MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Homeownership was once something most Americans saw as attainable. But the 2008 economic crisis and slow recovery have put that dream out of reach for millions. For those who lost their homes to foreclosure, it's been a nightmare. Joining me in the studio to talk about why the housing market is not recovering more quickly, Michael Greenberger of the University of Maryland, Dina ElBoghdady of The Washington Post and Vincent Reinhart of the American Enterprise Institute. Do join us, 800-433-8850. Send us your email to drshow@wamu.org. Feel free to join us on Facebook or Twitter. Good morning to all of you.

MR. VINCENT REINHARTGood morning.

MS. DINA ELBOGHDADYGood morning.

PROF. MICHAEL GREENBERGERGood morning.

REHMMichael Greenberger, how would you assess the state of the economy right now?

GREENBERGERWell, there are two competing narratives right now. One is a conventional wisdom that the mainstream media have sort of adopted, which is we're coming out of this, that the worst is over, that light is at the end of the tunnel, and, therefore, we can slash our budget, federal budget and undercut stimulus and things of that sort. I think the unheard conventional wisdom that most people experience in their everyday lives are -- is that things are not great. Unemployment dropped to 8.8 percent, but everybody understands that a lot of that is part-time work, that people who've left the job market are not counted anymore, and that you really can double that figure. And, anecdotally, we all know people who are unemployed and the hardship it's causing.

GREENBERGERIn terms of future shocks to the economy, oil prices are, once again, approaching world record highs. Gasoline prices are going back over $4, which is a threshold that the American public finds to be intolerable. There's a European sovereign debt crisis. Smaller economies are about to -- are threatened to fail, Ireland, for example, but Portugal is considered to be the key. If Portugal fails, the whole wall protecting the bigger economies in Western Europe collapse. Municipalities are in dire threats. Jamie Dimon said he only expected about 110 municipalities to default on their debts.

GREENBERGERThese matters, individually or collectively, could recreate the kind of crisis we saw in fall of 2008, where institutions simply don't have enough capital to cover all the commitments they made that either insure the European countries, insure municipalities, insure a very weak housing market. The American taxpayer had to come in to the rescue. Those bullets are gone. So my own view is -- I hope I'm wrong. But I am a pessimist, and I do not believe the current budget cuts are constructive and will further dampen economic recovery.

REHMMichael Greenberger, he is professor at the University of Maryland School of Law. Vincent Reinhart, what's your assessment?

REINHARTWell, don't turn to an economist for optimism.

REINHARTMichael talked about the narrative. I think the important phrase should be the comparator. People have been expecting that bounce back from a steep recession because that's what we normally get in post-war recoveries. Well, my wife Carmen and I did some work last year -- late last year, actually -- in a paper called "After the Fall." And we looked at the 15 most severe financial crises in the second half of the 20th century. And here's the bad news, economies perform poorly in the decade after the crisis relative to the decade before. On average, they grow something like one-and-a-half percentage points slower for the entire decade after the crisis than before. In 10 of the 15 cases, the unemployment rate never gets back to the pre-crisis low for the entire decade.

REINHARTSo we're mired in a sluggish -- we had a sluggish recovery, been there and done that. We're now in the midst of a sluggish expansion, subpar. That's one in which we don't make much progress in reducing the unemployment rate. And the main reason is we have a lot of bad assets cluttering balance sheets, the balance sheets of intermediaries, banks and the balance sheets of households -- one in five households with mortgage under water. That's weighing down business lending, household lending and household spending.

REHMVincent Reinhart, he's resident scholar at the American Enterprise Institute, former director of the Federal Reserve Board's Division of Monetary Affairs. Dina, focusing, specifically now, on the real estate market, where are we?

ELBOGHDADYWe're bumping along the bottom, basically. I mean, it's -- these shocks that we're talking about here -- if anything gets worse, the housing market just can't withstand it right now. It's very, very fragile. You know, it makes some gains, and then it retreats. And then it makes some gains, and it retreats. Now, we're at the beginning of the spring selling season, so we'll see how that goes. But, right now, I mean, the housing market is still not in good shape. And one of the major problems is that there are simply too many homes on the market right now, and too many of them are foreclosures. And those foreclosures just tend to drag down prices.

REHMAnd tell me about the new rules for mortgage servicers.

ELBOGHDADYOkay. Well, basically, in order to avoid a repeat of the foreclosure crisis that we're having right now, the administration has been trying to come up with some rules that would, you know, buffer us against that happening again, so one of the things that they're looking at is people's equity. During the foreclosure crisis, basically, home prices really plunged. People saw their equity get wiped out, and they couldn't sell their homes or refinance their way out of trouble. So now the administration has come up with a proposal, and it's just at the very beginning stages right now. They're collecting public comment. But what they're saying is that you -- that the banks that pool these mortgages and sell them as securities are going to have to retain some risk in those mortgages.

ELBOGHDADYThey can't just sell them off immediately and get off the hook if these loans go bad. And so they said, you, the banks, will have to retain some credit risk here. And we will leave it up to you, the regulators, to decide which types of mortgages could be exempt from this kind of risk retention. And so, now, the administration, last month, a bunch of federal regulatory agencies came out with a plan that said, unless you have 20 percent down on a home purchase loan, you cannot be exempt from this. So, in other words, loans that have smaller down payments than 20 percent, the banks will have to retain a risk. And so what the banks are saying is, if we have to retain a risk, we're going to pass that cost onto borrowers in the form of fees and interest rates.

REHMI see. And, Vince Reinhart, The New York Times just excoriated these new rules. Why?

REINHARTBecause in a financial crisis, a hardy perennial is we add to the cost of doing business because we want to be absolutely sure it never happens again, whatever it is. That means we add to the cost of finance, we require intermediaries to hold more capital, so just when there is a weakness in lending, as regulators, we tend to pile on more regulations that makes it more expensive to do exactly that. You think about it. They're just in the process of promulgating these rules. House prices have been declining for more than four years. This is version four of the restarting the household finance market. We just haven't gotten it right because there are bad assets sitting on bank balance sheets, and we're not willing to put government resources to clean that up.

REHMBut doesn't it make sense to ask home buyers to put up a fair amount of money in order to indicate that they have the resources to continue to pay?

REINHARTAnd it would have made even more sense to do it 10 years ago.

REHMYeah.

REINHARTI think what now is the tension between what's good and appropriate for longer-term risk sharing in the U.S. economy and what we need conveniently for the business cycle -- and, right now, business -- businesses are weak. Lending is weak. The homeownership is at risk. And so doing something to get us to a better place in the long run may have some short-run consequences.

REHMDina.

ELBOGHDADYWell, one of the things that's being brought up by opponents of this plan to put the 20 percent down is that there are other things that are better predictors of whether someone's going to default on their loans and the down payment, that a person's credit history means a lot -- you know, their ability to repay a loan, the features of the loan they take out. And, basically, the idea is lenders should just better vet the borrowers that they look at. You know, they should better -- they need to verify their income.

ELBOGHDADYThey need to verify their assets, which is something that wasn't being done during the housing boom. So a lot of people are saying, leave the down payment alone. That's not what it's about. Low down payment loans have been functioning well for a long time until this housing boom came up. And you should look at all of these other factors instead.

REHMMichael.

GREENBERGERWell, this is -- there's an insidious fact built into all of this. The financial regulatory reform bill that passed in July required banks to hold on to a certain percent of the mortgages they make because that gives a sense of responsibility. If the banks are just selling their mortgages down the road, they don't care what happens in the long term 'cause they're selling it to somebody else. So Dodd-Frank said, you've got to hold on to a certain percentage of this.

GREENBERGERWhat the banks are saying now is, oh, but if somebody puts down 20 percent, that's so secure. We don't have to hold that information. So this is done to accommodate banks, not to worry about security. I have every confidence that this will be lowered to 10 percent when the comment period is over. And the reason for that is 'cause then the banks can pass off anybody who puts down 10 percent. As is true of this entire economy, Jamie Dimon just took home $23 million in executive bonuses and had $600,000 in moving expenses paid by J.P. Morgan. The policymakers are looking at the economy from Jamie Dimon's success and not from the collapse of the lower part of the economy. This 20 percent figure is entirely bank-driven and doesn't take into account the needs of the middle class.

REHMMichael Greenberger, he's professor at the University of Maryland School of Law. He is director of the Center for Health and Homeland Security. We'll take a short break here. And when we come back, we'll talk about foreclosures.

REHMAnd welcome back. We're talking about the mortgage market, homeowners in precarious situations, foreclosures in the millions more to come. Vincent Reinhart is with me. He is at the American Enterprise Institute. Michael Greenberger is at the University of Maryland School of Law. Dina ElBoghdady is real estate reporter for The Washington Post. Dina, in the full, attorneys general around the country launched a joint investigation into foreclosure practices. What is the status of that investigation?

ELBOGHDADYWell, right now, it's going very, very slowly. It all started back in September when some lawsuits uncovered that there was a single employee at Ally Financial who had gone -- who was going through 10,000 foreclosure records every month and signing off without verifying that the information was accurate. So this prompted Ally Financial to halt the foreclosures temporarily as it looked into this issue. Other banks followed suit. All sorts of investigations started -- attorneys general at the federal and the state level. There are a bunch of investigations that have now grouped all together under one umbrella.

ELBOGHDADYAnd, right now, the attorneys general -- I think it was just two or three weeks ago -- had their first face-to-face meeting with the banks to discuss, you know, what the settlement should look like. And they came out of that meeting, and there had not been much progress. They said it was a positive meeting, that it was a serious meeting, but there were really no -- there was no movement forward. And they were looking at scheduling a second meeting at that point.

REHMSo all of this fraud is still on the table. In the meantime, what about the pace of foreclosures, Michael?

GREENBERGERWell, for -- the pace has somewhat been slowed. The critical problem here is what has been discovered is sort of like unmasking "The Wizard of Oz" and finding out there's no wizard. What has been discovered -- and our clinics at my law school are heavily involved in this in class action lawsuits -- is there is no paperwork to show who owns the house when the foreclosures come to reckoning. For a long time, the homeowner didn't -- wasn't represented, never knew enough to ask for the underlying documentation. Now, you've had law school professors, public interest lawyers coming in and finding out there's no, there, there. And to make the matter worse, lawyers are fixing documents to courts saying, oh, yes, there is paper there. And the attorney...

REHMWhat do you mean fixing documents?

GREENBERGERThe attorney general of the state of New York -- Gretchen Morgenson, this last weekend, ran a cover story -- is bringing a lawsuit against two law firms that do foreclosures for the big banks. And the element of the lawsuit is fraud has been committed by presenting affidavits to courts saying the documentation is there when it really isn't there. Some judge in New York State said this is the biggest fraud ever perpetrated on courts in the history of the United States. The tragedy of this settlement about which Dina talks -- and if people haven't read it, they should read the April 9 lead editorial in The New York Times, "Banks Are Off the Hook Again" -- is the settlement that's proposed would overlook all this stuff and go back to business as usual.

GREENBERGERNow, why is that? There are 12 federal regulators in this. By the way, when the state attorney generals uncovered this, the Obama administration didn't want to do anything, and there's a method to that madness. And the method is something that Charles has talked about. If the banks can't foreclose, their instability, their financial instability, because of all the bad debt they hold, will be worsened. So this is a way to prevent another banking crisis on the backs of people whose homes are going to be foreclosed.

REHMVincent.

REINHARTWell, I mean, a designed principle of the administration is not to spend more resources in cleaning up the foreclosure mess. And so, to the extent that you can push it off to somebody else, you can get someone else to be your agent of change, they're willing to do that. And, basically, as a nation, we said TARP was -- one TARP was enough and we're not going to do it again. And we're limping along as a result. Basically, it was incompetence that led to fraud. We...

REHMOr was it fraud that was designed as incompetence?

REINHARTWell, so we had the luxury of house prices rising for two decades. And foreclosure is -- delinquencies and default and foreclosure is not as big a deal if the house price is higher than when you first bought it. We had delinquency rates at the same pace in 2001, 2002, in subprime mortgages at the start of -- as at the start of this recession. But what happened was house prices rose through that recession. So what's -- so the decline in house prices is uncovering the weaknesses in the structure. And banks just don't have the resources -- they never invested in dealing with their clients -- so that they're just completely overwhelmed by the problems in delinquency and foreclosure.

REHMAnd, Dina...

ELBOGHDADYOverwhelmed is exactly the right word to use. I mean, the banks were overwhelmed. That's why people are, you know, not looking at the documents they're signing. That's why there is all this confusion, forged documents and so on. What the banks are saying, and one of the federal banking regulators is saying, is that, yes, there were a lot of mess-ups along the way. There were laws that were broken. But we have looked at these foreclosures, and everybody was severely delinquent.

ELBOGHDADYIt wasn't that, you know -- well, most of the people were severely delinquent. It wasn't that somebody was not, you know, late on their mortgage, and they got, you know, evicted from their homes. It might have happened here and there, but they're saying the bulk of this was people who were severely behind and the paperwork was messed up. But there are several investigations going on at the same time, and what the attorneys general want, at least -- you know, some of the information that's been leaked out to the press is pretty severe. They want to impose at least a $20 billion financial penalty, and they also want to...

REHMOn the banks.

ELBOGHDADYOn the banks, yes. And they also want to use that money -- want the banks to use that money to help reduce that principal on, you know, the debt that people owe on their mortgages, for people who are underwater, meaning, for people who have seen their equity vanish and who now owe more on their homes and than their homes are worth.

REHMHow many people or what percentage do we know have walked away from their mortgages because -- either because they're underwater or because they've heard these ads on radio and television, saying, if you're underwater, walk away?

ELBOGHDADYThe number is very, very hard to get up, but I do -- I always warn people who call me, who are thinking about it, that if you walk away, you'd better know what the laws are in your state because here in the Washington, D.C. area, for instance, if you walk away, the banks have the right to come after you. They will sell your home in foreclosure, and then they will come after you for the difference between what they sold the home for and what you owed on the mortgage...

REHMAnd what you owe.

ELBOGHDADYAnd so that can be really serious. Now, if you have nothing they can take away then, you know, I guess you have nothing, and they're -- they'll be wasting their time. But if you have something that you could have used to help pay off that mortgage, they'll come after it. And they're becoming much more aggressive about it from everything I'm hearing.

REHMBut if you still have a job, couldn't they garnish you your wages?

ELBOGHDADYYes. Yes, they could. They could.

REHMMichael.

GREENBERGERDiane, I don't want to let go of this foreclosure thing. It is not simply a question of (word?) all your houses, the banks are wrong, the homeowners are wrong. The banks do not have the documentation they need to foreclose on about 50 percent of the houses they want to foreclose on.

REHMFifty percent?

GREENBERGERThat is an estimate that's been tossed around. From my experience in the field, there is simply no documentation there. Now, let's finish this thought. If the banks need to foreclose and don't have the documentation, does that give leverage to the state attorney generals and the Obama administration? Dina says they're going to put together a $20 billion fund. The banks got a multi-trillion dollar fund to save them from a catastrophe. Jamie Dimon, the chairman of JP Morgan, walks away this year with $23 million.

GREENBERGERThe attorney generals and the Obama administration are in the driver seat to extract a reduction of principal in these loans that far exceeds $20 million, and they're walking away from it. The New York Times lead editorial is critiquing it. This is another situation where the American homeowner, who's about to be foreclosed, is going to have their back broken to help the banks.

REHMDina.

ELBOGHDADYThere are a lot of issues, but one issue is the political backlash. You start reducing the debt for some people who are underwater, others are, like, hey, what's going on here, you know? I've been paying on time. Well, I'm just going to stop paying debt and then you come and you reduce my debt, too. And so there is always that moral hazard issue that's out there all the time that makes this a very difficult issue to settle.

REHMVincent.

REINHARTSo, again, this is version four of mortgage relief of -- that started with the Bush administration to the Obama administration, one form or another. I think the bottom line is we're looking to industry to fund its own rescue, which doesn't actually sound like it can work. The strategy is, if we...

REHMBut if they -- if industry created its own mess, in part, by proposing documents that, you know, asks so little of the potential homeowner, if there is 50 percent of these documents missing, then who's responsible but the people?

REINHARTI think this was a crisis of our own making. We talked about the American dream being homeownership.

REHMOkay.

REINHARTThe American dream is to get rich quick. For a decade, it was to take a levered bet in housing. And in the rush to do that, we built too many homes. That's the economic loss associated with the recession and the sluggish recovery. We just have to get past that. Finance amplified that shock, and everybody should pay for that.

REHMCan...

REINHARTBut it's not banks alone. Banks had willing co-conspirators in many cases in terms of not providing the documents. Were banks incompetent? Almost surely. To what extent did that incompetence produce fraud? It certainly facilitated fraud on both ends of the transaction. It probably promulgated fraud further down the road.

REHMCan the economy recover without a housing market recovery?

REINHARTWe're in the process of recovery now. We're -- the economy is expanding. It is subpar by post-World War II standards. Without a strong housing market, we will continue in a subpar expansion. We're flying the plane a little slower and closer to the ground. We are less resilient to adverse shocks. But, basically, market economies expand. We're not going to do as well as we could because of housing. If we can restart housing, we would be better off. But unless we want to commit government resources to that project, it's not obvious how we do it.

REHMVincent Reinhart of American Enterprise Institute, and you're listening to "The Diane Rehm Show." We're going to open the phones now, 800-433-8850. Send us your email to drshow@wamu.org. First, let's go to Fairfax, Va. Good morning, Isaac. You're on the air.

ISAACGood morning, Diane. How can I find out if my documents have been lost? Do I have to call the bank? And, secondly, the question is, is Obama and members of Congress -- are they refusing to help because they make so much money that their homes cannot be foreclosed? Is that why they don't care about all of what's down here?

REHMI think you're making assumptions there, Isaac, about whether people care or not, including members of Congress and the president of the United States. But to your first question, what should he do to find his own documents, Dina?

ELBOGHDADYWell, I mean, first step is to call the banks and see what the banks can come up with. If they can't come up with anything, then, you know, you got to go to the courthouses and start looking things up or start researching online to try and find your mortgage records. And then if you feel like something is really a mess, then the next thing, I guess, is, you know -- and you're in trouble with your mortgage -- the next thing is to call a lawyer. I mean, there are lots of lawsuits right now going on in the country about, you know, paper -- the documents that prove who owns a mortgage right now. And sometimes the courts have ruled in favor of the borrower, and sometimes they've ruled in favor of the banks. So it's still just a very open issue right now.

REHMAll right. To Jackson, Mich. Good morning, Mark. Thanks for joining us.

MARKSure. I'd like to make a couple of points. I'm a real estate broker, and we're pretty -- I'm pretty much in the heart of one of the high foreclosure states. And our current marketplace is about -- 25 percent of our active residential listings are foreclosures, but about 50 percent of our closings are foreclosures. So there are still lots of real people out there buying and selling houses. Number two, one of your guests made a comment about the banks charging higher fees for a credit -- a riskier borrower who has less than 20 percent down payment.

MARKI'd like to point out that the majority of those less-than-20 percent down payment mortgages are either government-backed or insured, and the banks have absolutely no risk. And so, as far as I'm concerned, this is absolutely a way for the lenders to make more money, to charge clients more money.

REHMDina.

ELBOGHDADYIt's true that right now the market is dominated by government-backed loans. About more than 90 percent of the people out there have loans that are guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration. But the market is not supposed to look like this, and they're trying not to keep it looking like this for much longer. And so the administration has basically proposed shrinking the government's role in the housing market. They've proposed possibly eliminating Fannie Mae and Freddie Mac. They've already started protecting the FHA against risk by raising some of the fees that the FHA loans have.

ELBOGHDADYAnd so we're looking, you know, couple of years down the line at a market that might not have that government support, and, if so, most of the people are going to be left having to come up with that 20 percent down payment.

REHMFannie Mae, Freddie Mac on the firing line as it were. What's going to happen, Michael?

GREENBERGERWell, I mean, almost everybody seems to agree that they've got to shut them down, and it's only a matter of time.

REHMAnd what would that mean?

GREENBERGERWell, as Dina has pointed out, it's those institutions that have supported the housing market and enabled people to be able to meet the financial necessities to get their mortgages. If you up the down payment to 20 percent and there's no support in the market for those people that are provided traditionally by the -- these government-sponsored entities, it's going to be harder to buy homes. By the way, also -- look, Fannie Mae and Freddie Mac are the villain of the piece. People, especially the Republican Party, believed the whole meltdown was caused by those institutions. I don't agree with that. The Center for American Progress just did a study demonstrating that's not the case, but there's a competition on the Hill to shut those two institutions down completely.

REHMMichael Greenberger of the University of Maryland Law School. Short break. And when we come back, we'll hear from Holly in San Antonio and Joe in Covington.

REHMWelcome back. Just before the break, we were talking about Fannie Mae and Freddie Mac. My question to you, Vincent Reinhart, should they, will they be shut down as institutions of borrowing?

REINHARTOkay. Let me do the will and then the should.

REHMOkay.

REINHARTThe will is no. In every congressional district of the United States, among the most important citizens are the banker, the builder, the realtor, the mortgage broker. The support for real -- the real estate market is enormous. And we're just going to be risk averse. We're not going to try to tinker with a machine that did fairly well -- except for a very bad crisis -- and particularly at a time in which the unemployment rate is so high. So Fannie and Freddie will probably still exist.

REINHARTThey are a terribly inefficient way of providing support to mortgage financing. They did a wonderful job in creating the market for securitization, but that time is mostly over. If we want to provide that subsidy, we could be a lot more efficient. We could support mortgage insurance. We could -- but giving a private entity a public purpose is usually the wrong idea.

REHMAnd you're saying this because each of those entities is a profit-making organization, whereas the FHA, providing security in a public arena without being a profit-making entity, would have been better?

ELBOGHDADYWell, the FHA, right now, because everyone started rushing to FHA to get their low down payment loans during this crisis, is completely under a lot of financial stress right now. And so it really can't take anymore. Fannie and Freddie disappear for some reason, and then everyone starts piling on on FHA. That's just going to mean more trouble.

REHMWhat's going to happen to Fannie and Freddie, Michael?

GREENBERGERI agree with what Charles said. I just think the economic reality is that you can't do away with them. On the other hand, they are very, very poorly run institutions. I have a friend who's on the board of one of them and his reports to me -- the internal workings are nothing more than a nightmare. So there certainly need to be very seriously cleaned up, and work needs to be done. But I just saw, for example, Richard Shelby, who's the ranking member of the Senate Banking Committee, has backed away from any dramatic Republican ranking member, has backed away from some of his party's drama about shutting down these institutions.

REHMAll right. To Baltimore, Md. Good morning, Vincent.

VINCENTHello?

REHMYeah, go right ahead, sir.

VINCENTOh, thank you for having me. I'd like to make a couple of quick points, the first one being (unintelligible) or the 20 percent down, that we are absolving the banks and reducing their obligation on the risk retention. Secondly, the states and the cost of living alone are going to eat away at the home buyer even with that 20 percent down -- higher taxes, cost of living. It's just an abysmal failure. And you have to deal with -- you get to deal with leverage in the mortgage financing market.

VINCENTWith regards to foreclosure, the lenders themselves made a huge mistake by not going back for the title companies and saying, okay, here are the loans that we packaged. We just sold them X, Y, Z. You need to take your butt back down to the courthouse and record these assignments and therefore send them back to us because the states themselves lost out on millions, hundreds of millions of dollars, by not doing so.

REHMMichael.

VINCENTAnd that's just the way it is, guys.

GREENBERGERLook, in the real world -- and I have colleagues who are litigating these cases on behalf of home owners -- the documentation simply is not there or was robo-signed or was destroyed. Don't forget, you start with a mortgage, mortgage becomes mortgage-backed security, then it becomes a collateralized debt obligation. Somewhere in the process of moving from a mortgage to a fancy financial product, people just forgot that they had to save the documentation. They thought if they made a little notation on the spreadsheet, that would be enough. They simply do not have the documentation in a lot of these cases.

GREENBERGERNow, somebody has said here, oh, it would be a moral hazard to help some of these people and not the other. We helped every bank who brought down the economy. We gave them trillions of dollars. Nobody said, oh, if we save Goldman, this is a moral hazard. Goldman will not be -- Goldman is too big to fail right now. So can the homeowner get a little bit of this break, too?

REHMGood question. Let's go to Scott in South Florida, who's been fighting on paperwork. Good morning, Scott.

SCOTTYes, good morning. Mine is -- I'm not going to say it's a success story yet. But, basically, in a nutshell, after three-and-a-half years of back and forth, back and forth hair-pulling frustration, we finally got paperwork from Chase approving us for a loan modification. I've got to make four payments and then allegedly will fix the -- fixed mortgage in a much lower rate. It went from $2,300 a month down to $947. So I'm keeping my fingers crossed 'cause I've just heard too many nightmares, but it's been a battle like nothing else I've had in my life.

REHMCould you get straight through to the people who were involved with your loan?

SCOTTPardon me?

REHMWere you able to get through to the people involved with your loan?

SCOTTActually, what I did is I gave up on dealing on the phones, and I went to one of the local offices that they've established in different areas. And they were able -- like a hot knife through butter. They took about four months with them, but, before, I literally would talk to five different people and get five different answers and to the point of frustration like I've never had in my life. And I've got six kids. That's frustrating enough.

REHMWow. Dina, what is the best way? Should you get on the telephone? Should you go to the local bank? What do you do?

ELBOGHDADYWell, I say, as frustrating as it is to call the lender, call the lender first. I mean, that is the starting point, to make contact. Get some help from a housing counselor. Go to the website for Department of Housing and Urban Development and look up the housing counselors in your area and call them. There are lots of free services. Don't pay to get some of this housing counseling advice because it is free and it's plentiful. But it is a long and frustrating experience. And even when you manage to get into the federal government's program for modifying a loan and they put you through a three-month trial period, this three-month often stretches into four, into five, into 10.

ELBOGHDADYAnd at the end, they can still tell you, oh, sorry, we looked everything over and you actually don't qualify. And, sometimes, they can even say, oh, and, by the way, all that month that we helped reduce during those months, you're going to have to pay us back now.

REHMOh.

ELBOGHDADYSo, suddenly, you might find yourself with, you know, $10,000, $20,000 payment that you've got to give back to the banks. And you're almost in a worse situation than when you started, so...

REHMHere's an email from Scott in Ferndale, Mich. He says, "Currently, federal and state governments have several loan modification programs to modify the monthly payment to prevent foreclosures. These programs are typically not available to a homeowner with negative equity. These programs do not take into account people in my situation. We are willing and able to make our monthly mortgage payment, have done so every month since April 2007. However, our mortgage is underwater. What's being done or proposed to help homeowners like me?" Dina.

ELBOGHDADYThere is one program that's relatively new through the FHA that targets people who are exactly in that situation, who are underwater on their loans. But there's a big but. First, the bank that has your mortgage now has to agree to reduce the principal a certain amount before you could get, you know, refinanced into an FHA mortgage. And, by the way, this program is only for people who are underwater and who are on time with their mortgages -- so not delinquent. But the other issue is that the attorneys general and the administration, they're also looking into this issue and the borrowers that they want to help are specifically the underwater borrowers. And so that's one of the things that's being negotiated right now.

REHMInteresting. All right. To San Antonio, Texas. Good morning, Holly.

HOLLYGood morning. I am calling from San Antonio. My husband is active duty military, and we've been stationed here for three years. When we moved here, we bought a home, and now we have received orders to move again. And so we're moving in June, and we've had no success trying to sell our home. So when we move, we'll have to secure residence in our new state, and yet we'll still be paying a mortgage here. Do you know of any federal mortgage assistance programs for military family?

GREENBERGERI don't. And I don't pretend to have omniscient knowledge about this. But I'll tell you, what the banks are doing to the people in the military is a disgrace. There should be help for these people.

REHMOf course, there should.

GREENBERGERAnd, my goodness, if JP Chase -- JPMorgan Chase can afford to pay its CDO $23 million, they can find somewhere without a government program to help people in active service. And the banks have been criticized for their insensitivity to military service personnel, and it should be a high priority of our policymakers to fix this problem.

REHMDina, absolutely no help out there for military families?

ELBOGHDADYNot that I know, but that doesn't mean...

REHMWow.

ELBOGHDADY...it doesn't exist somewhere.

REHMAnd, Vincent, same with you?

REINHARTSame.

REHMIt is a disgrace.

GREENBERGERWell, it's not only a disgrace, but some of these banks have been caught, not only, you know, not giving a matter of sympathy to this problem, but have been actually taking advantage of these people.

REHMHow so?

GREENBERGERIn foreclosing on people when their husbands or wives are abroad fighting in Iraq, Afghanistan, and now in the air support to Libya.

REHMHolly, how will you manage?

HOLLYWell, we're considering renting. We're hoping that we can find a military family moving here who will rent from us. And then we can go ahead and continue to pay the mortgage until such time that we're able to put the house on the market to sell it.

REHMHow much success have you had finding a renter?

HOLLYIt's a good market out here for renting right now...

REHMGood.

HOLLY...so I think we will be successful with that, yeah.

REHMWell, I sure wish you luck. I'm very sympathetic to what's happening there and what's happening to military families around the country. Let's go to Stow, Mass. Good morning, Michael.

MICHAELHi. I wanted to just make a point that the government really has created this mess by creating a inflated market for a mortgage. By setting up regulations that govern how much people put down, they've essentially taken the free market out of the mortgage business, and that people who can't come up with a down payment should not be owning home. And, in a sense, the history was that people use to have to put down 50 percent. And I think that the whole market has been inflated by mortgages.

REHMDina.

ELBOGHDADYOh, that's true on the history. Certainly, coming out of the Great -- well, during -- just before the Great Depression, people had to put that much down. It's the Great Depression. There was World War II. Then the government stepped in and said, we're going to intervene here and we're going to start helping. And that's when they started -- when the costs -- the down payment costs got lower and lower and lower and kind of settled around -- 20 percent is the norm sometime around 1980s. But there have always been low down payment loans available. Even when the 20 percent became the norm, there were other programs to avoid that 20 percent down.

ELBOGHDADYAnd, you know, history kind of shows us that a lot of these low down payment loans have performed pretty well until the whole, you know, housing boom started. And then there were very creative ways of getting that money down.

REHMDina ElBoghdady of The Washington Post. You're listening to "The Diane Rehm Show." Is the government at fault here, Vincent?

REINHARTThe government is part of the problem. As a nation, we oversubsidize housing. We do it in lots of different ways, including the mortgage deducted (word?) in taxes, including the support to Fannie and Freddie.

REHMSo you would take that away.

REINHARTAnd here's the issue. If you look at household balance sheets, high-income households have equity. They have bonds. They have real estate. The lower you go down in the income distribution, the less people own businesses, the less they own equity, the less they own bonds. But everybody owns real estate. Why? Because the government encourages levered bets on housing. What we have to do is broaden the channels of wealth creation. We got to level that playing field, so we don't rely so much on housing as this whole mechanism for wealth creation.

REHMMichael.

GREENBERGERGovernment is very much to blame for this, and any attempt to put this on the back of a homeowner is, I think, assisting -- giving comfort to those who are comfortable and afflicting those who are afflicted.

REHMWould you do away with the mortgage deduction?

GREENBERGERNo. The mortgage deduction is not part of the problem. I mean, look, "Inside Job," Academy Award-winning documentary...

REHMI saw it just the other day.

GREENBERGERWhen you see that, it's the Alan Greenspans who were told that mortgages were getting out of control. They needed to supervise them more. He had the statutory authority to do it. He refused to do it. Sheila Bair told them that. Gramlich, another federal adviser, we -- all of these not having the documentation comes from that it was profitable to get people into homes and flip the mortgage down the thing, down the stream. People made a fortune off this.

GREENBERGERAnd then musical chairs -- the music stopped, and people didn't have the capital. This was government-inspired deregulatory programs that went aflame. And unless we get back to monitoring the system carefully from A to Z, as Congress tried to do when they passed Dodd-Frank, we're going to be right back where we were to begin with.

REHMDina, do you see the mortgage deduction going away?

ELBOGHDADYYou know, the talk of that had died down for a bit. But, now that they're starting to talk about deficit reduction again, it's come back. So, who knows? I mean, right now, it still doesn't seem very likely, but the buzz is starting to come back around again to the mortgage interest tax deduction. So maybe it will in all of these negotiations back and forth. Maybe there will be some kind of deal struck.

REHMNow, does that put people back into the rental category more quickly if they feel there is not going to be that incentive?

ELBOGHDADYI think that, you know, it very well could. I think that a lot of people feel right now that running is the way to go. I mean, a lot of people are sitting out on the sidelines. They're afraid that prices are going to drop further anyway. And so there are a bunch of factors that are making rentals look like a pretty solid choice right now.

REHMWhat a mess. That's all I have to say to end this conversation. Dina ElBoghdady, she is real estate reporter for The Washington Post. Michael Greenberger at the University of Maryland School of Law, he's a former senior regulator at the Commodities Futures Trading Commission. Vincent Rinehart is at the American Enterprise Institute, former director of the Federal Reserve Board's Division of Monetary Affairs. Thank you all so much. Thanks for listening. I'm Diane Rehm.

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