At the end of 2008, I appeared on various TV and radio news programs to make predictions about what 2009 would mean for the San Diego real estate market. Would real estate prices continue to drop, or were we at the bottom? How would the $700 billion government bailout affect the market? Would it trickle down to homeowners and local businesses? Would the banks start lending money again, or would the credit markets stay tight? Would the nation's large lenders make a real, meaningful effort to stem the tide of foreclosures, or would the number of mortgage defaults and foreclosures continue to rise? And finally, what effect would the financial crisis have on the rest of the economy? Would the pain be limited to the residential real estate market and the stock market, or would it spread to other sectors of the economy as well?
My predictions were as follows: Left to their own volition, the banks would not make a good faith effort to modify loans or lend out their newfound money but would instead hang onto it to brace for the coming wave of foreclosures. In other words, the bailout would do very little to help the real estate market, homeowners and businesses unless the banks were forced -- forced -- to start lending again and to modify borrower's loans in order to prevent foreclosures. The real estate market would continue to drop, and foreclosures and defaults would skyrocket in San Diego County. 2009 would be the Year of the Short Sale, and the pain would no longer be restricted to the subprime and first-time buyer markets, but would instead spread to the middle and high-end echelons of the real estate market. Finally, it would hit the commercial real estate market as well, as office buildings, industrial space and retail would start to go empty and eventually go to foreclosure as landlords became unable to continue making their payments.
That was December 2008. In January 2009, I traveled to Washington, D.C., to lobby the U.S. House and Senate. My perspective was one from the front lines of the Southern California real estate crisis. I told our elected representatives what the banks were doing -- and more importantly, not doing -- to stem the tide of foreclosures and help people stay in their homes. I expressed my frustration at how disorganized and overwhelmed the mortgage lenders' loss mitigation departments were, how the lenders were uniformly unwilling to modify borrowers loans and how difficult it was to get a short sale approved and closed, despite the fact that, in the majority of cases, it was in the best interest of the bank and its shareholders.
I told Congress that the way to revive the real estate market was not to reduce mortgage balances (Massachusetts Representative Barney Frank's proposal at the time) but rather to reduce interest rates for buyers and existing homeowners (down to 3 percent), and to let upside down borrowers refinance to the low rates. Finally, because I knew that the new administration would be drafting new legislation, I strongly urged the House Finance Committee to attach conditions to the TARP bailout that would force the banks to lend out the taxpayer money they were being given, to adequately staff their loss mitigation and customer service departments and to make a meaningful effort to help modify borrowers loans and stop foreclosures.
"If you make it voluntary," I said to the chief counsel to the House Finance Committee, "the banks are not going to do it."
I knew this because we had already seen how the banks responded to The Bush administration's Hope for Homeowners Act of 2008. This bill went into effect in October 2008 and allocated $300 billion of taxpayer money to lenders if they wrote down mortgages to 90 percent of the property's appraised value. The government predicted this would save 400,000 homes from foreclosure. As of my arrival in Washington D.C., almost five months later, only 451 applications had been processed and 25 loans had been modified. The House Finance Committee scheduled hearings to determine the problem, but the problem was obvious -- the banks were not participating. It was a voluntary program.
Fast forward to December 2009. Unfortunately for San Diego, 2009 played out pretty much as I had predicted. The only real difference was the passage of four consecutive foreclosure moratoriums, the last of which expired in September, that effectively stopped banks from foreclosing on delinquent homeowners. The purpose of these moratoriums was ostensibly to give banks time to modify borrowers' loans to avoid foreclosure. The moratorium temporarily stopped foreclosures, causing housing inventory levels to drop dramatically in San Diego County, but it did not force the banks to modify loans to any meaningful degree.
The result: A huge backlog of foreclosures -- homes that could not be foreclosed on because of the government moratoriums -- that will be hitting the market in 2010, now that the moratoriums have ended.
Which brings us to what 2010 will bring for the San Diego real estate market.
If 2009 was the year of the short sale, 2010 will unfortunately be more of the same, but the market will be peppered with a much higher number of foreclosures. The banks have a tremendous number of homes they will be foreclosing on in 2010 -- homes they could not take back in 2009 due to the moratoriums. They also have a huge number of homes that they have already foreclosed on -- known in the real estate industry as "shadow" or "phantom" inventory. These are homes the banks have foreclosed on but have held onto in an effort to make themselves look more solvent than they actually are. These homes are sitting vacant at a huge expense to the banks, need to be sold and will begin to hit the market in 2010. All of this means more depreciation for the San Diego housing market in 2010, and unfortunately, no bottom. Finally, we will see more and more commercial foreclosures, as vacancies hit record high levels and more commercial property owners are forced to default on their loans.
I will be traveling back to Washington, D.C., in January. My message will be the same -- reduce interest rates down to 3 percent for buyers and existing homeowners, allow upside down borrowers to refinance to the lower rates (and turn their loans into recourse loans in order to encourage responsibility), force the banks to increase their loss mitigation staffing for short sales, and finally, force the banks to start lending again.
Our real estate market and our economy depend on it.
Battiata is CEO of Battiata Real Estate Group.