The Housing Crisis - What Lies Ahead?

Fed economist, HUD official and leading lender address the question at Saint Mary's

Now that the nation is finally clawing its way out of the Great Recession, it's time to ask the important questions: What have we learned ? How has it changed us? And what does the future hold?

Three leaders of the financial, lending and government sectors tackled these questions in a forum on "California Mortgages: Crisis, Jobs and Hope," sponsored by the Center for the Regional Economy in the School of Economics and Business Administration at Saint Mary's College and moderated by the center's director, Professor Tomas Gomez-Arias.

Gary Zimmerman, senior economist for the Federal Reserve Bank in San Francisco, warned that even though the economy is showing signs of life, this recovery isn't shaping up like most economic rebounds in recent U.S. history.

When the economy first started to go into free-fall, optimists suggested that once it hit bottom, we might see a V-shaped recovery, as the financial engine that drives America powered up again. Instead, Zimmerman said, "it's looking like we've got a U-shaped recovery" -- one that hugs the bottom for a while before heading back up.

A major reason is the tenaciousness of the housing bust.

"Typically, housing is one of the first sectors to recover," Zimmerman noted, "but this time, there's a housing overhang." In the frenzied years of the housing boom, builders created too much inventory, and foreclosures are keeping that inventory sky high.

More than 15 percent of all mortgage loans in the United States are either past due or in foreclosure, he noted, and more than a third of mortgages in California are "under water" -- worth less than the balance on the loan. As a result, consumers who once used their homes as bank accounts or bought homes at the top of the market are feeling "house poor" and reluctant to spend or take on any more debt.

"We're in the midst of a deleveraging debt diet," and not just as a nation, but as individuals, too, said panelist Chris George, the CEO of CMG Mortgage, a nationwide mortgage lender that had its roots in Concord. Consumers are cutting back on all kinds of debt: credit cards car loans and mortgage debt.

Major Changes in Mortgage Industry

The recession has had a stark effect on the mortgage lending business. "We've had to rethink some to the ways we do business," George said. "From Wall Street to Main Street, we blew the consumer confidence in our industry, and we're slowly getting that back."

The mortgage crisis has prodded the industry into setting up some belated checks and balances. Loan officers are subject to increased oversight, and applicants have to jump through hoops to prove they really have enough income and assets to buy a home. In fact, George acknowledged that the loan approval process these days is more like a a "forensic investigation" than a credit check.

The federal government has imposed new restrictions on the business, too, some of which he called "short-sighted," like the dismantling of some adjustable rate mortgage products. "I get concerned when we take away choice from consumers," he said. But he applauded other major changes, like the proposal to reduce the roles of Fannie Mae and Freddie Mac in the mortgage business.

The recession and mortgage crisis has changed the way government housing programs do business, too, said panelist Ophelia Basgal, regional administrator for the federal Department of Housing and Urban Development.

Basgal cited some harsh statistics that spell out the extent of the crisis in the Bay Area. The percent of "distressed loans" -- in foreclosure or verging on it -- is 8.6 percent in Alameda County, 10.7 percent in Contra Costa County and 13.1 percent in Solano County, she said. Meanwhile, sales of single family homes have declined 34 percent, 42 percent and 51 percent in those counties, respectively.

Billions Spent Trying to Keep People in Their Homes

In response, the federal government has poured $2 billion into the "Keep Your Home California" program, which provides grants of up to $18,000 to help people hang on to their homes. It has put $7 billion into the Neighborhood Stabilization Program, which offers funds to purchase homes, rehab them and then resell them so abandoned houses don't remain derelict for months or years.

It also created the Home Affordable Modification Program (HAMP) and other initiatives that helps homeowners who qualify win a principle reduction or refinance over a longer term to lower their payments. Unfortunately, the numbers who qualify have been small compared to the staggering demand. The effort has just "nibbled around the edges," Basgal admitted, "but it has helped stabilize the communities."

Despite the depth of the problem, Basgal offered an optimistic outlook for housing prices.
"It looks like we may have bottomed out," she said. "When we come out of this, the demand will absorb the overhang, and prices will ratchet back up dramatically."

The question on everyone's mind, of course, is when will that happen?

"We didn't get here quickly ... and it's going to take a lot of time to get out of it," George said. "There are some places in other states that may take 20 years to get back to the go-go market we had," he added.

Zimmerman acknowledged that unemployment is creating a huge drag on the recovery. Although the official national unemployment figure stands at 9.8 percent, he noted that if discouraged workers who've given up or are underemployed are added, the reality is closer to 16 percent nationwide. In California, it's 22 percent -- about one in every five people.

"There's still a huge amount of slack in the labor market going forward," he said.

Panelists See a Silver Lining

Nevertheless, the panelists' messages were not all doom and gloom. "California may fare pretty well because of tech and foreign trade," Zimmerman said. He predicted that the U.S. economy would grow at a rate of 4 percent in 2011 and 4.5 percent in 2012.

And he challenged the idea that the housing crisis would lead to a drop in the home ownership rate in the United States. "The flip side of the housing crisis is positive," he reminded the audience. "There's been a big drop in housing prices, so homes are more affordable."

All the panelists also noted that the crisis has led people to take a new look at the true value of home ownership.

"Houses were once a place to live. They weren't necessarily a speculative investment vehicle," Zimmerman said. We're now returning to that view, he said, "and that might be a good thing."

Teresa Castle
College Communications

Photos by Gabrielle Diaz '11