we have a number of suggestions. with the steps in place, we think the housing market will flourish and these will be supplanted as the wind down in a natural fashion. we lay out in detail how this would be done. we rely on existing entities and definitions that can -- that are well known, fico scores, things of that nature. we consulted with participants and we have been advised once it

becomes clear that this is an approach that might be embraced, the mortgage insurance industry will become the recapitalized and the necessary capital in order to become an adequate counterparty to investors and bond issuers will develop rapidly and will be telegraphed to the rest of the market in clear terms. we consulted with members of the mortgage insurance industry and security issuers to look at pricing. this is one of the issues that is brought up. how much will this cost more than it is today? there are subsidies that the government is providing a look at history closely. our approach would permit private mortgage-backed securities to fund the equivalent loan that fannie and freddie does. a fixed-rate loan with an interest rate annually that is

about 25 to 40 basis points than today. that drops to 25 basis points if you assume the fees are implemented and we think our proposal gets smaller difference and overtime, one of these the bandages of the private sector is overtime as the market starts accepting the new prime loans that are underlined this market as collateral, as capital builds further beyond the minimums, their spreads will tighten and we think we will get to a more narrow spread. we have also found investors need access to this market. it is and $11 trillion market. what concerns have been mentioned that we have not already addressed?

the increasing mortgage rate i have covered. peter has covered the 30-year fixed rate. this is one the administration brings out. we believe the approach, the countercyclical approach that the mortgage insurance industry has to accumulate capital over time out of premiums which they put away will generate the capital cushion that is necessary to withstand a catastrophic event. that is why going into this last event, the mortgage insurance companies did have capital accumulated and they have survived. they have been bruised, they have been battered. they did not die. unlike fannie mae, freddie mac, lehman brothers, bear stearns, and a list goes on. including bond issuers mbia, etc. in congressional testimony after

the release of the report, secretary geithner observed that simply emanatineliminating too o fail and substituting a private financing system that shifts the rest from fannie and freddie to major banks will not accomplish what we're trying to accomplish because the taxpayers will be at risk for too big to fail banks that have the implicit guarantee the taxpayer backed by the taxpayer an explicit guarantee. we addressed this had on. compared to frannifannie and fr, banks have larger cushions. they are far more diversified and we have the benefit that we are focusing on the mortgage sector on prime loans and therefore, that will reduce the risk the banks have off the top. secondly, we envisioned a larger role for the market system for

securitization involving only prime loans and for banks. the banks will not be the repository of in terms of whole loans more than they are doing today. they can buy mortgage-backed securities but the securities will be of the type we just described. because you are securitized in prime loans, the losse is undertaken by truncheons and the loans will protect the banking system and the fdic will benefit from this approach. to the extent they banks originated loans and they hold those, or hold mbs backed from those loans, they will be prime. we expect that banks and other institutional investors will be able to, if they choose, originate loans that are not prime. the capital requirements will be

higher for those and therefore protect the institutions that hold them. we believe that this substantially reduces the likelihood of too big to fail banks imposing losses for mortgages. on taxpayers. preserving the to be announced market, we describe how that can be accomplished. preserving credit for credit were the americans, we have a definition of crime in appendix one and we show statistically is the average flaccfico score 730. 680 is not true. all individuals have a score above 660. 97% of all homeowners taking out a loan had fico above 660.

you can have a prime system based on a fico above 660 because that is the preponderant of households. this allows for individuals to get along with as little as 10% but using the mortgage insurance capital creation and accumulation methodology we described and we had fha to make loans with somewhat smaller down payments to creditworthy borrowers. small lenders and community banks will have difficulty competing. this is the easiest point to address. fannie and freddie always discriminated against smaller banks. we know this because they charge countrywide a fee of eight to ten basis points. there were charging community banks 25 and it went down to 21. why were they doing that?

countrywide could give them the volume of loans they needed both affordable housing and other volume that they needed in order to keep their profits and what they were doing going and meet their affordable housing goals and the community banks to have higher quality loans were charged more than countrywide with lower quality loans. ultimately, this creates a level playing field for all the participants because credit risk is not something that when you lose on each one you make up in volume. countrywide, that was the attitude of countrywide. they would buy bad loans in hoped it would make up in volume. it did not work that way. the private market will develop if we give it the opportunity. we think that once this is announced and gets some support from congress and the administration, we believe the private sector will come in and

announce capital. this myth that the private sector does not want to come into this space is a myth. the reason they do not is because it is occupied by the government. you cannot compete with the government. and you will lose capital if you try. the government does not have a cost for capital. you cannot do it. we believe once the message goes out and the signal goes out of the withdrawal from the sector, the capital will rush in and allow this to happen. thank you. >> thank you. let me review again before we turn to questions and we would love to respond. this is complicated. ed has touched the high points but it is complicated and we expect people will read it and have lots of questions if not here, at other times. what a prime market and prime

mortgages. we want some kind of low income support and winding down of fannie and freddie. ed made clear all the pieces are in place for this system. the preponderance, the majority of people in the u.s. who own homes or want to buy homes would qualify for a prime mortgage as ed described. the buyers of these instruments of the loans themselves or mortgage-backed securities are there. they want these instruments. we have talked to them. they want them because these are long-term assets and many of them have long term liabilities. they need assets to match those liabilities and there are not that many around.

there is a lot of interest in the private sector in the system in which they can get long-term assets that are prime quality. one of the questions that comes up is why is it that we are insisting that only prime mortgages be securitized? is awe're looking at here market failure of some kind. that is when a bubble begins to grow, it is common for bubbles to occur in the course of any free market because people get exuberant and believe that trends that are continuing in one direction will continue forever. we have seen that up on to 2008. the problem with the bubble is it tends to suppress the signals that private investors normally get when they are investing in the market.

as long as housing prices are rising, the losses that are likely to occur do not appear because people can always sell their homes for more, or they can refinance. in order to make sure those do not occur, we are insisting on prime loans and those would be the only kinds of loans that could be securitized because the securitization market is susceptible to the kind of pro- cyclical exuberance we are talking about as a market failure. others can make non prime loans , banks and insurance companies non-uy loans athat are prime. before we had this tremendous bubble, the subprime market was

exceedingly small. it was a niche market and there was a reason. buying subprime loans is very risky. we do not have to worry as long as we're assured that the securitization market is used for prime loans. we do not have to worry about a return of the kinds of things that are -- that happened during the late 1990's and the late 2000's. thank you. we would love to take your questions if you have them. if you do, please wait for the microphone. stephanie has the microphone and she will bring it to you before you ask the question. go ahead. >> there are a number of standards on how credit risk ought to be underwritten. if you mention -- few mentions

of how collateral is written. there is appraisal but verifying the legal right as collateral. i would be curious to walk through that. >> on page 25, we talk about better appraisal practices. .

[captions copyright national cable satellite corp. 2011] >> if you could replace it with another property, why would you pay more for that one than this one? that fell by the wayside. fanny said, we probably don't have to pay for this. which, in fact, was wrong. by the time we got to 2004, a large percentage of the properties being bought were being bought for investment. they were single-family homes strewn throughout the country in

california, nevada, florida. that built more and more, yet the appraisal process ignored all of that. likewise, as land values went up, there is only one extra place you can put that value, and that's in the land. the land became this reservoir of the extra value. the problem is, the land value wasn't really going up, it was the extra value being inflated, which we have seen disappear. as prices went down, it is the land value that went back down. fanny used to have a requirement that the price couldn't be more than 30% of the land value. they put together a great chart that showed that by 2006, the average land value on the average property was 40%. remember back in 1982 the highest you would have was 30%. we got to an average of 40%. these are the things that honed

out the appraisal process. we suggested going back to some of those. regarding title, things like that, i don't know if you are talking about m.i.r.'s or mortgage title or property title, but property title has not been a particular problem in the united states, except that it is come berso so many. the united states does not have a torent system where you register titles like you do with cars. so i don't know that that's a particular problem, but appraisal value is a definite problem. >> i was surprised when doing the documents that the owner had an f.h.a. loan. i thought something had changed

since then, but it hadn't. i got to know the buyer. i had never studied their finances, but clearly they didn't need zero down. they could have put something down. the question is, how do you treat that? i guess that's under your third principal -- principle. the money, everything went fine. >> that's moral hazard. when the government does something and just opens it up to all comers, which f.h.a., at the point you sold that house, peter, that's what it was. the income limits say -- when they don't have income limits, number one. their mortgage limits have gone up to $700,000 in some areas, so virtually every house qualifies for f.h.a. financing, and they allow 3.5% downpayment. they also allow seller concessions. they allow the premium to be financed. they have a lot of different things that make it a zero-down

loan. so what we suggest is that the f.h.a. program needs to be targeted. we believe it should be targeted by income. we believe it should be targeted by mortgage amount. we believe that the downpayment should be increased ultimately to 5%, and we also believe that the terms should be shortened some on a 5% down loan, so as peter said, you actually have some accumulation of equity through amitorization. you will still have people that do that. we also believe f.h.a. should be focused on home purchase, rather than refinance, because that's what their mission should be. again, if someone gets a home from f.h.a., they should be able to refinance through the private market and do it under those rules, or stick with the f.h.a.

loan until they pay it down enough to qualify or improve their credit enough that that's an issue mple we knew those were built in by having to go to the private market. >> it costs a lot less. >> it would regionally . we were proposing that it be based on regional numbers. that's very important, because the current numbers are just crazy the way they do them. >> the specifics in our plan would be that you could make a loan if it is an f.h.a. type program. we're not saying f.h.a. has to be the program, but what we're saying is there should be some low-cost, low-income plan, and we're talking about people with 80% of the median income paying for a home that is no more than 100% of the value of homes in that area. so it tends to narrow the people who are eligible. that's really what we want.

i mean, what we have here today is a system in which people who could otherwise a prime loan were able to go to f.h.a. and get a subsidized loan. that's the wrong idea. >> it was worse than that. f.h.a. had no income limit, yet they the policies were to put affordable housing goals on fannie and freddie, so the private sector was to make loans to people at 80% for affordable housing purposes, but f.h.a. had no such retirement. so we basically said, if that applies to f.h.a., don't apply it to the private sector, because the private sector shouldn't have those distortions f -- distortions. it has been acknowledged those affordable housing goals had a polluted effect and had tremendous negative

ramifications. >> we have three more questions. at least three. so one there, one here, and then here. >> i have a fairly general question. it is regarding regulation. i understand it is not the most popular word, but it seems you didn't like interest-only mortgages, fancy security, and these are things that the government promoted, and that you want to see most securitization of loans. so this sounds like regulation. so would it be fair that it is more regulated today? >> we are promoting a limited degree of regulation. that is, regulation is appropriate where there is a market failure. we believe that because markets bubble the way they do, that is

a market failure, because it suppresses the signals that the aprivate sector -- that the private sector usually gets when it is in trouble. that is regulation. i wouldn't say that a.e.i. is against regulation in general. we want the minimum amount of regulation. we think in this case by providing the regulation at the mortgage quality level, we can avoid a lot of the problems that arowed rose with the market before. >> and also, just on one thing you said, if you look at the source of many of the things that are now viewed as a problem , one, the loan term going to 30 years. interest only, fannie and fredd ie. f.h.a. invented that. they invented it. mortgage brokers. that's a creature of f.h.a. lending going back 70 years.

fannie and freddie, that's what they were. jennie mae, modern mortgage-backed securities. these things started, and they might have had good intentions. who knows. we have charts in our papers that shows who is leading the loan-to-value charge. it was not the private sector. so the government was doing things, and as usual, the law of unintended consequences operated very largely and loomed very largely in what the government does, and things were just taken to their logical conclusion. that's what i've said before. if you start with downpayments, the ultimate absurdity you could take that to is no downpayment up front and no amortization for 10 years. excuse me, but the only way that type of loan could pay off other

than inflation -- well, it couldn't pay off. that is not lending. that's gambling. >> i would be interested on your bank and security. a lot of thrifts with big portfolios are coming under enhanced scrutiny. london city which probably has the largest jumbo fixed rate portfolio is in trouble with regulators because the f.c.c. does not like the risk it entails. >> i had an op ed in the real clear -- real estate markets last week, and i called it "the eye of the hurricane. i "the mayhem spreads and risks

the market around it. if you do this, you will have a market that develops, and there will be space. we have a chart. it will be up here. the 3, 2, 1 prepayment fee will be here, and then you have 15-year arms with a 15 year fully amortized, down to 15 years, which we define as a prime loan if their experience justifies that. you will start seeing a shift away from the subsidized 30-year fixed rate. because again, for most people, for example, 15-year a.r.m. with a 30-year amortization, 95% of the people probably move by the time that 15-year period is up, and even if rates were up some, their amortization would have

grown. forget inflation. if they had just sat with that loan, there is not much risk that gets introduced into the marketplace. we do believe that in order for this market to develop a bit more rapidly and bring in more investors, you will immediate a better mix. if you start with the premis -- premise that you need fully repayable loans, then we will have a system that we believe collapses. and we believe a free market pricing things properly will do that in a way that -- and the consumer will respond to that. and we want people to pay off the loans. the goal here is not to keep leveraging up the debt. we've proven, you can't do that. >> yeah. let me add to what ed said.

and this is the important thing to take away from this whole issue. where you have a market that is freely structured and people can come in and make the various kinds of offers, if a person wants a 30-year mortgage, he or she can get a 30-year mortgage. that person will have to pay for it, because there is a certain degree of additional risk that the bank or other investor. not a lot of this will be portfolioed. we believe a lot of it will be securitized. that risk will have to be paid for. so people will say, do i really need a 30-year mortgage here? am i expecting to say -- stay in this house 30 years, and the answer is, no, i probably will not. so i will take a lower maturity at a lower cost. and that is the way the market -- any market should work. and that is not the way our market has not been working up until now because of these

government programs that have incentivized people to take mortgages they don't need and would not ask to pay for if they were asked to pay for them. final question? >> i'll try to be quick. first of all, thank you so much for supporting the m.i dodd-frank. >> we believe it is necessary to

eliminate the q.r.m. it also eliminates it for a second reason. since securities are required to have as collateral prime loans, and since the q.r.m. says, if you are not a q.r.m., if you want to say that's what the new word means, you have to have retention. well, the retention goes away, and therefore you don't have to have this regular torle -- regulatorily set of rules. you just put them in the mortgage-backed securities. we think that simply identifies the process and also makes it much less suceptible to problems that can happen. when you put something vague in a statute, and in this case it is a case of five or six rl regulators. you have seen the discussions. they can't quite figure out what to do.

the second question on the t.b.a., the to-be-announced market, we tip-toed through a rating of industries. how that all falls out we're not exactly sure. we believe that the issue really is how robust is the ability or the level of capital that a particular entity has to withstand the various scenarios. the double-a or triple-a tends to be a short-cut name. a triple-a has to withstand a depression scenario of 40% decline, and a double-a is 45% and on down. whether you call it double-a or triple-a, you still have to look at, how much stress can you handle. we think this is appropriate to the stress levels that need to be met in order to have the kind of robust market with counterparties that are

acceptable. on the compliment about the mortgage insurers. the reason we ended up recommending that the mortgage insurance industry is a good means, perhaps, for doing this, besides the fact it already exists, you don't have to re-invent it, you will see in our paper, we actually go back to the -- what's known as the alger report from 1934. not well known by most people. i go to people and ask, have you read the history of the mortgage insurance. someone said, let me google it. i said, you will have a hart time finding it. it was written in 1934. the united states had a robust

securities market in the 1930's and 1940's. they were mortgage-backed securities. in fact, freddie mac used to call them participation certificates or mortgage certificates. so we end up going back to that. many of the things that happened in the early 1930's, they happened exactly again this time. so some of the solutions that mr. aldg -- mr. alger came up with, is why we focus on this. the mortgage system happens to be the one existing methodology where you can accumulate capital on a countercyclical basis. mortgage-backed securities didn't do it and fannie mae and freddie mac did not do it. >> thank you for being here. our conversations with private sector indicate that there is a lot of support there. what we are hoping is that the

ideas that we've suggested here and will be circulating will get the support that congress will want to see before they pr willing to proceed with an entirely private system. most people alive today have never participated in an entire private system and don't understand how it will work in the housing field. i think we have shown how it can work. now we can see how the people are participating in that market to go and tell congress that they think it can work, too, and they can participate in it. so thank you all for coming, and we look forward to questions after this conference and in the future. [applause]

>> here on seep -- c-span we are live at the state department. we will be hearing from hillary clinton on news about enforcing the no-fly zone. the associated press reports that rassmussen said late today that 28-member nations have

agreed to act in order to prevent libyan civilians from attacks by muammar gaddafi's forces. they write the decision came after six days of negotiations on a break-through today, when turkey, nato's only muslim member, agreed to back the plan. it was written that the possible deal was reached in a four-way telephone call between the secretary of state and the foreign ministers of turkey, france, and britain. nato operates, they write, by unanimity so all 28 members must agree. and turkey has agreed, according to the associated press, that nato will enforce the no-fly zone. that's what we're expecting to hear from secretary of state clinton. we'll have it live for you. one more thing we can tell you. we found out from the white house that they will hold a classified congressional briefing on the house floor next week when the house and senate returns. this will be a classified briefing on libya from secretary of state clinton, defense secretary gates, the chairman of

the joint chiefs admiral mullin. they are slated to address members of congress next wednesday. we will have the secretary's comments when she comes out to make them. in the meantime, u.n. secretary ban ki moon just a couple hours ago briefed reporters on the enforcement of the u.n. union. he spoke to reporters for 15 minutes. we will show you what we can and come back here live when we see secretary clinton. >> i appreciate this opportunity to discuss passage of resolution

1923. as convened by president sarkozy, the international community called for an immediate cease-fire and agreed to undertake necessary measures pursuant to resolution 1973 to stop the pursuital -- brutal campaign of violence by the libyan regime against its own people. resolution 1973 also reaffirms libya's sovereignty and integrity and expresley forebids foreign occupation of -- and expressly forebids foreign occupation of libya. in tune eeshia there was concern about the nations still in libya and the heavy burden of caring for refugees at their borders.

re-integrating nationals who have left their country. in all my meetings public and private, i have expressed rezz -- expressed action on the resolution 1973 is governed by an overriding objective to save the lives of civilians. the international community has acted together to avert a larger scale pricis. i expect the international community to continue to exercise full deliverance in avoiding civilian casualties and collateral damage. finally, i emphasize how important it is for the international community to speak with one voice in u.n. resolution 1973 and in dealing with the human situation.

let me now update you on the implementation of rezzluges -- resolutions 1970 and 1973. as you know, sfrikse -- strikes were initiated with the intent of creating a no-fly zone over their country. that campaign is ongoing. libyan authorities have claimed that they have instituted a cease-fire, including a statement by the prime minister of libya on 19 march. we see no evidence that is the case. to the contrary, firing has akurd in and around several cities. in short, libyan authorities

have taken steps to -- in short, there is no indication libyan authorities have taken steps to carry out their obligations under 1970 or 1973. the united nations has engaged in strong diplomatic efforts. i have kept in touch with all parties, including libyan authorities. i have called repeatedly for an immediate end to the violence and for unrestricted humanitarian access. in this context, humanitarian aid is exempt from the region. in march my special envoy to libya visited tripoli acome anied by the u.n. humanitarian coordinator. their teams undertook consultation with libyan officials and other forces. my envoy set forth the

international community's positions clearly and unequivocally that attacks on civilians must stop. safe humanitarian access must be gaurned, and resolutioned 19 -- guaranteed, and resolutions 1970 and 1973 must be employed. the special envoy emphasized it was in libya as best -- in libya's best interest to stop the crisis. if libya fails to act on 1970 and 1973, the security council may be prepared to take additional measures. libyan's foreign minister claimed that the government had been forced to act because of the perceived threat by al-qaeda and islamist terrorists.

he has told the special envoy that they gave a message for rebels to lay down their arms. also he stressed that meckmisms should be put in -- mechanisms should be put in place so that they are forced to abide by any cease-fire. on march 24 we had a meeting including the chairman of the transitional international council. they reiterated their call for a cease-fire as well as lifting the siege imposed by libyan government forces on some cities in rebel hands. they also expressed a deep concern about the hardships insflicted on the -- inflicted on the libyan people.

they further stated they need a humanitarian mission to all parts of the country. yesterday i had an informal meeting of the smule community and discussed at length how the united nations and african union can work together to resolve the libyan situation. tomorrow my special envoy will travel for a meeting convened by the african union.