Ted Simons: Good evening, and welcome to "Arizona Horizon." I'm Ted Simons. President Obama's speech yesterday in Phoenix dealt with increasing homeownership opportunities for the middle class. Last night on "Arizona Horizon," we looked at the speech from a broad angle. Tonight we focus on the president's specific ideas for strengthening the housing market. Joining us now is Mike Orr, director of ASU's center for real estate theory and practice. Good to see you again. Thanks for joining us. Your thoughts on the president's speech?
Mike Orr: It was quite a bit of different areas he covered. The ones that interest me are the ones which the president can actually make happen himself without getting the approval of Congress. I was focused on his ideas for making it easier for first-time home buyers to get loans approved. He did say he thought too many people with decent credit were getting turned down, and I was glad to hear that, because I agree. I think I'd like to help first-time home buyers get into a home, that they can own, I think that's good for a economy -- Rather than young people being long-term renters.
Ted Simons: Let’s go back to the president's speech and take a look at what he had to say regarding initial programs that were put in place to help strengthen the housing market. Here's the president.
Barack Obama: Less than a month after I took office, I came here to Arizona and I laid out the steps to stabilize the housing market and help responsible homeowners get back on their feet. And the truth is, it's been a long, slow process. The housing market is so big, that it was going to take some time to heal when it got hurt that badly. It's taken longer than any of us would like. But during that time we helped millions of Americans save an average of $, each year by refinancing at lower rates, we helped millions of responsible homeowners stay in their homes. Which was good for their neighbors, because you don't want a bunch of foreclosure signs in your neighborhood. We worked with states to force big banks to repay more than $50 billion to more than 1.5 million families, the largest settlement in history. We extended time folks had lost their jobs could delay their payments on mortgages-- While they kept looking for work, we cracked down on the bad practices that led the crisis, led to the crisis in the first place.
Ted Simons: We hear a long, slow process according to the president, some of his critics would say that would be generous at best. Why so long, why so slow?
Mike Orr: The slowness I think is typical of big, new complicated government programs being introduced in an area where we've not seen anything before. And at the same time in Arizona we have a very fast foreclosure process. So we basically -- Basically the original scheme was introduced too slowly and relatively ineffectively, whereas hundreds of thousands of people were getting foreclosed very quickly from 2007 onward. So that initial program really didn't have a great deal of effect in Arizona. The one area which he mentioned I thought was affected was relatively late in the program, introduced late 2011, which was the refinancing program. And that did help a lot of -- I have friends who were helped by that, where they were too far underwater to get refinanced, but when that came, if the loan was owned by Freddie or Fannie they could get the refinance.
Ted Simons: Were some of the other programs, were they just slow to start but now they're picking up speed? Or were they slow to start and they faded?
Mike Orr: Sometimes they were too complicated, the banks had to cooperate. We had lots of people working in areas that they had never been familiar with. So we'd never really experienced this volume of foreclosures. This complexity. Often you're trying to get something like a short sale approved, you've got so different people that have to get agreement and none of them had done it before. So it just took -- When we first started short sales it could take a year to get everything lined up. And now we're actually pretty efficient at short sales, but they're starting to disappear. We don't have that many of them to do anymore.
Ted Simons: The idea of extending the time the unemployment can take as far as delaying payments, did that make a difference?
Mike Orr: I think they all made some difference, but relative to the scale of the problem, it wasn't really preventing the issue. And we've really had a lot of pain we've gone through, probably one in four families in Phoenix area have been through either a short sale or foreclosure in the last five years.
Ted Simons: When the president says the housing market is beginning to heal because of some of those initial programs, you grew with that?
Mike Orr: I think it's not the primary reason that it's healing. It's healing because of natural market forces. Most of the bad loans have been through a foreclosure or short sale don't exist anymore and the loans written since 2009 have been written to very high underwriting standards and are very unlikely to become delinquent. So eventually gone from a very poor quality loan situation to a very high-quality loan situation. And as a consequence foreclosures are dropping below normal as we go forward. And that's healthy for the housing market.
Ted Simons: Let's take a look at what the president had to say, we just looked at the initial programs, how they fared and his assessment, let's hear about some of his newer ideas. Here's the president again.
Barack Obama: I believe that our housing system should operate where there's a limited government role and private lending should be the backbone of the housing market. And that includes by the way, community-based lenders who view their borrowers not just as a number, but as a neighbor. So that's one principle. A second principle is, we can't leave taxpayers on the hook for bad decisions by some of these lenders or Fannie Mae and Freddie Mac. [applause] We've got to encouraging the pursuit of profit, but the era of expecting a bailout after you pursue your profit, and you don't manage your risk well, that puts the whole country at risk. And we're ending those days. We're not going to do that anymore. [applause] We should preserve access to safe and simple mortgage products like the 30-year fixed rate mortgage. That's something families should be able to rely on when they're making the most important purchase of their lives.
Ted Simons: All right. Your idea -- We'll start with the last one -- Preserving the 30-year mortgage. Make sense to you? Can you do it?
Mike Orr: I think all of the things he said there are actually good. They make sense. But getting there from where we are now is pretty tough. We've become almost addicted to government providing security and backing up the lending industry with guarantees or should be buying the mortgages from the banks when they're written. And it's got to such an extreme that about 80% of all the mortgages are being -- Involve government guarantees or being purchased by Fannie or Freddie. And weaning off that towards more private sector finance is going to take a lot of effort and thought.
Ted Simons: There are ideas regarding government -- The mortgage bond investors maybe paying a fee, so if losses do pile up the fee was somehow cover the losses -- It sounds like you're moving the beast from one spot to another. Is it feasible, is it likely, is it viable?
Mike Orr: It needs an enormous amount of willpower and determination, probably a lot of bipartisan support, too. So I'm a little skeptical that it can get done, certainly within Obama's term, or even in the next years. I do agree it's a good thing. I think we've swung far too far in terms of having the government involved in housing. Where I grew up in Britain, the banks lent the money, they took the risk. If the loans didn't work out that was the bank's problem, the government usually didn't bail them out. And I think we've got -- We had a big problem because the banks were lending and they knew they weren't really going to pick up the risk if it went bad. The government was going to cover a lot of that.
Ted Simons: The president did mention a senate plan, and the president did -- He wants a push to wind down Fannie and Freddie. First of all, were you surprised to hear that?
Mike Orr: I was surprised it came out so black and white. Unequivocal, saying we should get rid of them in time. I still don't see a clear path to achieve that, though. The -- If we lose them overnight, where are all the loans going to come from? The housing market would freeze up, all these people that -- He was talking about helping would not be able to get enough money lent by the private sector. So we have to be weaned off it. It's almost like a -step program from getting off an addiction. I haven't seen the first step yet, but I do think -- I'm encouraged everybody is thinking about it, because I do think carrying on as we are is not practical.
Ted Simons: Regardless of how fast we get there or maybe considering how fast we get there to weaning us these government-backed securities and such, impact on credit.
Mike Orr: Well, yeah. The free flow of loans to home buyers is essential to the housing market actually operating. And where do you draw the line in terms of -- Where do you draw the line in terms of the quality of the credit of the person you're going to lend to? At the moment I think most people would agree the banks are being fairly cautious. If you look at who's getting the loans, the people with credit scores of and above, not many people below that are getting approval and those that are having to jump through lots of hoops to provide documentation.
Ted Simons: Is that getting better?
Mike Orr: Very slowly. I think what the president was saying, this is where I would agree, if Fannie and Freddie and FHA can simplify their rules, get rid of red tape and get that down to a more normal level, we went from one extreme of two lax rules to very strict rules, I think there's a Goldilocks level we should strive to get to, where we're approving those responsible people and not approving the people who are irresponsible.
Ted Simons: I think some folks are looking for a Goldilocks level as far as price increases are concerned. Things are going way down or way up, right now we're going up.
Mike Orr: Right.
Ted Simons: How healthy are things? Let's talk about the Phoenix market.
Mike Orr: Well, appreciation is right about 20% at the moment over last year in terms of overall sales prices. That's pretty strong. But we're no longer the most extreme. Most of last year Phoenix was the number one in terms of sales price appreciation, but several other areas are moving faster than we are, particularly in California.
Ted Simons: Why is that?
Mike Orr: I think we started moving up first because we got through our foreclosure crisis first. But now other areas are doing the same and they have severe limitations on how fast they can increase their supply. Once the bank-owned homes are dried up, their only source of new supply is new builds. And if you're in somewhere like San Francisco or San Jose, there's not much land left to build on. Even if the builders want to build. Home prices accelerating like crazy in silicon valley, where not only have you got shortage of land, lots of people with good stock options wanting to buy houses. So it's very much a seller's market.
Ted Simons: As far as the Phoenix area is concerned, things settling down a little bit, and that's a good thing?
Mike Orr: We're still going to see home prices increase, but at a slower rate going forward. A little bit more normal, settled. But I -- I don't think we're going to see them come back down again from where they are now.
Ted Simons: Mike, good stuff. Good to have you here.
Mike Orr: Thank you.