Dig into the foreclosure crisis with these local real estate stories

By Jodi Schneider
Mortgages form the financial underpinnings of the nation’s housing market and led to more than two-thirds of households owning their homes by 2004. Historically, banks made and held home loans with money from local deposits. But over the past 30 years, the financing for mortgages has increasingly shifted to investors in the bond market.

During the real estate boom of the early 2000s, with interest rates at historic lows, investors poured trillions of dollars into mortgage-backed securities in search of higher-yielding assets. The flush times allowed many homeowners to buy homes or tap into the equity of their properties, driving the homeownership rate to its highest level ever, 69.2 percent. It also helped propel home prices skyward, especially along the coasts and in the Southwest.

Then, however, mortgage defaults and foreclosures increased sharply, and the homeownership rate began falling; it was 67.9 percent in September 2008. In late 2008, some economists were estimating that 8 million to 10 million borrowers might lose their homes because they could not afford to repay or refinance their loans. While delinquencies first surfaced among so-called subprime borrowers, who had blemished credit records, increasing numbers of homeowners with good credit fell behind as the economy turned down and layoffs soared. Many of these homeowners had adjustable-rate mortgages (or ARMs), which “reset” at higher rates after a set period. When they reset, even homeowners with good jobs had trouble paying at the higher rates. And as the unemployment rate climbed, a growing number of borrowers defaulted on their mortgages.

Meanwhile, as foreclosures flooded the market, the value of homes fell rapidly for nearly three years, starting in early 2007. The drops in value were most acute where housing prices had risen most sharply, especially in Florida,  Georgia, Nevada, California and Arizona.

In July 2009, an early sign that the housing market was beginning to stabilize came in a national index called the Standard & Poor’s/Case-Shiller Index. On July 28, that composite index showed that, for the first time since early 2007, the prices of homes over all remained  flat in May instead of falling. While prices in Nevada, Florida and other hard-hit areas continued to fall, albeit more slowly, prices in eight cities edged up, and prices were steady in two others. In the past year, many local markets have stabilized while some metro markets – including New York, Washington and Chicago – are seeing price increases and upticks in activity for the first time in years.

The market’s bust shook Wall Street to its core, creating what many describe as the worst financial crisis since the Great Depression.

In Washington, the giants of the mortgage finance system, Fannie Mae and Freddie Mac, were taken over by the Treasury Department in September 2008. Their losses were expected to overwhelm their capital, and the government  pumped billions of dollars into them. The Federal Reserve also began buying mortgage securities issued by the companies, helping to drive down mortgage rates.

More than 100 mortgage lenders went out of business, and banks, hedge funds, pension systems and other investors and the financial system were expected to lose $1.4 trillion, according to the International Monetary Fund. But the ultimate losses could be many times greater because of derivatives, financial instruments that derive their value from other assets. The value of U.S. residential real estate was estimated to have fallen $5 trillion to $6 trillion, or 25 percent to 30 percent, economists estimated, at the peak of the crisis.

In February 2009, the Obama administration and the Democratic Congress passed a wide-ranging $787 billion economic-stimulus measure to increase government spending and cut taxes. The administration hoped to create or preserve millions of jobs. Democratic leaders said at the time that  they planned more aggressive efforts to stem foreclosures. Yet efforts on that front have not been as successful as many had hoped.

In March 2009, the Obama administration announced what it described as a $75 billion plan to end the foreclosure crisis by keeping defaulting owners in their homes. But in its first year it ended up helping only about 200,000 of the 7 million households that are behind on their mortgages and risk foreclosure. In March 2010, the administration said that it would significantly expand the program. The goals of the new effort were to refinance several million homeowners’ government-backed mortgages with lower payments; to temporarily reduce the payments of borrowers who are unemployed and seeking a job; and to encourage lenders to write down the value of loans held by borrowers in modification programs.

The biggest new initiative, through the Federal Housing Administration, would refinance loans for borrowers who simply owe more than their houses are worth. About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.

The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble. Additionally, the administration, starting April 5, determined that it would help some underwater homeowners to leave their homes, in a program that will allow them to sell for less than they owe and give them a little cash to speed them on their way. Local banks, community-based organizations and state and local governments also have programs to help those in danger of losing their homes to foreclosure – though homeowners often complain that the programs are “too little too late” and require navigating their way through a Byzantine application and screening process.

REAL ESTATE STORY ANGLES/IDEAS

1) As the saying goes, real estate is all about location, location, location – and as such, is a highly local story. Take the temperature of your local real estate market. Determine whether the residential real estate crisis has peaked in your market and whether things are stabilizing. Look at submarkets – both geographically within your region and such submarkets as condo/townhouses, resort, or at certain price points. Consider the effect of delinquencies and foreclosures in your market and how this has affected price and availability of homes in certain neighborhoods.

2) Take a look at the Home Affordable Modification Program (HAMP) (through the Federal Housing Administration) and determine whether banks and other institutions in your region are refinancing mortgages based on its guidelines. Look at factors such as foreclosure rates, delinquency rates and refinancing information from local mortgage companies and banks. Tell stories through real people as well – this is a story that can be given a human face and voices. Look at various neighborhoods in your region and consider the effect that such programs – or the lack of them for several years – had on these communities.

3) Commercial real estate. Often, this is a story ignored in favor of determining what’s happening with housing in a community. Yet in many areas, problems with commercial real estate developed after the housing crunch and aggravated regional economic woes. Look at vacancy rates, prices and commercial construction in your community. Are there any “see-through” (half-finished) buildings or buildings that were permitted but are not going forward because of financing woes? What does this mean for the local economy and the companies, and for jobs? Look at various segments of commercial real estate in your community as well, not just downtown office buildings, but suburban tech campuses, industrial and warehouse construction. Is this off, or has it bottomed out locally? What are the plans for the next five years? How will this affect local and state tax revenue as well?

WHAT TO INCLUDE IN REAL ESTATE STORIES

Real estate/mortgage stories should include the following information:

• Local foreclosure rates, as geographically specific as you can get; often the state Department of Commerce, other state or local agencies and universities can give foreclosure rates by Census tract, and sometimes by counties. RealtyTrac also has foreclosure data.
• Sales and pricing information – compared with a year earlier. This information, again, is often broken down very specifically, even by ZIP code. Local Realtor organizations can be helpful). Look at the number of sales in a given area compared with a year earlier (as real estate sales are often very seasonal) and the percentage by which median, and average, sales are higher or lower than a year earlier. (In some markets, it makes sense to break out $1 million-plus homes, as they skew the overall figures.)
• From banks, delinquency information on mortgages by location.
• The length of time it is taking homes to sell – often determined by when they were first listed on the market until a contract or closing. Compare this with year-earlier figures (for seasonality) but also with recent quarters to get an idea of whether things are moving more quickly. Break this down by geography, price and submarket (condo, resort, for example) as well. Also (from Realtor groups and banks), the number of transactions that are not completed or closed.

Jodi Schneider joined the Washington bureau of the American Banker, a newspaper covering the nation’s banking industry, as a senior editor in December. Previously, she was director of training and recruiting for Congressional Quarterly’s newsroom. She gave this presentation to the Maynard Institute Multimedia Editing Program at the University of Nevada, Reno, in June.