Foreclosure Woes: How Do They Affect Your City?

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How does the mortgage meltdown affect your city? Anthony Sanders, professor of Finance and Real Estate at Arizona State University, explains how financial unrest has affected Phoenix, and what that says about other cities in the county.

Copyright © 2008 NPR. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

NEAL CONAN, host:

Now, Phoenix, Arizona, is one of the epicenters of the mortgage meltdown that's led to the financial crisis. This past year, an estimated 25,000 houses were foreclosed in Phoenix alone. Arizona officials are trying to respond. The Arizona Republic reports the state has a new $13.6 million initiative designed to help struggling homeowners and homeless families. Today, stories of real estate in Phoenix. We want to hear from those of you in Las Vegas, in California and Florida where it's also bad. Tell us your story. If you live elsewhere, has it spread to where you live? 800-989-8255; email us, talk@npr.org. You can also join the conversation on our blog at npr.org/blogofthenation. With us is Anthony Sanders. He's professor of finance and real estate at the Carey College of Business of Arizona State University, with us here at the Arizona Historical Society Museum in Tempe. Nice to have you in the program today, sir.

Dr. ANTHONY SANDERS (Professor of Finance and Real Estate, Arizona State University): Well, thank you very much for having me.

CONAN: And why does Phoenix have such a high rate of foreclosures?

Dr. SANDERS: Well, like Las Vegas and California, we were in on the big bubble. That is we had a lot of migration down out to the West Coast. We also had a growing economy. Housing prices started ratcheting up and a lot of people wanted to get in on the ride.

CONAN: And a lot of people, particularly in this area, were buying second or third and fourth homes.

Dr. SANDERS: Yeah. This is one of the second-home capitals of the United States, along with a part of Southern California and Florida. So we had a lot of that.

CONAN: People who wanted to come here in the winter months when it's cold in the northern states?

Dr. SANDERS: Well, that's part of it. A lot of people were actually buying property in Phoenix. There were coming from Los Angeles. They saw this enormous differential between L.A. house prices and Phoenix, so they thought this was just a great deal to have a place to rent to people.

CONAN: So for investment?

Dr. SANDERS: That's right - investment properties.

CONAN: And this government bailout - what does it mean for Phoenix?

Dr. SANDERS: Well, actually, if we again - it's you know, whether we want to bail out banks that did bad things as a separate question, what Phoenix needs and what L.A. needs and what Las Vegas needs - liquidity. Here's what happened. When the market or the house market turned down sub-prime default spiked, all the banks' hedge funds that sure altered bets on the sub-prime market because they thought it was performing much better than it did. Well, guess what, the housing market turned down and it took everybody by surprise. And I worked on Wall Street on a trading desk and when volatility evaporates, it's truly frightening. All of a sudden you can't do anything and you're stuck with securities you want to get rid off but you can't. That's what's happening today. So the good news is - if the Paulson plan works - By the way, they just passed - this came out of Congress. We have a bill.

CONAN: We have a bill. It's not signed yet.

Dr. SANDERS: No, it's not signed yet. But at least, we have the bill. The good news is it works. It will get banks' money to start lending, and for Phoenix, that will be great because it means the banks now can start lending again because they've taken it off their books and will be giving them cash. That will help the housing market jumpstart, which will lower the number of defaults.

CONAN: Yet, we've also heard a lot of people say, wait a minute. Why am I, as a taxpayer, somebody who behaved rationally, someone who didn't get in over their head - why am I bailing out millionaires on Wall Street?

Dr. SANDERS: Well, again, that clearly is one of the arguments against it. But you have to look at it - that's done deal. Going forward, what we have to deal is what is best for us. I own a home in Phoenix and I'm not going to publicly embarrass myself about how much underwater I am. But frankly, I would love to have lenders to have money to lend so somebody can, at least, come and buy my home. But again, that's what you have to think about right now for everything that happened and we should probably punish some of the people who got involved in this. But what we need to do is the banks need money, that need to start lending, that will really help finance.

CONAN: Let's get some callers in on the conversation, 800-989-8255. Email us talk@npr.org. We'll start with Andrew, Andrew with us from Cleveland, Ohio.

ANDREW (Caller): Yes, hi Neal. Thanks for taking my call. I - you know, Cleveland, Ohio, in this area. It seems to be the most likely we feel like we're the birthplace of the housing problem. I'm wondering we're seeing here is sort of a secondary level indicator of the further progression of the foreclosure mess, right alongside the for sale signs, the bank notice signs, in a lot of houses and a lot of neighborhood to cross the board, we're seeing signs sprouting up, trying to ward off scavengers saying this house contains only vinyl siding. This house contains no copper plumbing. Because we're seeing the entire neighborhood, in some case they are just being skeletonized.

CONAN: Obviously, those things are - if you can get the aluminum siding or the copper piping, you have those can be solved for scrap.

ANDREW: Right. And a lot of times nobody lifts a finger to call the police because either they don't know their neighbors and then don't know who actually owns the house. And so they just assume that it's somebody trying to get back into bank. And a lot times, its just scrap haulers. So it's a really sad thing but we've had entire neighborhoods that have - you know, block by block been in sort of picked to pieces. And, you know, my life in my wife, when I were actually looking for a home, we saw it all the time just houses that are bank owned being gutted right and left. It was really, really quite frightening.

CONAN: Andrew, thanks very much for the call. It's interesting. Any signs like that here in Phoenix?

Mr. SANDERS: Well, let me sympathize with Andrew. I moved her from Columbus, Ohio, and I beginning to think sub-prime prices just kind of follow me around the country. So I might be.

CONAN: So you're the one, high point mary here.

Dr. SANDERS: But I have to say that Freddie Mac and Fannie Mae, the two mortgage giants that earned the press a lot right now, they've been complaining about that for a while. They saw this is a big problem, the basically of the piracy of houses. And as soon as they - someone walks within the house, people are stealing everything out of it. So that's what they're arguing is trying to get this things through foreclosure as fast as possible because they really are nailing. And this is happened in Phoenix, in fact, one block from my house a house got broken into that was in foreclosure, they just demolished the place.

CONAN: Let's get a question from the audience here in Tempe.

SUSANNE: Hi, my name is Susanne and I'm from Scottsdale. And I'd like to turn the coin over for a minute and ask you do you see any opportunities in this financial mudslide?

Dr. SANDERS: Opportunities in the housing market or the global market as well?

SUSANNE: Just any opportunities. All we hear is gloom and doom. Are there any opportunities to reach for?

Dr. SANDERS: Anytime we have a financial crisis like this, securities, for example, and houses get discounted enormously. By the way, this why the banks have a problem. They got all these bad loans in the books, they're tried to sell them. Guess what, no takers. Because you need the money to be able to buy those one on the books, which is both the government's thought is. So yeah, right now. There are actually a whole bunch of investor sitting back, they're waiting to buy the stuff at the right price. So right now, in Phoenix, if we get an indication that the market's going to turn it around and as this bill goes through, banks start lending. These are great opportunities, so that's - for me, that's the good news. If you happen to be in the house that's underwater, it's not so much good news. But, yeah. There's a lot of buying opportunities and here, try and stay away from Vegas for two reasons. Number one, they've got tons of property. That's like going to turnaround. Second is, it's dangers to take money to Vegas. We'll leave that on the side.

CONAN: Here's an email from Jenny in Ypsilanti, Michigan. My friends and I are furious over this whole debacle while Wall Street deserves much of the blame. So do people who are living beyond their means. People who walked away from their homes and my neighborhood have reduced the value of my home by tens of thousands of dollars. They've drove big cars, lavishly furnished their homes. Now I'm paying the price. Wall Street in its infinite greed snatched up their loans and my children will pay the price for that. Last Saturday, my daughter's soccer games, parents both Republicans and Democrats, were tossing around like socialism and revolution. And we were all angry. It's an outrage. We need to get people into these homes and keep them in their houses until then the bail-out is a $700 billion waste.

Dr. SANDERS: Well, yeah. I appreciate those kind of sentiments. It's those much longer emails than I ever write so it takes me a while to try and understand what she was getting at. Yeah, there's a couple of issues here, let's start one by one. Number one, she's right, it's not just the subprime crisis. It's just not the subprime crisis. People went crazy on credit cards, home equity loans and just, you know, bought the huge F150 when they should be driving a Hyundai, not to offend any Hyundai drivers here. But you know, people went credit crazy on all dimensions. And so, when you drive up your - all your indebtedness, then you'd suddenly - when you could've afforded the subprime payments before, somebody can't. So that is a problem. But who caused it? Yes. There's a lot of borrowers that looked beyond their means. We had enormous cases of speculation. People were just getting on the bandwagon that just knew they couldn't afford it. But there's also - we put Congressional legislation in place in the 1990s that made this, you know, possible. We had created what's a well...

CONAN: Made it easier to buy houses.

Dr. SANDERS: The way we made the Community Reinvestment Act and we deregulated the markets so we extended a lot of credit. Made it very easy for people with bad credit to suddenly get loans. You know and I think by the way, going forward, when they bailout the banks, they'd better rewrite some of those regulations because otherwise, guess what's going to happen? We're going to repeat the same fiasco over and over again. So...

CONAN: Let's go to Natasha. Natasha with us from New Braunfels in Texas.

NATASHA (Caller): Yes. Hello. I have more of a comment than a question. But the area of Texas that I live in is on 35 between San Antonio and Austin. And we have a median home value of $220,000 and rising in this economy.

CONAN: Rising?

NATASHA: Is that normal? Should we expect to down turn or not? I'll take my answer off the air. Thank you.

CONAN: OK. And Natasha, thanks very much. Location, location, location?

Dr. SANDERS: Well, it turns out, I gave a presentation yesterday which is actually posted on my Web site, about 90 percent of the United States has actually experienced growth between zero and 10 percent. The only places in the United States that are really getting hurt are well, we're sitting in one. But it's a California particularly the Inland Empire, Vegas and then, some selected inner cities around the northeast and of course, Florida. But take away those places, property values were actually rising in most of the United States.

CONAN: Now, we're talking with Anthony Sanders. A professor of finance and real estate and the WP Carrie College of Business at Arizona State University. He's with us here at the Arizona Historical Society Museum in Tempe and you're listening to Talk of the Nation from NPR News. A question from the audience here.

MIKE (Audience Member): Hi. I'm Mike. Mike from Scottsdale. Many of the foreclosed homes in my neighborhoods are now an escrow. In fact, the full re-servicing company woke me up about seven o'clock this morning next door. So, I'm wondering if there's any signs of a turnaround here in the Phoenix market?

Dr. SANDERS: Well, I've got good news and bad news for you. The - in terms of the - what we call the Fannie Mae, Freddie Mac conforming loan market, that's going to be zero to about 400,000. That market is showing signs of coming back. That's the good news. The bad news is that Scottsdale is more high rent for the most part and they're out of the conforming loan range than the jumbo market. All capital for the jumbo market, big loans has dried up. It's gone virtually to zero. It's very tough to get those loans. So, what's going to happen is, is that while the mid-section of Phoenix comes back and the bank bailout, believe it or not I think will help, help prop that up. The highering markets which were pretty strong for a while, are starting to really deteriorate. That happens usually in a lot of these housing bust. It's the kind of middle range and lower end housing comes back first. The high end housing doesn't get crushed immediately but it follows. So, that's going to be a little while to work that one out.

CONAN: A little while? How long is that?

Dr. SANDERS: Well, again if the banks are really going to lend, that's the big question. I assume Paulson and Bernanke met with the banks. I hope, I hope, hope and got their - at least, you know, statements saying yes, we are going to lend. And remember, we're entering into a recession independent of all those anyway. We just had a miraculous GDP growth of 3.2 percent, which is great. But everyone's forecasting a downturn. That doesn't help. So, I'm - at best probably a year, we'll probably see in '09 some of the markets coming back. If this A., bailout doesn't work or B. the recession's worst than we thought, so we get 11 or 12.

CONAN: Let's get Phil on the line. Phil with us from Denver, Colorado.

PHIL (Caller): Yes, thanks for taking my call. A comment and a question. The comment is that here in Denver area, we've had a tremendous amount of foreclosures and we've found that people have tried to stick around in - particularly in Colorado to keep their jobs or to get another job because they love staying here and that's one of the factors that's driven our foreclosure rate. My question is, are we starting to see people moving around the country as they lose their jobs and lose their homes or are they're trying to stay put and ride it out?

Dr. SANDERS: That's a very interesting question. In fact, one of the things that really cut-down in influx of people into Phoenix by the way is that people that have jobs that want moves to Phoenix can't get rid of their homes. So, it's really cut down on mobility. I wouldn't say that's a blessing from a default that you're now free to move someplace else but it is, unfortunately. But again, just to bear in mind that while we've had - with the whole spectrum of society's been impacted by this, the sub-prime borrowers that are - have the largest default rages and have the largest foreclosure rates, generally your people with more entry-leveled jobs, so that's a little more easy. But as we go into recession, that's going to make it tough on them.

PHIL: So, we might see a spill over into the other segments of the economy that are more affluent.

Dr. SANDERS: And we are seeing a spill over as we speak.

PHIL: Any implications for how long it'll take to work it out?

Dr. SANDERS: No. What's going to happen as I said is that the lower and modern income housing will come back first and then the high end housing will be the lagger.

CONAN: Phil, thanks very much. Good luck.

PHIL: Thank you.

CONAN: Another question from the audience here in Tempe.

Ms. SHEILA HARRIS (Audience Member): Hi. I'm Sheila Harris and I'm the former state housing director for the state of Arizona. So this is an issue very near and dear to my heart and I still work in the housing arena. I'm a little concerned that the issue is being characterized as people of low income are the ones that are most in trouble. When I was at the state, we had done about 2,500 loans to families that were below 120 percent of median income. We'd only had four go into foreclosure. What we did though was a very disciplined approach. We ensured people had home ownership counseling, their houses were inspected to ensure there were safe, decent, sanitary, they weren't going to fall down. And we also made sure they had proper loan ratios, that they weren't getting into too much debt, not only for the house but their total debt. So, my concern is that when you talk about CRA legislation, that came in the '70s, and banks have been doing that for a long time and have been approaching that I think rather reticent and when we had an opportunity with the previous administration, I think what happened was we ended up having too many options with not enough discipline. And my concern is that this gets characterized as only people of low income are in a situation. That was not the case with us and I'm sure there's others that have had a similar experience. I would just like you to speak to that.

Dr. SANDERS: Yes.

CONAN: And very quickly if you would.

Mr. SANDERS: Oh. To be sure, it's more than just low income people. The data we have says that it's predominantly lower income but again, it's spilled over to other facets of society. I agree with you, by the way. I think any counseling that could be done, Fannie Mae and Freddie Mac much maligned Fannie and Freddie have excellent parts of the website, trying to advise people, don't buy too much housing, take care of your credit. People really have to do that.

CONAN: Anthony Sanders, thanks so much for your time today.

Dr. SANDERS: Thank you.

CONAN: Tony Sanders, professor of finance and real estate at the Carey College of Business at Arizona State. He joined us here at the Arizona Historical Society Museum in Tempe.

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