The questions and answers posed for background for today's Arizona Republic article by Catherine Reagor called "Housing recovery threatened by 'strategic defaults'".
AZ Republic: "What were the forces behind the Phoenix area housing crash and the 50% drop in home values? What made it so bad here compared to other parts of the country?"
Amy Swaney: I had the unique opportunity in 2006 to see a lot of things about the mortgage industry en masse that other people did not. I am a producing Loan Officer, so I got to see the Main Street or homeowner side of the market. I am a non-depository mortgage banker so I got to see products available from many different lenders, but I was also President of the Arizona Mortgage Lender Association, so I got to hear and interact with MANY lenders, trade groups as well as regulatory bodies and hear their experiences as well. From that perspective, I think it was "perfect storm."
To begin we had a good investment property market, good rents, lower home prices and lots of land to build. In fact at one point our market had 25% higher number of legitimate investment properties than the rest of the nation. The secondary market made it easier to qualify for an investment property with lower down payments, lower credit scores and income documentation flexibility. The ease of becoming a real estate investor gave way to a mass of inexperienced buyers.
This new pool of buyers gave our market a hefty boost in home price, which gave homeowners a nice equity position in their homes that could be tapped into by way of more aggressive lending options. There were not many controls in place to deter the everyday homeowner from trying, what they perceived as their neighbor to be doing, getting rich in real estate.
As the home prices continued to go up and more and more people had access to equity in their homes, the pool of buyers continued to grow. But for those that still could not meet the qualifications of a very loose investment market, buyers started taking advantage through intent or by accident, of an over-capacity industry trying to keep up with the business coming through the door. The industry was blindly hiring anyone they could to handle the volumes, with no background, no education and no controls.
Buyers were now speculators. People didn’t think they were doing anything wrong, because they could not fail…as long as the market kept going up. The loans were easy. Stated income became “state an income”, no one said it had to be THEIR income, at least that is what they claim. The demand just kept growing, builders kept building, Realtors kept selling, lenders kept lending and buyers kept buying.
But the demand was not all that it was cracked up to be. The numbers were skewed. There was a false barometer in play. In 2006, the numbers of homebuyers were not the same number of home Owners in the marketplace. Somewhere borrower ignorance or greed or whatever else you want to call it, became criminal. Lending was easy, regulatory enforcement was zero and volumes were up. The criminal element found a safe haven in big money and low risk.
As the market in 2007 started leveling out and the fall out in the secondary market began to trickle down, aggressive loan products started going away thus shrinking the pool of legitimate borrowers. The declining market uncovered a massive web of inexperienced speculation and huge numbers of fraudulent transactions that without new homeowner’s entering the market, landed a significant amount of inventory in delinquency and foreclosure.
Arizona was a speculative market. The economics of our state relied heavily on the success of our real estate market. Thus over time it has become a severe economic issue, which continues the downward spiral of the property values.
AZ Rep: What are the prospects for a stabilization and gradual recovery in home values here?
AS: As an economy, we have to avoid the mistakes of the past. Solutions don’t always come easy, but I think solutions will come over time. We are starting to see light of stabilization. Recovery can only come if the private sector is given the opportunity to provide jobs and opportunity. One issue that can cripple the recovery is over-reaching regulation with unintended consequences that will stifle protracted and deliberate growth.
Some people view a house as their longtime home. Others, particularly in Phoenix, view a house as a short-term investment or source or equity with a good return. What are the dangers or problems with viewing a house as equity?
Real estate traditionally has been a longer term investment. What defines “longer term” however, is relative. For some, a home is similar to a retirement account. Something that provides financial security. For others it could be a stable slow growth investment with sustainable returns year over year. Viewing your home as an ATM will never be a winning investment strategy.
AZ Rep: Many homeowners in Phoenix are facing foreclosure. What are their options?
AS: A homeowner that faces foreclosure has many more options today than they did even three or four years ago. Depending on their specific circumstances, will determine the which option they have available.
AZ Rep: There is a growing sentiment among homeowners who now owe far more than their homes are worth that it is OK to walk away from a mortgage? What is your view on that sentiment?
AS: Each individual circumstance is different. I can’t be the judge as to why someone should or should not walk away from their home. As long as people understand there are ramifications for breaking a contract.
AZ Rep: How will banks react, especially if a significant number of people just walk away?
AS: Banks will continue to react the same way they have been reacting. They will continue to tighten lending guidelines, continue to make borrowing money more difficult and will be more selective as to who they lend their capital. More banks will shut down or be sold, and the options for consumers will shrink. Costs will continue to rise to consumers as banks try to offset their losses. Without question it will slow the recovery.
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