Has San Diego Recovered From Lehman Brothers Collapse?

MAUREEN CAVANAUGH: This is KPBS Midday Edition, I am Maureen Cavanaugh. Six years ago today, the giant investment banking group Lehman Brothers filed for bankruptcy, sending the stock market plummeting. The end of Lehman Brothers marks the beginning of public awareness that the US economic system was in trouble. But the problems started years before, when shaky loans on overpriced homes were sold to clients as solid investments. It is for that root cause of the great recession that Bank of America has agreed to pay more than $16 billion to settle a federal lawsuit. The settlement made headlines a few weeks ago, what will that mean for homeowners struggling to stay in their homes? Joining me to talk about the Bank of America settlement and how the recession has changed the real estate market in San Diego are my guests, Marney Cox and Michael Lea. Welcome to the show. Within this $16 billion settlement, there is a chunk of money that is supposed to go toward consumer relief. How much is that? MICHAEL LEA: I think about two thirds of the settlement is designed for various measures to relieve consumers. MAUREEN CAVANAUGH: Can you tell us how it is supposed to help consumers? MICHAEL LEA: There are two main thrusts. The larger pool of money is to modify loans that are basically still on the books for Bank of America them a that can take a number of different forms. One thing they insisted on was that some of those had visible reductions to deal with the underwater mortgage situation. MAUREEN CAVANAUGH: In other words, in theory, some homeowners may apply to reduce the amount they are on their homes, by bringing that loan down, not just the payments, not just the interest rates, but the actual amount they own a home? MICHAEL LEA: Yes. Traditionally banks, and particularly Fannie Mae and Freddie Mac have only done productions and interest rates for extending the term, but they have not written down any principle. That is with the settlement is encouraging Bank of America to do. In addition to the other types of relief they provide. MAUREEN CAVANAUGH: That is if your house is not worth what it was when you bought it? MICHAEL LEA: If your house is worth less than the mortgage. MAUREEN CAVANAUGH: We heard a lot several years ago about San Diegans struggling to stay in their homes. Is that still a problem in the economy now? MARNEY COX: It has gotten better, but has not gone away completely. Foreclosures are down, which is an indicator of how San Diego is doing. Other indicators can be construction employment and whether or not it has rebounded, and the number of permits taken out each year to build new houses. All of those are indicators that things are not back to where they were before, and the economy still struggling. MAUREEN CAVANAUGH: Remind us of the hit that San Diego took when the real estate collapse. MARNEY COX: A good indicator is construction. San Diego lost about 103,000 jobs, because of the session. It was worse in terms of proportion than what occurred at the national level. Of that, about 40% of lost was in construction. It took the brunt of the impact. All of the industries, the construction and retail sectors have yet to come out to the levels they were previously. Another way to look at it is the number of new units currently authorized. We dropped from about 2004, two 18,000 or so units it down to 3000. In 2007, we bought 6000. We're back to 8000 today, but not a where we were before. We should be about 12,000 on average. We need about 4000 permits to go to get to normal. MAUREEN CAVANAUGH: Some neighborhoods, when Marney talks about foreclosures, we know is some neighborhoods in San Diego County were affected more than others. And you give us an idea how bad some places were hit? MICHAEL LEA: Some counties were hit more than central San Diego, where the North county, generally speaking, the closer you are to the coast, the more the uppity values held up. The boom bust that occurred in housing prices affected house prices less than $4000, that will be more in the outlying areas. MAUREEN CAVANAUGH: Will people who have already lost homes to foreclosure get any of the settlement money? MICHAEL LEA: There's a little bit of money in the neighbor of $1000-$1500 for specific people who had foreclosed. I do not know how they allocate that, because it is somewhat of a drop in the bucket. MAUREEN CAVANAUGH: When we talk about the neighborhoods that were very badly hit by foreclosure, you could see block after block of signs of foreclosure on properties. Give us an idea on the impact that has on neighborhoods. MARNEY COX: A couple of things have happened since all of the foreclosures took place. House ownership has dropped dramatically, in terms of people owning their own homes. Banks held on to them for a long time. Now that some of them have started to filter out, they are being bought as an investment vehicle, as opposed to going out to homeownership. It will change the structure of homeownership in the region for a long time, because one of the other things that is unfortunate with it, it is difficult to get a loan. The standards are set very high, so if you do not meet the standards, it is difficult to buy in today's market. That is probably holding down the number of new units being built, as well as the ability for households to go out and buy the ones that may be available through foreclosure. A lot of sales taking place over the last couple of years are taking place, which is a good indicator that investors are swooping up what they think are good deals for them. MAUREEN CAVANAUGH: For the larger economy in San Diego, what are some of the trickle-down effects on the economy of so many people losing homes? Or, afraid of losing homes? MICHAEL LEA: We saw a number of things. One of the things that happened, a lot of people lost homes and equity, so now they are renters as opposed to homeowners. That is a big hit, especially in light of things that you use your home for in terms of future use. Also, the nature of the job make up in the region completely changed. Not just here, but nationwide, a lot of high-value jobs that we lost have been replaced with jobs. Now, wages are not keeping pace. There is a whole structure change that has taken place that has led to movements such as minimum wage and other things, calling for social changes. Some of that you can tie back to the recession and the characteristics of it. MAUREEN CAVANAUGH: Michael, the settlement we're talking about, the Bank of America settlement follows on other billion dollars settlement with J.P. Morgan Chase, and Citigroup. Part of those settlements were intended for struggling homeowners, but they haven't helped, have they? MICHAEL LEA: They have not had a major effect. You can think about these multibillion dollar settlements, as a large amount of money. But when you look at it from the standpoint of how many people, millions of people affected by the foreclosure crisis, and many more that are still in homes, but struggling to make payments, those billion dollars do not go a long way. Politicians also have a propensity to move money around. Even if, for example in the national mortgage settlement that was meant to go for certain uses them a and not all that money has filtered down to consumers. MAUREEN CAVANAUGH: I read with surprise that since November, J.P. Morgan has only paid out $6 million in loan modifications from the $4 billion really fun. That is almost a year. What would cause something like that? MICHAEL LEA: There are a lot of paperwork requirements. You get into a situation of how you decide whether someone should get aid, or whether or not the circumstances were their own fault part of that has to do with documentation requirements. Can you pay the loan and show us the income, etc.? We know in the run-up to the recession, there are a lot of no or low document endings, and people call them liars loans. We are still seeing that today. People have a lot of specific requirements to go through, but they cannot always meet them. MAUREEN CAVANAUGH: They have a window where this money is available, I'm wondering if anything is being done to speed up the process, because it sounds as if these groups, these banks that might have received big settlements, they might be paying out big settlements and instead they are dragging their feet. MICHAEL LEA: It is hard to say. The settlements have rules and regulations that govern with the banks can and cannot do. I doubt the banks are delaying anything on purpose. The government requirements are fairly onerous. MARNEY COX: I think banks are not geared up to handle the type of people requirements that are required. Part of what looks like dragging their feet is simply the size that they are being asked to wade through in the light of the people available to do it. I know during the worst of the recession they were encouraging people to contact financial institutions. They were swamped and had no ability to respond in light of all of the demand for services being asked. MAUREEN CAVANAUGH: We hear about the major settlements from banking institutions, but are they enough to dissuade institutions from doing exactly the same thing in the future? MARNEY COX: I think no. Some of it was incentive-based. There were incentives built in to the system, while he was possible for the collapse we had. New regulations that have been put in place, I would argue they are not sufficient to forgo any future problem like that. On top of that, I would say the characteristics that have results from it are concentrated more today than they were before the problem occurred. MAUREEN CAVANAUGH: In the limited number of lending institutions? MARNEY COX: Yes. I read the other day that 0.2% has control over 70% of total assets. It is a very small number of banks that have control of a substantial amount of financial assets. Too big to fail is a worse problem today than it was originally. They are trying to make headway on how much liquidity the banks have to hang onto to protect themselves from this. It is difficult for me to see that the taxpayer is not at risk. At least, as much, if not greater than the risk the taxpayer was in without knowing about it, before the financial problems occurred. MAUREEN CAVANAUGH: Michael, I would like to get your take, what did you think about whether or not this could happen again, considering the kinds of relations in place? MICHAEL LEA: I think it could absolutely happen again, and it's getting into the incentives these institutions have. A lot of regulation changes have been micromanaged. You can do this, you can't do that. But the underlying system is a volume-based system where people are compensated based on getting loans funded and approved and having more larger loans. As long as you have that incentive along with the fact that you can lay off a lot of risk as a primary lender into the capital markets, you have the same basic structure that we had prior to the crisis, and as a consequence, I think there's a good chance it could happen again. MAUREEN CAVANAUGH: In referencing Lehman Brothers, a lot of people are still saying that if criminal prosecution of officials at these institutions had taken place, that might have been a deterrent. What do you think about that, Michael? MICHAEL LEA: I think it is difficult to prove terminal intent. If you step back for a moment and say what was going on, there was a lot of sloppy lending, a lot of fried, and if you can show individual cases of fraud, yes. But if you go all the way up the food chain and look at top executives, they were encouraging people to do sloppy lending. But is that a crime? MAUREEN CAVANAUGH: We will never know. MICHAEL LEA: We will never know. None of them have been taken to court. MAUREEN CAVANAUGH: Let me fast-forward to today, and as you some questions about the current real estate market. We now see home prices going up, and we see sales going down. Why is that? MICHAEL LEA: We are seeing sale prices moderate, which I think is good. It is a legacy of the recession. We still have a substantial portion of homeowners who have either negative equity or very low equity. When that happens, it really takes a lot out of the trade up market, where people would be looking to move, but they do not have the equity in their houses to purchase another. I think that is part of it. I think the other part of it relates to Marney's point, in regard to structural changes in income. San Diego is a high-priced market, and a lot of people do not have the income to buy into that market. MAUREEN CAVANAUGH: Let me ask you Marney, he mentioned the fact that instruction is down from the recession, and it remains down. But if you drive around certain areas of San Diego County, I'm thinking of Mira Mesa and mission Valley. There seems to be a apartment house and condo building boom going on. Is that taking place? MARNEY COX: Absolutely. In fact, if you break your market into single and multi family, multifamily here and nationally is up to where it was before the recession. It is not hurting at all. It is the single-family area. You're right about the boom, that has to do with the alternatives faced by those who are looking to find a place to live. It appears the rental market is a place that they can afford to get into one. There is a small boom taking place that is supposed to accommodate the new people looking for a place to live. MAUREEN CAVANAUGH: Michael, the way that you see it, is it going to take a fundamental recovery of the economic system? In other words, people getting better paying jobs and feeling more confident about the value of their homes increasing, to actually bring San Diego's market to where it needs to be? MICHAEL LEA: Partially yes, I think it is just a matter of time if we continue trends we have been having. That said, we have a planning process within San Diego that heavily restricts the production of new homes, particularly single-family homes. That is another reason the starts and completions are so low. From the planning standpoint, we do not allow a lot of new construction to happen. That is the reason San Diego is always going to be high-priced. There was always going to be pressure for prices to increase, because it is an attractive place to live, but we are not building enough to meet demand. MARNEY COX: Another thing, San Diego's housing market stretches beyond corporate boundaries today. Even Riverside has a housing market for San Diego. They were hurt even worse than we were during the recession with many foreclosures taking place. Supply needs to be absorbed before San Diego comes back. We are also seeing some housing market start South of the border into Mexico. The housing market, you can't just look at our numbers and hope to derive the answer. Our housing market is beyond our borders. It becomes an important key, because what looks like a congestion problem right on the freeways today coming from Riverside is actually a housing problem, and how difficult it is to get units built. You are forced to find one some distance away and commute. MAUREEN CAVANAUGH: Thank you both very much.