Why the foreclosure crisis isn’t over yet
We've got a long way to go.
-Christopher J. Fry
This is the story of two housing markets — one that’s doing quite well and another that’s still treading water.
Economics correspondent Paul Solman spoke with Nick Retsinas, who teaches real estate at Harvard Business School, about the second, larger, lower-end market. Strolling around Cambridge, Massachusetts the two discussed how there can be bidding wars in one neighborhood and foreclosure signs in another. In the latter neighborhood, banks have refused to refinance mortgages despite the depreciated values of the homes.
Tune in to tonight’s Making Sen$e, which airs every Thursday on the PBS NewsHour, for more on the ongoing foreclosure crisis. The following conversation has been edited and condensed for clarity and length.
— Kristen Doerer, Making Sen$e Editor
Paul Solman: Are there really two housing markets now — one that’s doing well and another very large one that’s just not moving at all?
Nick Retsinas: Well, it’s a big country. So there are many markets. But generally speaking, it is a story of two markets. The higher-end market is doing very well, as a matter of fact, maybe too well. The lower-end market is kind of mired and stuck in the housing crisis.
Paul Solman: So houses on this street in Cambridge, not far from Harvard Square, how much are they?
Nick Retsinas: They’re million dollar homes, easily. Sometimes more.
Paul Solman: And I hear that there are now bidding wars!
Nick Retsinas: There are bidding wars, because so few come up for sale. A lot of these people have lived here a long time, so when they bought the house it might not have been a million dollars, but now they’re living in million dollar homes.
Paul Solman: They’re snapped up — people are bidding more than the asking price, right?
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Nick Retsinas: We had a quarter last year in Cambridge where the majority of transactions were sold above the asking price. That’s unheard of to do that. The sellers know how high the market is, but even they can’t price it high enough to keep people out.
Paul Solman: And yet, I’ve been talking to people in the last few days who have told me that their houses lost 50 percent of their value and have barely come back at all.
Nick Retsinas: It’s like the housing crisis keeps on giving to the lower end of the marketplace overall. Fifteen percent of all the houses under $200,000 owe more than the house is worth. They’re underwater, so to speak.
Paul Solman: Fifteen percent?
Nick Retsinas: Fifteen percent. That’s one out of six, one out of seven houses owe more in their mortgage than the house is worth, which is why they can’t sell their house without paying money to get out of their mortgage.
Paul Solman: And how is the higher-end market doing?
Nick Retsinas: At the higher end, it’s closer to five or six percent of the houses are still stuck — in some markets like Phoenix and Las Vegas and Los Angeles. But for the most part, the housing price increase has almost brought them back to where their peak was in 2007 and 2008.
Paul Solman: Why is it that banks will not accept an offer from a homeowner at the current market price, and then once the homeowner is out, the bank will sell it on the open market? The bank doesn’t get as much as it could’ve gotten from the very person who was living in the house.
Nick Retsinas: Some investors are very afraid of principal reductions. They’re afraid that there will be bad things happening between owners and related parties that would necessitate the bank taking up a reduction in what was the amount owed. They’re very nervous about doing that. I think they over-inflate that worry, but it’s one that does affect their behavior.
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Paul Solman: But it makes no sense. You’re the mortgage holder. I live in the house. The house has a $250,000 dollar mortgage, it’s now worth $140,000 or $130,000 or something. I say, “Hey! I will absolutely service that loan at $130,000, because it will cut my payments.” And you say, “No,” you kick me out and then you make the same deal with somebody else?
Nick Retsinas: I don’t disagree. But the counterargument they are hearing from their investors is: “If you start doing this, we will never buy mortgages from you again. If we get worried about whether or not we can get back our principal, we’re going to stop buying mortgages for you.” That’s what they’re afraid of.
It’s an investor saying that, because the banks aren’t necessarily holding these mortgages. They’re often bundling them, securitizing them and selling them to investors. Investors are very nervous about losing any of their principal. They feel that’s inviolate. And they’re afraid that if a bank starts to do that, they’re at risk of doing that for future investments, and they threaten not to buy other mortgages going forward.
Is that a real concern? Yes. Is it a real possibility? I’m not sure.
Paul Solman: So the bank is simply afraid of setting a ‘precedent’ that will hurt its business later on?
Nick Retsinas: Yes, they are afraid it will be contagious to people. As a result, they haven’t done principal reduction, and you have these low values, particularly among low-end homes, continuing to stilt the marketplace.
Paul Solman: So are you sympathetic to the lenders for not giving the homeowner the same deal that is actually a price on the open market?
Nick Retsinas: No, I think the lenders have been shortsighted. And because they have been shortsighted, for the most part, this housing crisis has dragged on and on, and it explains why the recovery is so slow and so laborious.
Paul Solman: But what’s the logic?
Nick Retsinas: That contagion effect. The same logic. Absolutely the same logic.
So I own a house, and there is a mortgage of $300,000 dollars. The actual value of the house is $200,000 dollars. I might say to the bank, “Look at it! It’s only worth $200,000 dollars! So take the house for the $200,000 dollars. That’s all I got overall.”
The bank’s saying, “Oh, no, no. When you signed this agreement, you promised to pay the $300,000, not the $200,000 dollars.”
Paul Solman: But why doesn’t the bank accept the $200,000, since that’s the market price!?
Nick Retsinas: Because the bank thinks my neighbor is looking at me, saying, “Wait a minute, there’s something wrong with this. I’m paying my mortgage every month, even though I owe $300,000 dollars, and my house is only worth $200,000 dollars. Why don’t I stop paying my mortgage, so they’ll accept the lower valuation and save me that balance of $100,000 dollars that I owe them?” The banks are afraid this will be contagious to other people in similar situations with these underwater mortgages.
Often the lender has put this mortgage in a pool of mortgages and sold it to an investor. So while some banks are holding this in portfolio, many of them are in securities that are owned by investors. And investors are sending the signal: never, never forgive principal. Whatever you do, never forgive principal. They’re willing to sacrifice interest rate, but they’re not willing to sacrifice principal.
As a result, we’re mired in this, in the aftermath of foreclosure that never quite seems to go away.
Paul Solman: Inequality in the housing market as everywhere else in the economy has been happening now for 35 years or so. Why is there this sudden difference between the top end of the housing market and the significantly large bottom end?
Nick Retsinas: Well, there’s always a difference between high-end and low-end, of course, for many years over time. I think it’s exacerbated here because of the large numbers of foreclosures. The large number of foreclosures have made it impossible for people to go back in the market. They’re not allowed to go in the back in the marketplace for another five to seven years until they build good credit overall. And in the meantime, government and the government agencies, the Fannie Mae, the Freddie Mac and the FHA, are so spooked by what happened in the last crisis they’ve been tightening their credit boxes. So basically, you’re reducing demand at the low end.
One element of the housing recovery has been a spiraling rental market. Rents are going up consistently, almost all over the country. As a result, historically, young people rented and then used their savings to save for a down payment, but they don’t have any savings anymore. They can barely keep up with their rent. You couple this with stagnant wage growth, and you’re basically muting demand. Less demand means lower prices, and that’s why the prices don’t go up, that’s why the mortgages stay underwater.
Paul Solman: So the foreclosure crisis is not over?
Nick Retsinas: It’s not over. It’s not at its peak where it was two or three years ago, but in many states, say, Florida and California, you still have a residue of foreclosures that are continuing to fill up that pipe and stuff the pipe so we can’t have the free flowing of markets.