Honoring Gramlich part 4: Consumer protection and housing

[ Inaudible Discussions ]

>> So, this panel is on consumer protection and housing and is chaired by Sandy Braunstein. Sandy until very recently was the Director of the Division of Consumer and Community Affairs here at the board, a division that thrived under her leadership. Sandy was also the director of that division under Ned's tenure and so both she end her staff were closely with Ned on consumer protection issues in which as I mentioned earlier Ned was deeply interested in. Earlier in her career Sandy was on the frontlines of community development here in DC leading and working in several organizations. With that introduction, Sandy, the floor is yours.

>> Thank you Dan. Good afternoon everybody and I just want to say it's a real privilege to be here as Dan mention I retired from my job here at the Federal Reserve Board after 27 years which for the Fed I was still rookie. You wouldn't believe how long people stay here at the Fed just still amazes me. But I retired and I still--I feel very privileged that I was able to come back and do this and that the board was very generous in allowing me to do this because it means a lot to me personally. I worked very closely with Ned when he was here at the board and he was a real champion of consumer protection and community development here at the board and then something that we certainly had never really had before not in the way that Ned did it. And, you know, he was a very hard act to follow. So, he means a lot to me and to my division and many some of whom are still with the board and are here today because he was so important to us. So, we're going to do a little something different on this panel. We don't have PowerPoints which I know to the researchers which was very hard for Bob Avery to deal with because, you know, it's like I think I therefore IM and for economies, I have a slide or data there for IM. So, we don't have PowerPoints. We had a very interesting conference call two weeks ago to prepare for this panel. And one of the things about this panel is everyone of us up here had personal relationships with Ned Gramlich and our conference call ended up being--we talk substance and we're going to talk substance today but we also ended up telling a whole lot of Ned stories. Our real life experiences with him which we're just wonderful, we were suppose at an hour long conference call and of course have ran over. And some of those stories we plan to share with you today. So, I'm going to start out on--I'm really pleased to have the people here and on the end over here is Bob Avery who formerly was a staff person here at the Federal Reserve Board when Ned was here, he is now at FHFA. And we've got Eric Belsky whose from Harvard from the Joint Center for Housing at Harvard and Ned were closely with them and they'll talk about--he'll talk about that. And I have Ken Wade who is the former, he is now with Bank of America, but he is the former director of NeighborWorks America which was an organization on which Ned sat on their Board of Directors when he was here at the Fed and I will talk about that. So, going to the way we're going to do this is we rather than have everybody get up and say a piece like everybody else has done we're actually going to have a conversation and have you listen and then at the end we are going to take questions. To start out, I just want to say a little bit about Ned Gramlich when he first came to the board. It was--I had been here for quite a while and Ned was really a very different kind of governor than we had ever had before. So, one of the things was interesting earlier today, Bob and I were talking offline and we said all the people who preceded us at this conference have been colleagues of Ned. And although we kind of our colleagues, we--Bob and I are the only ones so far that have gone up, who actually worked for him. We're staff members, we're just a little bit different although Ned tended to treat us like colleagues but he still was our boss. So, one of the things that here at the board when I first came to the board in late '80s, the governors who by the way seat in that building across the street on the second floor. That area was kind of Mount Olympus is held the Fed culture was. And the governors in that those offices, you know, you didn't really go up there unless you were like summoned and when you did show up in those offices usually, it was to get some pronouncement from a governor, and it was kind--and everybody was governor this governor that except for chairman this chairman that. And, you know, it was all pretty formal and they were very intimidating. And then Ned came, and one of the first things he did was when we first met with him is that he told us, "I don't like that governor stuff, just call me Ned." And I have to say for a lot of staff here at the board it was very disconcerting at first because we were not used to that. But we grew use to it and now luckily it's become more the standard here at the board--it's, you know, people who are more recent to the board wouldn't understand what it used to be like. But Ned was really kind of the forerunner of wanting to have staff be more collegial with him, he wanted us to present a posing view points, he wanted us--if he had a pronouncement to make he wanted us to take issue with it and tell him why we disagree, and argue with him. And that was something very, very different for at least us I know in our division and I think others around the board. So, anyway, that was something I just wanted to bring up which was, you know, like I say Ned here at the board was a--he was just a breath of fresh air. So, I'm going to start by putting question to Bob Avery who I said also was staff here at the board but Bob by the way was in a different division than me Bob as an economist and he was in the research division. And so Bob, can you talk a little about the types of research that Ned was interested in doing related to consumer matters not the monetary policy economic stuff? But related to consumer matters and like to hear the particular or overall research agenda for the consumer area and, you know, did he talk to you guys about that?

>> Let me just add before I answer that, just one other anecdote about Ned and governance in creating a climate for staff that I'm not sure I fully understood or appreciate at the time but I'm--as I age much more. And I think is important for schools of teaching public policy to think about how do you create a climate where you get good government employees, good government staff work. How do you do that? What are the necessary things to do? And let me give you one example that I'll--that the other question a second. We were required to consult, we had congressional report we had to do and my colleague Glenn Canner and I we're suppose to consult with two members of congress who were the ideological different answer the spectrum. We're suppose to consult with both of this people and they were both very powerful and intimating people. So, we went down with Ned to the hill and we consulted with them and then one of this people and I don't want to say which one. I started to argue with the person and take issue with what they were yelling telling to do the study in this particular way. And as we left, Ned said, "Don't do that, just seat there" and the way he put it "Take it like a man." They've got--he said, "Yeah, they've got a different agenda and it's not about the study. They want you to do--they already know the answer they want and they want you to produce their answer. And there's no amount of arguing when you can do with them that makes any difference." He said, "The anecdote to that is to do the right thing. If you try to cater to what they want for optics or whatever reason and end up doing the wrong thing or shading it, now you've left yourselves open to legitimate criticism that you didn't do the right thing." He said, "My job is to protect you from those people. Your job Avery is to do the right thing. And you stick to your part, I'll stick to my part." Now one--one final thing to add to that later on some very different environment we were meeting with Michael Bar, treasury when his younger age--younger years some totally different thing. And maybe some heated discussion with Michael and I get kick by grandma kind of the table. So, I now I must violated the Gramlich rule. So, I'm going to shut up. And we're walking out and I said to Ned, "Why did you kick me? I didn't think Michael was, you know, it was nothing political or anything. And he says, "Oh, did I kick you?" He said, "It was boring in there, I must have fallen asleep."

[ Laughter ]

I just overtly kicked you. So, I'll talk a little bit more but I--when the--when we first got here Ned called Glenn Kinorai [assumed spelling], his regular police and I'm not--I took that as a compliment but I'm not sure he did but in any event he said here are the policies, here are the rules that we're going to visit over the next half a dozen years. I want you guys to start research when we get to that--those rules I want you to have already done research on those things. So, that when we get to them you're already--we've already got some stuff and then we spent time particularly was focusing on the CRA and I'll talk about that a little bit later. But he laid out an agenda saying not what answer he wanted but what were the kinds of things that he felt we need a good evidence in order to do good will making and he wanted us to start in that process and empowers to do that. So, there was a significant agenda and--I'll go for maybe a little bit later but this some specific item but he clearly came in with a game plan of having the policy making be data driven and have based on research.

>> OK and thank you. So, Eric I'm going to turn to you for a second. In your work at the joint center I know that your staff, you and your staff have conducted a lot of studies over the year and I'll give you a little plug you put on a fabulous by any all conference would research on housing, and I know that Ned was a big supporter of your efforts over the year and I think while he was around he used to participate in pretty much all those conferences because I always went to the--he was always there too. So, can you tell us a little bit about your interaction with him and the support that he gave to the work that you guys did?

>> So, first of all I would also say it's an honor and a privilege to be here honoring Ned, he I think to anyone who meet him was just a remarkable individual that you--you know, very quickly bond within the--want to have an opportunity to spend more time with. He did come to many of our conferences and would engage in those conferences on a very active way. And I guess the way I would describe my impression of Ned is that he was just an incredibly inquisitive person. He just sat there with lots of things he wanted to know, lots of things he wanted to understand and he had formulated I think as Bob said a lot of questions in his mind is that he felt needed to be answered before he could really in good faith reach conclusions and take what we're going to be significant public actions because of course I knew him when he was a governor of the Federal Reserve. So, he was just a very deliberate person but also a very inquisitive person and I would say intellectually playful as well. So, you know, the idea that he would always want you to--it would invite you to poke holes and what he might be saying to give him ideas about what other people might say that I had heard that might disagree with what he was saying so it was always this give and take back and forth. And as, you know, and it shows up in this wonderful book that he did which I think will end up talking about on seoarate mortgage lending that he mentions in the final chapter, a paper that was presented at one of this conferences and it was a paper written by a law school Professor Duncan Kennedy that was entitled "Why don't the high roaders put the low roaders at a business?" and he was just literally captivated by this paper as I think many of, you know, and, you know, he came up to me afterwards he said, there's something in here, I really need to get a handle on. You really need to understand this and the fundamental question was in a world in which, many, many, many businesses interest is to do the right thing to comply with laws to serve customers and fully responsible and responsive ways and you have other companies that are not behaving in that way, why don't the ones who behave in that way band together. They should be doing better in the market place and were sustainably and figure out ways to create standards that you can enforce. And I think with the leaning towards he'd like to see this big industry standards that were industry lead and that industry would comply within. And if you didn't it would be very obvious because you won't get certifications where you would fall out of certification. And then I think you also have the though about why aren't they more supportive of some regulations that basically endorse the things that they are already doing but would prohibit certain practices that they aren't that others are. And I think that really, you know, kind of for me encapsulated a lot of what he was like in terms of really want to engage with the concept, really trying to figure out how to apply to what he himself was trying to do. His interest in understanding how industry could organize itself to do the things that he felt made sense for the industry to do. But he also was a person who would pick up for phone when he had a question, you know, and he would call and when he was working on his book he was very intensely trying to figure out if he had reviewed the right literature. He really did not want to leave a stone uncovered and he actually, you know, described his enjoyment in working on this book because there were so many contradictory points of view that where ostensibly supported by very detailed data and evidence. And he loved the idea of rolling up his sleeves and deciding which evidence, you know, really made sense to him and really ought to inform his thinking and his policy judgments. And then or course he was a decisive person so, you know, he reached a lot of conclusions. But I think many of us remember him despite all those remarkable contributions and his book is an amazing contribution. It's just an incredibly warm human being, I'm looking at Paul which you came, we renamed a fellowship that we have that we worked with NeighborWorks on. The Edward Gramlich Fellowship and we had our 10th anniversary and we ask Paul to come and speak and Paul is relating stories about here, here he was a governor and he is rolling around with my kids on the floor in a dinner. That something you just wouldn't expect a person to do in that circumstance and that's what he was like, he had a playful nature intellectual and I think deep appreciation for people. I love the fact actually that all three of you are mentioned in the acknowledgements of his book and in very flattering--very flattering ways.

>> Thank you. Ken, I'm going to return to you and I think one of the interesting things is Ned's working connection with NeighborWorks America. So, for those of you who don't know about this, let me explain a little background. One of Ned's responsibilities as a governor here at the Fed is that somebody from the Board of Governors seats on the board of directors of NeighborWorks, the NeighborWorks Board is made up of the regulatory agencies in HUD. So, when Ned came in and was Toby who's going to be the consumer governor this was one of the duties that was assigned to him and, you know, he was fine with that and what was really interesting is that as it turned out. So, Ned's parents lived in Upstate New York and if I get this wrong looking at Ruth Gramlich because I know she'll correct me. But anyway very interesting story in one of these things small world in coincidences is that Ned's parents lived in Upstate New York. And Ned's father for years was involved with a local housing organization in upstate New York where the town where they lived. And Ned knew that but he never paid a lot of attention to what it was or who the parent organization was. So, it turns out that Ned's seating on the Board of NeighborWorks, NeighborWorks was the parent organization of this organization in New York where Ned's father had been involved for years. So, my understanding is Ned's father was thrilled to hear that Ned was now on the board of directors of the parent group. And also, for Ned it was a very personal connection to the work he did with NeighborWorks. And there used to be, you know, there was always a term, you know, to being chair of that board and I know Ned did at least two terms, they didn't want him to leave being chair of the board, he got so involved in the organization. But let me turn over to Ken, do you want to--can you talk a little bit about Ned's works with your organization--

>> Sure.

>> --and also you might tell people a little bit more about NeighborWorks first.

>> Sure, sure and thanks and, you know, I'm honored to be here and at this conference sponsored by two institutions that Ned felt very deeply about obviously University of Michigan and then here at the Fed. As Sandy said and I'm going to be clear I'm not speaking as a Bank of America representative. I'm here in the role that I have at NeighborWorks with Ned served on the Board. And NeighborWorks is a congressionally charted national non-profit. It gets an annual appropriation from Congress but it's not a federal agency. But it has a lot of the characteristics of a federal agency. It has to testify appropriations hearings and, you know, go to the normal federal budgeting process and it has the statutory board made up of the regulated. So, the banking sector and, you know, around NeighborWorks, we would typically say that, you know, someone would come to Washington for very important presidential appointment and when they showed up here, they were told, "Oh, yes. And by the way, you're on that NeighborWorks America Board." And most of our prior board members had no idea what it was we did or how we connected to the local communities that we served except for Ned. He's father was on the Board of one of our local affiliates in Rochester. The Rochester Neighborhood Housing Services and for years, served on the Board there and all of the organizations that were affiliated with NeighborWorks had a local Board. They were independent, non-profit organizations that raise their own resources locally but they were all part of this network of community-based organizations. And then, the early years, NeighoborWorks created these organizations from scratch where nothing existed prior and then the early is they were all called Neighborhood Housing Service of this place or that. But since that time, you know, we--or they admitted pre-existing organizations that had their own names and so it's a much more diffused organization in terms of name but all of them use NeighborWorks in their name and some way shape of former on their--in their branding. And one of the things about Ned's contribution, I mean, he was highly regarded by the staff at NeighborWorks in his role as Chair but we used--always used to try to get all the Board Members out to visit the local communities and Ned was always very eager and interested in going out and seeing how the stuff worked at street-level. Because, all of this organ--many of these organizations were lenders and have their own loan funds, so they actually loan money to people in their local communities and many of them developed affordable housing as well. So, obviously, there was an earnest section between what Ned had done historically in Academia and then the policy role with this role on the Board of NeighborWorks America where he could see some of this playing out in practice.

>> So, one of the things that I wanted to you to cover a little bit was actually connects to what that Eric was talking about with the paper with the high roaders and low roaders.

>> Right.

>> And I was at the conference so I remember that well because on the plane on the way home, Ned talk about was with him then he talked about that quite a bit. But, didn't he take some of that to NeighborWorks because obviously they were a high roader and talk about how you did ways--

>> Sure.

>> --that you could be more competitive with the added sector?

>> I mean one of the things that we did do at NeighborWorks, we had initiated on the Ned's leadership a home ownership initiative which is one of the early efforts to demonstrate that you could responsibly loan to low and moderated income individuals and have them become home owners. Some of the early work that NeiborWorks did was primarily around home improvement lending but this would--expansion into actual creation of a home owners. And then, in addition to that as a result of that work, NeighborWorks along with probably, the center for responsible lending, I don't know if--

>> I think Mike was here.

>> Mike, yeah, was here. I think NeighborWorks and probably see or would probably the two national organizations that began to raise the alarm about predatory lending and that was driven by the work that our local affiliates were doing in their local communities. What they were seeing playing out in particular, Ned's, sometime in Chicago with our Chicago affiliate, they had done an extensive study kind of block by block, looking at the effects of who was lending in their market, what kind of loans were people getting and what was happening to them overtime. And we think that helped inform Ned about the concerns and the challenges around this segment of lending that was going on. In the very early years it obviously did impose the kind of systemic challenge that it became in later years. And I don't think any of us in the early period thought that it would become something that would almost bring down the world economy but at the end of the day, it was something that clearly was playing out and Ned was concerned about it. So, as a result of that, he also encouraged us to set up the center for foreclosure solutions which is again one of the early attempts to try to get to handle on the growing foreclosure problem at the time that was pensively playing out in the lower income communities around the country.

>> Yeah, go ahead.

>> Can I jump in on these? You know, I don't remember the exact here but the two episodes, one was early on after having some conversations with Ned about this issue of high roader and low roader. Can you ask the--I think, it was Bill Upgard [assumed spelling] and myself to go to a meeting and we're in some hotel in Washington talking about strategic planning and the conversation turned to this issue that he had all these actors in the community that you had already identified is doing things that you felt. We're not any interest of the community and then, it was kind of critical to figure out how to position yourself because in the end all the good work you were doing was going to be problematic because if these things led to high levels of foreclosure so it's going to be able this significant negative externalities. And I remember at some point then, a couple of years later having another conversation with Ned and he was basically really focused on that. He was focused on this issue of what happens if we get this concentrative foreclosures, what is it going to mean for communities and how do we avert what is essentially and later was described in a Federal Reserve paper on housing came out a couple of years ago is deadweight loss. So, essentially, you know create a situation in which if you were able to revert this foreclosures you would be preventing a lot of damage that didn't necessarily need to be done. If really focused on that, he was also very focused on a--when we were got into the run that 2005-2006 period, again, I think, to say this--that he was thinking ahead of where other people were thinking on this would be an understatement but it was really interested and he would--I think, he had incredible resource at the Fed. Nevertheless, he would never miss an opportunity to tell you what he thought you might study or should be studying. And he said, you know, "Where is this capital coming from from all those kind of lending because it looks like a lot of it is going to be a problem. And I know they're charging higher interest rates?" So, he had an interest in that and he said, "Who are the nature of the players really who were doing this? Ad even more kind of, you know, "How did they service loans, what are they up to?" And he said, you know, you got to study that. We didn't quite have the, you know, tools, or resources, study and I remember getting a lot of data and information around 2006, people come to my office with the shares of loans that met some of these categories in so prime lending or of another category of loan product. He was very concerned about which exposed people to pay but reset risks. And I remember looking at this number and I'm saying, "This numbers can't be right. I'd never seen this data source before its industry data, you know, loan behold that was completely right." But he had the hunch, I think, having been out on the ground and doing the kind of work he was doing with NeighborWorks to sort of see that this was likely actually going on before a lot of the data was even available and made widely available.

>> I think that's right and, you know, my recollection is pushing NeighborWorks to set up the foreclosure prevention center basically when the tsunami hit, the organization was about the best positions in the country, you know, nobody could deal with the true tsunami, but you were better positioned that pretty much any other organization to deal with a lot the issues, right?

>> Right, right. And, you know, one of the first things that Congress did to respond to the foreclosure crisis actually was to appropriate money for foreclosure prevention counseling. And one of the things that they had decide was what means would that money get out to the communities and they thought about HUD and they thought about other places and at the end of the day, they ended up choosing NeighborWorks to be the conduit for that funding. And that was because of their early work that NeighborWorks did under Ned's leadership to kind of describe what the issues were related to the challenge that we were facing at the time and NeighborWorks because it had a network was able to get the money out on the street fairly expeditiously and was able to make an initial contribution to try to deal with the foreclosure crises. And I did want to say as well that Ned's contribution being recognized that NeighborWorks for what he had done. Not only did NeighborWorks renamed the fellowship that we do in collaboration with the Joint Center for Housing Studies at Harvard but the board room at NeighborWorks is named the Ned Gramlich Board Room. And that just goes to show what contribution he made at the institution at NeighborWorks and how people feel about it.

>> When we were saying that we ought to collect some of these because I'm also aware of the Ned Gramlich Award that the opportunity finance network gives out now every year because I'm on the board of that. And, many things have been named in his honor.

>> Yup. And I failed to mention as well. Ned was my boss too because as the CEO of NeighborWorks America he was Chair of the Board. And some might say that one of the things that he made have fallen down on is that he was the Board Chair when I was appointed, I don't know. But no, we had a great relationship. I had already been at NeighborWorks but he was the Board Chair when I was appointed CEO.

>> Well, and he--we had that in common because he was head of our Committee when I was made Division Director. So, he may have fallen down there too. So, I want to go back--to circle back Bob for a second on CRA and then we are going to come back to the subprime stuff because I want to get Eric to talk a little bit about the book which is so important. But first I wanted to talk a little bit one of Ned's major projects here at the board during his tenure was a very massive rewrite of CRA regulations and I know for me this was a really prime example of where Ned felt it was so important to have data to be used for policy reasons which is the purpose of this whole conference. And before I turn over to Bob to talk about how that worked and how they--the data they did influenced the policy that came out on CRA. I do want to tell this one anecdote about Ned in data. So, one of the things that our division did a lot of Ned did a lot of public speaking during his tenure at the board. And he did quite a bit of public speaking on consumer protection matters and on community development matters, he was a great spokesperson for our issues. And so, as a result of that, our division wrote a number of speeches for him and a lot of them actually were written by Caroline Welch who is here today. So, Ned would always--we wrote governor speeches before. But Ned from the day he came in always insisted when we would write a speech for him that we collaborate with Glenn Canner and Bob Avery and Raphael Bostic was here then too is he used to call them the ABC group, the Avery Bostic Canner, the ABC group in order to get data for the speech. We talk about the topic and then we go to them and say, "OK, here's what we're writing, what can you give us and." So, Ned used to say to me when he would give us a speech, you know, a speech commission, "Don't forget, talk to the ABC group, get some data. Because Sandy, you know, a speech without data is just bullshit."

[ Laughter ]

And, that was a direct quote, pardon my language but that's a direct quote. So, he used to say that to me all the time, you got to have data there. So, when Ned left the Fed and we had a little farewell thing for him in our division and Ruth is smiling over there. We had t-shirts made up that said a speech without data is just bullshit and we gave t-shirts to Ned and Ruth and, you know, I don't know if you still have them. And I was-- I have one, I was going to bring it and show it is a thing today but I didn't. But I just thought I had to tell that story. That was--that's a classic Ned Gramlich story. But with that, do you want to talk about the data used in CRA and the [inaudible] informed policy.

>> You know, Sandy, before I do that, I was reminded as a 30 year staff where I forgot to say that these are my views and not those of FHFA or the fed or anybody else so now I said that. Ned left here in 2005. And I think, when we had originally talk with him when he first came, the CRA was clearly a very much on its mind and that's a community--now, you probably all know what it is, a Community Reinvestment Act. And it's an interagency act that means that all the four banking agencies kind of had to agree or technically they didn't but they--good if they did agree on how the rules would work. They started in 2002. And Ned I think--no, so it rolled along and they did what this is sort of standard interagency rule making at it became 2003 and 2004 and we had comments and lots of things and there is no rules. And it gets into 2005. And Ned, senses there's a problem here because there's nothing emerging as a consensus. And the OTS is decided it's going to go its own way. Well, this is not the way regulatory supposed to work. The issues whereas follows. There was a--we have a--had a large bank test and a small bank test. And the cut off was $250 million. And the small banks felt that that was way too low. And that it was a regulatory burden that really they we're applied in a large bank test and it should have been a higher level. And they were pushing for a billion dollar cut off. And that was--OTS had already decided that was the right answer. The OCC and the FDIC and I won't speak for them but one interpretation is would be is they saw this is as advocacy battle ground between the community groups and the banks. And they were kind of want to have satisfy each one and then figure how to do that. And the community groups wanted to get more teeth into CRA and do other things and they also didn't wan to raise the threshold. Sort of an auxiliary issue there was how to treat rural areas. This area was written initially as an urban law. And, really, the question had become sort of a parent wasn't working so easily, didn't really apply to rural areas and what was the right policy. So, Ned sense this lock gem and nothing was coming out. And he said "Call Glenn and Ian [assumed spelling]." And said, "We have to--I don't want to do it as an advocacy, I want to make it data driven. I want to figure out what's right here. Is this threshold said at the right spot, and if it's--is there evidence that it should be the different spot? It is right? Who is right? What benefits truly the community in getting the funds of the community? Let--can we work on that?" So, what we did is we device this--what I think in retrospect was a pretty good process. One of the things we did is we took every single bank that it ever--the bank scroll and they grow from being under 250 million to bring over 20 million. So, they would transit through this threshold. And we look at all of those transitions. And said, "Did their behavior change? Was there something magical about $250 million?" Then all of a sudden they became [inaudible] institution. And being subject to this larger test wherever how it was applied would in fact impact them in different ways. We found no evidence of that, we also looked at the banks just below 250 and the bank is just above. And again, we could really not see any difference when we looked on all kinds of different measures of that. But then we did something that I thought was really, really novel. Ned said, "You know, we have always examined our self there. And they don't, you know--they go unto these banks everyday and they're committed to the mission. Let's ask them about this threshold and find out what they think." And they've never been ask. That's not the way policy--policy has been top down not bottom up. So, we contacted Fed examiners went out to the reserved banks and somebody in Sandy's division did effectively what amounted to a survey. And the examiners came back and they basically said, you now, we don't--a $250 million bank isn't a large bank. They really are--when we examine them and we give them ratings we really treat them like small banks. We treated $300 million bank, it was a $500 million bank. It really is until you get up into the high coastal billion dollars that it's realistic by based of what they do that you should treat then in a different way. And so, effectively, they were saying, "That threshold is really at the wrong spot that these banks aren't at the right level." And really billion dollars isn't going to do any social harm. We're already treating them as other billion dollars. And Ned then realized that he had political capital that if he was willing to concede to the OTS and to the bankers that he would go for a billion dollar cut off. How could he leverage that win which we make them very happy into doing something that would truly benefit that cost if you wish of a supporting communities. And the area he focused on was the rural areas. Though he wanted us to take a hard look, again, all this was data driven. How was it applied in the rural area, is there some evidence that the way it's working in the rural areas really doesn't work very well. And he focus on this band of banks particularly that we're going to win because they were going to lose the--the ever committee lose they become small banks no longer large banks. What teeth might we have with those banks, they're not completely let them go and become small banks--did they play a critical role? We focused on the rural areas and what we did is looked at banks who expand urban and rural. They operate in both markets. Did they treat the rural markets differently than they treated the urban markets? There are both in both sets of markets. So, they allocate their loans in the same ways they got deposit, as they had branches and so on so on, all kinds of different measures ways of looking at that. And overwhelmingly, it suggested in all but one area that rural markets were better served rather than worst served. And the critical area that sort of that emerged was community development. That all else equal. Banks were less likely to do community development lending in their rural areas than in their urban areas. And I suggest that that was a particular problem. And part of it as we probed and pushed became structural. Therefore reflective structural is the way he sends his tracks. CRA reallocates according to geography as well as income of the people, they're just are far fewer the ways to find low income census tracks in rural areas than in urban areas. It's just tracks are much bigger. You aggregate over poverty areas are smaller and it's more scattered. In a typical state about 43 percent of the census tracks in rural areas are below 80 percent of the median income of the whole state. About 30 percent of urban tracks are below the median income have below 80 percent. There maybe an income as below 80 percent of the median income of the whole state. But that's not how CRA works. You compare one rural track with all other rural tracks. And so, it's a different standard not the state as a whole but the population of urban census. Under that standard, only 15 percent of urban tracks--of rural tracks qualified as low income even though state wide really it should have been 43. So, Ned said, "Can we come up with the scheme that would really expand the coverage in the rural areas? Make more areas eligible for CRA credit because bankers like certainty. They like to know you have a five year project. Is this project going to count? Having it--no one advance that if it's done in this area, it's going to count, it's going to--that--examiners are telling us, you need that kind of certainty to get loans." So, we came up--we explored all kinds of different ways to do this and we came up with a scheme that involve trading tracks and it had population loss. We looked at the CDFI definitions. You always like to look for something that's already been adopted by somebody else. And we came up with tracks that are at popular--areas that have population laws, areas that had a high poverty rates, and areas of high unemployment. And we made the added and middle income tracks that had gone through this additional degree of distress. We were up close to 40 percent. Ned--we put all this evidence together and Ned had us create a Federal Reserve bulletin article which had the pretense of kind of an objective research over here. And he went back to the other agencies and said, "You know, we've actually--I've got this economist and it turns out they've done a lot of work on this." And here's the evidence and we come in and we presented to them as objective people that had no advocacy. And the other agencies hadn't done that. And that turned out to be compelling. And if you look at the regulations or actually adopted at the very end of his tenure, they reflect the findings that I just went through. And to me, if I look at my years as a staff for that was kind of a highlight. It was when it all worked, it was all done in the right way. And then the end of the day, the policies that we adopted were in my view based on the evidence we had appropriate good policies. They weren't done by treating advocates and kind of compromising. They were done truly trying to sift out where it matters and where it doesn't. And I--to me, that's the model. If we could all emulate that it be a great world.

>> Thanks Bob. I love that story. And yeah, that was--you're right. Anyway, I want to turn to Eric, back to you to talk a little bit about, you know, one of Ned's last areas of focus. It was after--well, he started while I was here but really after he left the Fed reserve was really looking at subprime. And of course he published his book after he left here. And I will say I was also the recipient of many phone calls when he was writing the book as was Jim Michaels who is here. I remember one day this was kind of funny to me is that it was a Sunday afternoon and I was just at home and my phone rang and I pick it up. And it's the operator from the board here at the Fed. And I thought, "Oh, my god, what could have happen like the operator, the board is calling me on a Sunday afternoon at HAMP?" And she told me she was sorry to bother me but Ned Gramlich had called the board because he lost my home phone number. And he really needed to talk to me and it was urgent and here is his phone number and could you call him as soon as you can. And it was just so funny to--and she was like protecting my privacy. She won't even give--she had my home phone number but she wouldn't even give it to a former governor of the Fed. Because which he said something and I guess about privacy. But of course I called them and it turned out he have questions, he was writing his book. And he had questions about the subprime stuff and some legal questions because I think what happened that Sunday afternoon is answered some of them and then I had to call Jim Michaels at home on Sunday afternoon to get the answers for the rest of them. But anyway, do you want to talk a little bit about the book? Did he--

>> Let me start by, you know, just reflecting on Bob's story there. I mean it's just amazing to me because here I am and I'm still learning from Ned, you know, by hearing stories and examples of things that he did. And just this, you know, this intensity about data and facts and trying to come up with informed policies you can see in there. But I love that, you know, he also said, "I want to go ask examiners, you know, this should be a more 360 degree view. And I want qualitative information. I want quantitative information. And it seems very consistent with him. And just, you know, very thoughtful thing. Also, the way that he did adjust his views of the world continuously in this [inaudible] way which we heard over our key note speaker. He always was trying to adjust and readjust his thinking based on what he found. Just really interesting. It's really a challenge to summarize this book. And the reason I say it's a challenge is it is classic Ned also not only from being so gracious in the acknowledgments, but it's a very slim book, it's under a hundred pages and it's going to take me 400 pages to describe the fifth section of this 100 pages. He's just so spare in the way he described things and to unpack it actually takes a little bit of time. But the book is very interesting and it's very readable. And so, I still assign it to students in my graduate courses. And they still tell me how remarkable a book it is for being so clear yet so penetrating and so on point. And as it turned out incredibly prescient. But he builds out a whole argument about how the finance system emerged and how we end up with subprime mortgages. And starts to speculate about what might happen given the, you know, remarkable amount of lending that he gone on. And what might becoming next of what are some of the policy prescriptions you might want to put in place to deal with it. And so, let me just summarize very quickly and say first of all, he thought of it as a multi pronged approach. It wasn't going to be something that you could address through anyone intervention. And he felt that many, many different organizations, many different industry aspects in the industry, angles of the industry, different participants in the sector would really need to do a whole host of things to address what had already happened and where it was like did he go. So, as lenders, he asked that they do a better job of policing their own industry. He was, as I said, still captivated by the idea that a higher money of the firm should take actions to prevent competitors from getting on the field or being able to stay on the field by promulgating and enforcing their own standards. He also very presently from my perspective said that he felt that would take what he called a one full cycle of the subprime lending and the style of lend that went on before the market would enforce its own discipline. And of course the conversation we have right now is that the market pendulum has swung so far in the other direction and because it's imposing so much discipline. And there are so many efforts now by industry through their straight organizations to come up with standards that might help restart and restore confidence and investors in an asset bank securities market which was the secondary market on which subprime mortgages traded. So, that was one, that was of lenders and borrowers, he basically said "Look, you have to better understand and educate your self about risk." And community based organizations really have to redouble their efforts. And government has the--provide funding to try to encourage people to just better understand the choices that they make and the risks they may be taking. And of community based organizations, he again felt that they should focus on financial education, helping borrowers make prudent choices. But he also felt that they should call out lenders that were not doing the right thing. And that that was one of their responsibilities that if they saw lenders taking advantage a vulnerable populations to draw public attention to it. Regulators he ask if they strength their efforts at supervision and find ways within existing laws to limit practices that threaten the equity of home owners. He especially was captivated by the Homeowner's Equity Protection Act which was an as part of the truth in leading umbrella that was indented to address what we're--a series of abuses that were detected in the early '90s since the law I believe is 1994. And that was the first law that really started talking about verifying ability of people to repay which is something that is now become kind of the lingua franca of the post Dodd-Frank era because ability to repay is now the law, the land and verification of it. But was only for loans that met fairly high spreads above standard rates. And so, the threshold was quite high to be called a high cost loan. And speculated as to whether there ought to be some kind of middle tier that maybe you call higher price loans and wouldn't have quite the level of restrictions that are placed on the higher--the high cost loans, you know, that ones that were above this very high threshold and wouldn't be a strong in terms of discouraging the ability to securitize them. And, you know, the short story and all these things as all of these things have--occurred. Before Dodd-Frank went into affect the homeowner's protection act--equity protection act regulations were tightened. And a lot of these suggestions that he made right here at the board were acted upon, you know, maybe not with every detail but the contours absolutely. Of law makers, so you ask that they consider illumining what he called a whole in the supervisory safety net but today we would call extending more of the reach of regulation and in fact, he was very explicit about the supervision to the shadow banking sector. And this is a topic that still actively debated but certainly the Dodd-Frank laws and the regulations at the primary market level extend to all the financial players and actors in the marketplace all those supervision not so is specifically called for demanding that taxes and insurance all--insurance always be escrowed and that arm bar was be qualified at the fully index rate unit even if they got a discounted rate, you know, for someone who lives and breathes does this all the time. It is just amazing to me. This is pretty much what happened and it's--in this part of the book must be 15 pages long. He spoke about the importance of taking of it properly or asses bars ability to repay repeatedly throughout the book and in this particular section. He warned in another section that the nation should avoid a "domino effect that forces large and unnecessary losses on households through unnecessary or premature foreclosures." And as I said, there was a paper later that was very influential by the Federal Reserve that pointed out that this wasn't just a problem for a house--for household but very clearly for communities because of the negative externalities or the cost imposed by this poor lending practices on A, every other barrow on that community because property values fell. And B, because that affected their loan performance, a lot of leaders who didn't offer this kinds of loans. So, I found that, you know, incredibly again, concise well put. Given in your experience of NeighborWork, he was really interested in real community based organization. So, he goes on at some length about those counseling for prudent choices providing quality loans to barrowers at scale. I think he always felt the best way to crowd out this behavior was to have easily accessible loans to barrowers of this similar backgrounds, the barrowers that were done. The loans that were done with product features that didn't expose these people to the same risks. He basically, felt in reviewing the evidence that it was possible to lend to this people through what we now call homeownership done right. All these things were things that he talked about. He talked about helping people deal with the inevitable ration for closures and helping council barrowers in trouble so that they can avert foreclosures. So, every aspect essentially this has been implemented. So, let me just check the room very quickly. Industry is attempting to police itself better as I mentioned. They're trying to establish stronger standards and areas around mortgage back securities collateralized mortgage obligations. They--a community based organizations have expanded. Many of the programs and NeighborWorks started with were added too in the middle of the crisis. The nation did mount a considered effort to avert for foreclosures through the Home Affordable Mortgage Program or HAMP in the Home Affordable Refinance Program, HARP, which sounds little bit better than HAMP. I always thought that HAMP was not the greatest acronym ever invented but HARP sounds good. And these are all things that, you know, he suggested because he was really concerned about the negative impact of foreclosures and its collateral damage. HFA is just announced it's launching a program to provide reduction in insurance premiums for barrower who receive counseling and for the reductions if they continue to perform with their loans. These are things that Ned would wanted to have see and what have been proud to have seen occur and he would--I would suspect even though it was all written in his book take no credit for any of them. Ahead of regulation throwing out of Dodd-Frank as I said, the Fed did issue stronger rules around higher price mortgages and consumer disclosures as well. One makers did act to strengthen consumer protections in the mortgage space through Dodd-Frank. So, it is really amazing to think that this book came out in 2007 when we was asking all of these questions, it was 2006. The problem is that probably not the right metaphor wasn't really twinkle in anyone's eye to that great extent. Couple of organizations as Ken mentioned were wary of what was going on but he was hard at work thinking about these things putting this book together. And it's still as a--you know, remarkably relevant, fresh, exposition of the issues.

>> Thank you very much. I want to just open it to my panel with anybody has any closing or last remarks they want to make. And then, we're going to open to questions from the audience. So, what do you think, Bob, you want to add? Ken, anything--Eric?

>> The one last thing I would say is I've read so much above the ABCs works, sometimes it's ABBC, AC or all the combinations that in a sense, you know, the legacy of the attention paid to those issues in terms of forming and understanding of how these regulations actually work in a way that was very clearly, carefully studied, very well identified, sound judgments, you know, went into the conclusions has just been a real important bedrock for a lot that has followed. So, well, I'm up here I just like to--one of many people plus you shared data with us and let us do some studies that were very valuable in terms of looking at banking organizations, so.

>> So, actually I have to say something else, say something more generic. How do you--I'm pretty difficult person to manage. I spend 15 years in academe as well as the board. And I--one of the things I've learned is how do you take people like me who were sort of boarder line or just, you know, hard to my--the good researchers instinctively rebellious, doubtful Thomas. And--Davis--Dave can all resonate with this. Yes. It takes some notes that--and what Matt did, I realize you--some friends is like the lobster in the pot. You're being managed and you don't know you're being managed. And that's a brilliant skill. And Ned did it in a way that I always felt, this habit in the meeting of having everybody there and you go around the room but then you say, you know, "David, you didn't say anything." What do you think about this? And now, never be Sandy and I, we would have said something but he would take people and you felt empowered. You felt that what you did, he didn't have to follow what we came up within the CRA, but he listened to it. And it took an under advisement and that is a staffer, that's all your really want? You want to have you work, looked at, given credibility and then, the next time, you're going to work extra hard because, you know, it's not wasted. If it's not looked at and is thrown away and this although this decision had already been made, you don't put the energy in the next time. Ned Gramlich just did this in a way that I've--and as I said, in retrospect I realize how brilliant he was at this and how much better we were as staffers because of the way we were governed. We thought it was all us, it wasn't. It was Ned.

>> Well said Bob. Ok, questions from the audience, please raise your hands. Yes.

>> Need a mic. So, to bring this current, my question would be about [inaudible], I'm sorry if I'm mispronouncing his name quotes recent article in the Atlantic which makes the case for reparations and one of the things he really emphasizes is our legacy of institutionalized discriminatory housing policy and essentially theft. So, I was wondering, first of all, if there's any comment about that. And then the second thing was, I know all of us were reading about essentially kind of kangaroo courts through the foreclosure process. And has that improved--where does that stand today? Thank you.

>> So, I don't know, does anybody else want to--Ken, do you want to [inaudible]--

>> I could say a little bit about the foreclosure price practices given that amount in institution that has a fair amount of that work both ahead of it and behind it. Early on in the foreclosure crisis and this was obviously when I was at NeighborWorks I think--I think they weren't a lot of tools to address the foreclosure crisis. And so, I think there were a lot of things that probably in hindsight had they been available, we could have--we could have saved more homeowners. Now, as the crisis evolved though and it became driven primarily by the downturn in the economy. There's not a good loan modification or someone that hasn't have any income. And that began to happen more and more as the crisis morphed into being driven by not just because people had a bad loan but because there's a lot of people at work and that--those who are tougher situations to deal with. So, I think there were a lot of tools to modify loans that are out there today. I think all lenders have learned a lot of lessons. The government's got some things in place that didn't exist early on. I don't know that they were necessarily kangaroo courts as they were rules being enforce based on the way the rules existed at the time. And I think that's kind of what played out early on in the crisis. I don't know about the reparations thing, I let--I let Eric deal with that one.

>> I have really thought about it. I don't really have a point of view on it. But I do think that, you know, when you look at the issues of foreclosure. Clearly, it was described here as a tsunami. It was an incredible amount of loans are going bad. And the business model let this servicing industry was based on wasn't really structured to stand that level of stress amount of funds to do the job that you would expect and hope that they would do. In many cases, wasn't available. Clearly, there's been a lot of attention to improving the information technology and tools to do loan modifications in a way that is verifiable, that is consistent. There is still issues about, you know, how consistently when someone calls what the problem. They're able to deal with a single point of contact and things like that. There was also of course a very large attorney generals settlement with--the many of the largest banks. And not only, you know, was a large part of that doing a much better job, in a more meaningful job on modifications but also had a monitor monitoring this who was kind of, you know, looked at the quality now of those practices.

>> I would just add to that. I can't speak on behalf of the Fed. I'm not here any longer, I'm retired. But when I did work at the Fed, I was involved in--we also, in addition to the attorney general settlement, you know, it's probably get information that we also did some major settlement with banks. And we're working on at a large project through our supervisory people to make sure the practices were changed. There were a lot of problems with the foreclosure practices in the banks. No question about that but, I know that, you know, unless things have changed drastically in the two months since I retired. I know that we are still diligently monitoring what's going on in the banks in making sure that they fix the things that were wrong in the institutions. So, that's also being done by the regulators. Bob, did you have anything to add to that? OK. Questions--other questions on anything? No? Oh, David. Are you going to talk about how difficult Avery is to supervise?

[ Laughter ]

>> It's probably a violation of personnel rules or something. I have the privilege of reading Ned's last speech on his behalf at Jackson Hall in 2007. And the closing section of that speech basically amounted to an exhortation from Ned to Federal regulators and others to fix the housing finance system, who's very--it was a really interesting argument and this partly based on the idea that was simply the right and necessary thing to do for a whole range of reasons. But given that Ned knew that he was speaking at that point to mainly monetary policy makers. The emphasis that he put for that audience was that, it was important to fix the housing finance system in order that monetary policy, the tool of monetary policy could be exercised the next time around without undo concern for the collateral damage that it might do to home owners to communities to community developments and so forth. And so, in order to enable the exercise of monetary policy, it was important to fix the housing finance system despite a very broad qualitative question for all four of you. How far how we gone in realizing Ned's--in responding to Ned's exhortation to fix the housing finance system so that monetary policy can focus on it's assigned task?

>> Well, that's a great question.

>> Bob, do you want to comment first only because you're FHFA.

>> Yeah, I might--I--again, it's an interesting question David, I mean we set out to gather the data that we should have had in 2005 and '06 just this part of that system. And I'm not quite, don't quite have it yet and that's five years after the crisis so I do--I will have it. But, in simply regulating Fanny and Freddie as if they went two big thrifts which is a part of the structure. When our head of supervision left a couple of months ago he told me he thought he's about halfway there. And that's just part of those sort of have been of easy things that you're regulating --changing their supervision of large institution, there are very embedded forces who have a stake in the system as it was and maybe as it is and it's--it must be much--I'm not a politician but it must be a lot more challenging than it looks and others can have other views but I don't sense that we have really got to the very heart I don't even think we really know why, anybody in this room can really answer why that employment rate doubled in six months. And if we don't understand that, I'm not sure we know what we need to fix so that I'm more pessimistic that we haven't--we don't have that understanding yet.

>> So, more of an optimist. So, I'd say and everything first I think it's a great question. Part of the answer to your question is, you know, the mortgage debt on residential Wilson United States is over $10 trillion that's with the T, I once said I wonder, you know, how many times you can get to the Moon and back and one of my classes and this is the internet age and someone figured out the length of a dollar bill while I was talking which I don't know so good. And said, try Jupiter or something like that which is $1 trillion dollars to get to Jupiter with dollars or something. So, 10 trillion is a big number, it's a huge part of the total capital market and so, you know, disruptions that eliminate in the space or inevitably going to have enormous consequences and because we're sourcing that capital and still are globally, it's going to have huge global consequences. There's, you know, other aspects of this in terms of the fact that it wasn't in the US that there was this excess liquidating funding, it's going to residential real state often with some degree but not maybe this degree of relaxed standards. I think the one thing obviously has happened is there's been a lot of regulation in the jury's out is to how effective the regulation ultimately will be in preventing certain practices or discouraging them and also that you don't have that rising tied of risk. There are a lot of capital markets, things that have gone into place to increase transparencies, you know, around clearing houses and being clear about what's happening as credit to [inaudible] because it wasn't just what's happening in the primary market, I talk about the origination of risk and then the multiplication of risk literally in the capital markets through the way these things were put into sophisticated securities, synthetic securities based on, you know, [inaudible]. So, I think progress is being made in that area, still again, the game is a foot. I think the reality though is, you know, there are still are a lot of financial institutions that operate within the space that don't have the same degree of supervision as banks do. And they--therefore, you know, do still run the risk of having some systemic importance, so I think that aspect in that angle of it is still kind of, you know, in progress. And then of course there's Fanny and Freddie Mac and we're totally stalled in Fanny Man Freddie Mac, there was some hope that there would be a by partisan bill that would be put in the floor on the senate. It's still not clear, it won't be but there are some discouragements around whether or not it will. And because, you know, they are currently backstopping, you know, such a huge proportion of the market until we have a sense of where they may had. It's really had to know, you know, how and whether we've corrected some of the really fundamental institutions that are still embedded in the housing finance system. But I think Ned was right that a lot of the practices that were first observed in low income communities but certainly we're not exclusively the province of low income communities. In fact, a lot of this loans with payment reset risks were actually more heavily and affected people with higher incomes and higher communities that these things do have, you know, and we now see with great clarity potential monetary policy implications and systemic implications. And I think a lesson has been learned there, you know, there's, you know, attention to systemically importance institutions that I think we've moved down a path but it's still a little unclear how effective all these things will be and there's a lot of undone things that eventually will have to get done.

>> I would just say that, you know, also coming out of the crisis making sure that we learned the right lessons from what occurred is important too, so one of the things that's being sorted out is how broadly will homeownership be available on the go forward basis? There are some who learned the lesson that we can't loan to those people because it doesn't work. There are others who say, yes you can if you do it right and so I think that's one of the issues that still to be sorted its one of the things that's got GSC reform kind of tangled up and I know CRL is working very closely with some folks on that. But, you know, there are studies out there and this is where researches come in, NeighborWorks has one out there, Freddie Mac has one that demonstrates that low income borrowers who have access to high quality counseling perform 30 percent or so better than people who don't get counseling. I mean obviously you can--there are ways you can do this and connect it to one of the earlier panels if we are going to take a shot at this income equality issue, there's no bigger wealth creating vehicle in America for lower income folks than own a home, that's still the case today. And unfortunately if we don't get that right, we're not going to be able to address some of those other problems either.

>> And [inaudible] a lot of attentions being paid to that, right? And I think across all investors in financial institutions.

>> Yeah, I agree. I had made myself some notes earlier things and I think they've been covered by Eric and Ken. I would just mention that in terms of the housing markets being fixed, we don't yet know--we know that there's been a lot of new regulations promulgated that were done to address the excesses of the crisis but these regulations are all fairly new and we still don't know the results of the implementation and one of the things I was concerned with is that what Ken was talking about. Some of them could have, you know, a negative effect on affordable housing and people being able, credit access and things like that. So, I agree and until the Fanny and Freddie thing is sorted out. No, it's not fixed yet.

>> Let me add one thing, just to channel Ned. When the private label market started, it was applauded, Ned applauded it that the private sector had the incentives to go out and find the loans that were--that they would bring people to homeownership in [inaudible] book addresses this issue, a cost benefit analysis, profit motivates and people finding credit where the borrowers that's a system in which everybody benefits. I think the jury is still out on that and I think Ned would say that, how many people got homes in 2004, they're still on those homes and wouldn't have been able to afford it otherwise other than the fact that there was a private label market that allow the rents in the subprime market were to greatly diminished over that period of time because of competition. And I think you could take the view then until the private label market comes back which it hasn't, which it doesn't exist. You really not going to end up serving that community that maybe one last and I think Ned might say is that government with all of its rules and everything else isn't the most efficient mechanism to find out that [inaudible] difficult to underwrite but still profitable borrower that's in those communities and until we get driven by the profit motive get those private companies in there, we're really not going to serve those communities as well as we could.

>> Right, you have a lot of [inaudible].

>> OK, yes we're going to end this. Thank you very much.

[ Applause ]