Housing Market Decline Impacts First-time Buyers, Lenders
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GWEN IFILL: We begin with the expanding housing crisis and the very real fallout it poses for Americans shopping for, selling, or investing in homes.
Across the country, mortgage foreclosures are skyrocketing, home prices are dropping, “For Sale” signs are becoming part of the landscape, and construction is slowing down, as the nation’s housing slump becomes a stubborn fact of life.
Sales of existing homes in June dropped more than 11 percent from last year; sales of new homes plummeted 22 percent. As a result, there are now enough houses languishing on the market to satisfy sales demand for eight solid months. And as the mortgage market collapses, easy money in the form of low interest or no down payment loans is evaporating.
GUY CECALA, Publisher, Insider Mortgage Finance: Literally anybody who could fog a mirror or had a driver’s license could get a mortgage, and the pendulum is swinging pretty far the other way.
GWEN IFILL: Lynda Nicolay said it took months for lenders to approve a loan for the person who wanted to buy her home in Phoenix.
LYNDA NICOLAY: What I was hearing was that the banks weren’t giving subprime lenders loans and they were double- and triple-checking.
GWEN IFILL: Some of those mortgage lenders are now filing for bankruptcy. Yesterday, American Home Mortgage, one of the country’s largest home lenders, became the latest casualty. Earlier this year, New Century Financial Corporation also filed for bankruptcy protection.
Some presidential candidates have raised concerns about mortgage lending out on the campaign trail. Just today, Democratic Senator Hillary Clinton proposed providing federal aid to help homeowners avoid foreclosure.
The housing decline has also rippled into related businesses, driving stock market volatility. But in deciding today to leave interest rates unchanged, the Federal Reserve opted not to step into that debate.
For more now, we turn to Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, and Mark Zandi, chief economist at Moody’s Economy.com, an online research firm.
Professor Retsinas, let’s start with the Fed. They didn’t step in today. Does that mean things are not as bad as they seem?
NICOLAS RETSINAS, Joint Center for Housing Studies: No. First of all, in their statement, they indicated that they were aware of this issue. There is a lot of pressure on the Fed to act. There are other ways to act, however, other than changing the interest rate, and they are considering a number of rules that will affect lenders and affect this whole provision of credit.
How money lenders are adjusting
GWEN IFILL: You mean ways in which they would, perhaps, put stricter rules on how one lends money?
NICOLAS RETSINAS: Both stricter rules on how they lend money tomorrow but also, perhaps, some suggestions on how lenders might react to some of the borrowers who were in trouble. Now, it is difficult to walk that balance beam, but it is something they are considering. And, again, there's lots of interest in Congress for them to take these affirmative actions.
GWEN IFILL: Mark Zandi, let's talk about the effect that this downturn is having on individual groups of people, starting with first-time buyers.
MARK ZANDI, Chief Economist, Moody's Economy.com: Well, they're in big trouble. And many of those buyers are subprime or alternative day buyers, and they just can't get credit. The mortgage credit spigot is closed for them, so for first-time buyers, this is a very difficult market.
GWEN IFILL: How about people who are trying to refinance their homes?
MARK ZANDI: They are having trouble, as well. House prices are falling in about half the country, and now with lenders tightening their credit standards, it's increasingly difficult to refinance and to pull cash out of your home.
GWEN IFILL: Would you agree with that, first of all, with those two assessments...
NICOLAS RETSINAS: I would agree. The problem is, we're trying to do two things at once. We're trying to make sure we don't make loans like these again, but at the same time we're trying to help people who are stuck with these loans to get other loans, again, tough to balance those two.
GWEN IFILL: I was going to say, that sounds like two competing interests that you're trying to satisfy.
NICOLAS RETSINAS: They are. And there's probably a way to do it, but it's not going to be perfect, and it may not always be pretty.
GWEN IFILL: Now it also sounds, Mark Zandi, as if part of the problem here is that this is not just affecting people at the very entry level or people who are the poorest trying to get into the housing market, but people of varying income levels and home ownership status.
MARK ZANDI: Sure. I mean, you can't trade up unless you can sell your home to an entry-level buyer. So many mid-income households trying to move up in the housing market just can't. They can't sell their home.
And, of course, house prices are down pretty much across the board, and that affects everybody, from low-income households to middle-income households to even high-net-worth households. So this is a problem really for everybody. It's most pressing for lower- and middle-income households, but everyone is suffering.
GWEN IFILL: How about if you are a middle- or upper-income homeowner who's trying to qualify for the next step up house or get one of those big jumbo loans which we've heard about so much? Are those no longer available to people?
MARK ZANDI: Well, if you're a prime borrower, meaning you have a good credit score, you have saving for a down payment, if you can prove that you are earning a good income, you can still get a loan at a relatively good interest rate. You're going to have to go through more hoops today than a month ago or three months ago, but you'll still get that loan. If you have any problem in your credit history, if you don't have that down payment, if you aren't earning what you say you're earning, you're not going to get that loan.
Lenders "out of the business"
GWEN IFILL: But I've read today that so many mortgage lenders have simply stopped giving loans. They've just said, "I'm out of the business for now."
MARK ZANDI: Many are. And most of those are the lenders who are the most aggressive that were extending out credit to now the folks that are in default and in foreclosure. The big national lenders, they're still making loans. Fannie Mae and Freddie Mac are still providing credit. So loans are still available, but they're certainly not available for big parts of the housing market.
GWEN IFILL: Professor Retsinas, we've been watching the market swing up, swing down, usually within an hour, the way it's been going this week. I wonder how much of this -- so much of what happens in the market seems to be psychological. How much of what's happening with this housing market for people, whether it's lenders or borrowers, is psychologically driven?
NICOLAS RETSINAS: Well, it's psychological. But if you're a borrower facing a loan that you can't pay, there's nothing psychological about losing your home. That's very real.
But there's no question, people are trying to think, "What is going to happen in the market?" Even with some of those larger jumbo loans you alluded to -- Mark's right, they're still available -- but investors are getting a little skittish. And if they're getting a little skittish, that means they're going to demand a higher yield. Higher yield translates into higher mortgage rates. So it does have what's called a contagion effect on the entire market.
GWEN IFILL: Which isn't necessarily psychological, that's very real.
NICOLAS RETSINAS: That's very real.
GWEN IFILL: So what happens then to this big market we saw a year ago? We were probably sitting across this table saying, "No end in sight to the housing boom." Was that all an illusion?
NICOLAS RETSINAS: Well, we said it was too good to be true for so long, and we were right. It was too good to be true. The underlying fundamentals are still fairly strong. That is, people need a place to live, but they need a place to live, and what happened in the past, in the recent past, is they thought homes were to invest in, not necessarily to live in. And that's where we ran into this problem.
GWEN IFILL: Do you agree with that, Mark Zandi? Is that what happened with all the excitement over the booming housing market just a year ago?
MARK ZANDI: I think Nic's got it right. If you go back a year, a year and a half ago, the market was in frenzy. You had lots of investors, flippers, short-term investors. Builders were speculating by putting up too many homes. The market was, everyone thought, easy money, and it's very clear it wasn't. Lots of people are losing money now.
GWEN IFILL: Let's talk about that easy money idea, Mark Zandi. Is easy money the easy access to money? Was it easy money to invest, to build speculatively? Or did a lot of people end up buying homes who simply really couldn't afford them?
MARK ZANDI: Well, there was easy money. There was money everywhere for people who wanted to invest, buy a home, sell it quickly, make a profit. There was easy money for people who didn't have a credit history. There was easy money for people who said they were earning income but really weren't. There was money for everyone who wanted to get a loan. Obviously, many of these folks shouldn't have gotten that loan, and now we're seeing the price being paid.
Outlining the root of the problem
GWEN IFILL: Was that at the root of the problem here?
NICOLAS RETSINAS: It was the root of it, but it is complex. There were some families, some borrowers who were just desperate. They saw prices going up dramatically, and they were worried. "If I don't find a way into that house today, I'll never be able to afford it."
So in some ways there was a conspiracy, a collaboration between some lenders that were push-marketing, over-selling some products, and some borrowers who were asking no questions. And those are some of the real victims today.
GWEN IFILL: Let's continue with that, because at some point, when market hits bottom, if it has, people start to say, "OK, so how do you pull out of this?" We heard Hillary Clinton today lay out her four-part solution -- I don't know if it would be a solution -- but people starting to weigh in, saying that the government ought to take some sort of action. Is this something -- the market will sort itself out?
NICOLAS RETSINAS: Well, from the investor point of view, there's already been a market correction, in terms of the re-pricing and the withdrawal of some investment. The problem is, there is damage left behind, which are the individuals.
There's great call for government action; indeed, there are handful of states that are looking at providing some kind of financing. But the question all those programs face is, are we helping people just temporarily? Or maybe these people shouldn't have had a home in the first place. And, therefore, what is the appropriate role of government in that case?
GWEN IFILL: What about that, Mark Zandi? Is there an appropriate role of government?
MARK ZANDI: Well, you know, this is a tough problem. It's not going to be easy for policymakers to weigh in and make a big difference. I think there is a role for regulators. I think regulators can step up and make some changes to allow lenders to modify loans and mitigate some of the problems.
But for legislators, it's going to be very, very difficult to do anything that's going to be helpful here. I mean, the most important thing to remember here is that lots of people made big mistakes. They overstepped. They took too much risk. And you don't want to bail these folks out to the degree that it's just going to incite more risk-taking in the future and bigger mistakes in the future.
So it's that fine line. You want to help people who have been defrauded and didn't understand, but you don't want to help to the degree that you create a bigger problem in the future.
"Two separate dilemmas"
GWEN IFILL: Well, and does that extend, as well, to companies who may be -- I think defrauded may be too strong a term, but who went out on that limb to make some of these risky loans, are they also not worthy of bail-out?
NICOLAS RETSINAS: Well, companies who make bad business decisions ought not necessarily be protected. If you were to do so, you would encourage everybody to make bad business decisions. But at some time, one does need to look at the broader economy, look at the people who are suffering. The question is, what can you do to ameliorate that, while at the same time making sure that you're not interrupting the normal flow of the marketplace?
GWEN IFILL: So is that a separate issue, what we're talking about, the normal set of corrections which happen in any market, as we hear Ben Bernanke, the fed chief, talk about as separate from the very real pain that some people are going through? Are those two separate dilemmas?
NICOLAS RETSINAS: Well, I think the role of the government is to focus on the pain and make sure those people were not defrauded and make sure, if they were, there's actions taken, and, secondly, it doesn't have a larger impact on the community, the neighborhoods they're in. That's what the role of government is. But as Mark indicates, that's a tough one to find out exactly how to intervene.
GWEN IFILL: And, Mark, ending where we began, do we think that part of that role of government is something that the Fed needs to speak more directly to or is this just not likely, the way we have looking at this current Fed?
MARK ZANDI: Well, the Federal Reserve is focused on economic growth. It's focused on inflation. If it feels that the economy in a broad sense is sound and that inflation is tame and low, then they're doing their job. Now, if financial market turmoil is going to affect the economy, if it's going to be a problem for economic growth, then it will intervene. But until that day, it won't.
GWEN IFILL: Mark Zandi of Economy.com and Nicolas Retsinas of Harvard, thank you both very much.
MARK ZANDI: Thank you.
NICOLAS RETSINAS: Thank you.