Key to economic recovery: Curbing rate of foreclosures

Key to economic recovery: Curbing rate of foreclosures
By Catherine Reagor - Jan. 24, 2010 12:00 AM
The Arizona Republic


Before renewing efforts to build a new economic model, Arizona needs to first fix the battered foundation of its devastated growth-reliant housing economy.

That means bringing down foreclosure rates, which continue to drive down home values. Unstable home values undercut the larger economy by discouraging potential new residents and businesses. And Arizona homeowners, builders and investors with money tied up in the housing market are virtually paralyzed until values stabilize.

There are concrete ways to help the housing market recover through combined efforts from government and business. A stable housing market could pave the way for future growth that is more sustainable. Immediate steps include more help for struggling homeowners, greater use of federal money for neighborhood stabilization, diversification of Arizona's mighty home-building machine with a focus on different kinds of residential development other than fringe suburbs.

Metropolitan Phoenix has been hit harder by the national housing crash than any other part of the country because of the area's dependence on real estate.

• Home prices plummeted more than 50 percent in two years. Foreclosures hit a record 55,000 last year.

• Home building is down 85 percent since 2005.

• More than 200,000 construction jobs have disappeared since the home-building peak; unemployment is now 9.1 percent.

• The area's population has fallen since 2007, the first such decline since the Great Depression.

Fallout from the housing-market crash has contributed to an anticipated state budget deficit of $3.2 billion for fiscal 2011. Phoenix's battered housing sector must be stabilized before the region's overall economy can be mended. And to prevent a repeat of Arizona's painful boom-and-bust scenario, the area's housing-dependent economic model must be overhauled.

Along with new tactics, this will require more cooperation between government and business.

Collaboration can increase the impact of federal housing money intended to shore up battered neighborhoods and retool development that values a range of new housing.

For example, Arizona's influential real-estate industry groups, including the homebuilders, could direct some of their resources and lobbying efforts to help consumers. Arizona's real-estate groups and businesses have the power, money and member expertise to do a lot to stem foreclosures, revitalize neighborhoods and help the housing industry evolve.

There will be pain felt by those reliant on the old growth model. But if the housing industry could work with government to pool resources, that would help more homeowners, save and create jobs, stabilize the economy and position Arizona for future growth.

"Arizona's problems are not just cyclical, like markets. They're structural," said John Graham, president of developer Sunbelt Holdings and the Urban Land Institute Arizona, a growth think tank. "Fast growth cycles are a thing of the past. We need to adjust and plan for slower and more sustainable growth."

Here are some immediate ways to stabilize the housing market.


Slow foreclosures

The first task is to curb foreclosures. Arizona continues to be one of the top three states in foreclosure rate.

Research shows that keeping more people in their homes stabilizes families, neighborhoods and the economy. National foreclosure-prevention programs hosted by big non-profits and lenders in the past year have not been as successful as many hoped. Government and business leaders, particularly those affiliated with lenders, have the power to push for more home-loan modifications backed by the federal government.

Arizona's budget deficit means the Arizona Housing Department is dealing with huge budget cuts and smaller staff when there is a need for more financial counseling for homeowners.

Housing non-profits receive federal funding for each homeowner they assist. Struggling homeowners are directed to these non-profits through Arizona's foreclosure hotline. However, the number of homeowners calling the help line isn't keeping pace with the rise in foreclosures, suggesting that many struggling homeowners don't know about the free help. Fewer calls mean Arizona won't receive all its federal funding. Housing counselors, real-estate agents and attorneys working on foreclosures say most struggling homeowners don't know about free help. Arizona's business community has the ability to spread the word.

Struggling homeowners also need more time. Other states have placed moratoriums on many foreclosures because government and housing advocates found that homeowners asking for help or in the process of receiving loan modifications were still foreclosed on.

Loan modifications for metropolitan Phoenix homeowners continue to lag and fail. A growing number of homeowners in the middle of negotiating with their lenders still lose homes to foreclosure because of problems with the process.

A foreclosure-moratorium program in Arizona, along with a private/public partnership group to review pending foreclosures, could substantially reduce foreclosures.


Better regulation

Weak regulation of Arizona's lending and real-estate industries led to poorly conceived mortgages that contribute to the state's foreclosure problem.

Not every industry that plays a big role in the sale of a home is even regulated. Confidence and stability in the system could improve if all segments of the real-estate industry were regulated equally.

During the boom, more than 10,000 Arizona loan officers operated with no regulations; they weren't even screened for criminal backgrounds. Bad mortgages, illegal mortgages and mortgage fraud perpetrated or assisted by unscrupulous loan officers became too common.

Even existing safeguards are weak. Arizona real-estate and lending regulators face huge budget cuts like other state agencies. The state Appraisal Board has no full-time inspectors. Budgets for investigations done by the Arizona Department of Financial Institutions and the Arizona Department of Real Estate have been slashed.

A bill to license loan originators passed in Arizona two years ago and is supposed to become effective this summer. However, the state agency charged with enforcing the law doesn't have the funds to administer the criminal-background checks.

Arizona's real-estate regulation could be improved if state agencies had investigators who were paid through increased licensing fees or fines collected for violations.

A group of Arizona appraisers are now pushing for new regulations in their profession. There is strong support from others in Arizona's real-estate industry for better regulation. However, if there is no money for more regulation and enforcement of current laws, industry leaders could help with more self-regulation.

Recently, a former Scottsdale real-estate executive was sentenced to six years in prison and ordered to pay $6 million in restitution to his firm. He was charged with embezzling $11 million through phony real-estate deals from his former employer. The executive's employer conducted its own internal investigation and handed the case over to the Arizona attorney general.

Empty homes

Phoenix's record number of empty homes presents other opportunities for stabilizing the housing economy.

Vacant properties often mean blight and crime for neighborhoods and drag down home values. Many empty homes today are foreclosure properties, abandoned by owners and neglected by lenders. Others are empty rentals. Some are unsold new homes.

Federal funds are available to rehabilitate, sell and utilize more than 80,000 empty homes across the Phoenix area. Doing so would create jobs and help stabilize neighborhoods and home values.

Arizona will soon receive $118 million in federal funding to help neighborhoods hit hard by foreclosures, which follows $121 million from last year. The money is aimed at people willing to take on foreclosure properties as their primary residences. But those prospective homeowners, often stretched for cash, are now in competition with investors.

Arizona could take steps to curb housing speculation and support more homeowners willing to help build neighborhoods. Lenders, especially government-owned Fannie Mae, could give such people preferential treatment.

Cities and non-profit housing groups also could convert abandoned homes into affordable rentals for people who have lost homes to foreclosure or into group homes for the elderly and handicapped. Such projects would allow local government, non-profits and builders to tap federal funding designed to provide different types of housing.

Industry overhaul

Metropolitan Phoenix needs more new residents to stabilize its housing industry.

A more diversified housing stock - including more apartments, affordable housing and mixed-use projects that reuse foreclosure homes in established areas - would offer alternatives to more acres of single-family homes in ever more distant suburbs. Again, federal money is there to help.

The building industry can reshape itself and metro Phoenix's growth pattern by shifting the long-standing focus on edge developments to include a greater variety of housing to attract and retain a greater variety of people.

Such a shift in focus could include, for example, reusing homes and vacant land in foreclosure and would provide construction jobs and help struggling neighborhoods and people by providing more affordable housing.

There are national grants and federal funding to help the building industry change its focus. The Arizona State University School of Construction and ASU's Stardust Center for affordable housing can both help find funding and provide training and design services to help the building industry evolve. Both entities are already working on innovative plans for different types of housing developments. They just need more builders and lenders willing to take them on.

Arizona cities can help by expediting building permits for these new types of projects. In the past, it's been easier to get plans approved for basic single-family homes built in expanding suburbs.

No quick fix

The housing industry can't rely on Arizona's old model for growth. No one in Arizona can rely on annual 50 percent home price run-ups again.

Many housing-industry leaders are working to overhaul their operations to meet current market reality.

The head of one prominent Arizona homebuilder has said his firm will never pay a high price for a huge chunk of land on Phoenix's fringes where there is no other development because it's no longer what the region needs, homebuyers want, or a money-making move.

Estimates now are that it will take more than five years for metro Phoenix's home values to climb back toward their highs of 2006. But recovery won't begin until more jobs are created, foreclosures slow and the building industry regroups.