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Bailout Won’t Fix Housing Crisis, Real Estate Pros Say

The financial panic that triggered global market sell-offs and brought Iceland to the brink of bankruptcy last week can be traced back to homeowners, who for one reason or another, defaulted on their mortgages.

While the $700 billion bailout contains some provisions for homeowners in distress , for instance, modifying interest rates on home loans for hardship circumstances , real estate professionals say interest rate reductions won’t solve the housing debacle in Southern California, where property values have fallen by one-third since 2005.

“The only way out of this market is that all of these foreclosures and short sales have to get washed out,” said mortgage broker Matt Battiata of Battiata Real Estate Group in Carlsbad.

Saving several hundred dollars a month will do little for homeowners in San Diego who can’t make payments on a $600,000 mortgage for a home worth $400,000, says Battiata.

If they can’t get a bank-approved short sale , which allows owners to sell their homes for less than the mortgage balance , they’re forced to walk away. The home falls into foreclosure, leaving a blight on the neighborhood and the bank with a nonperforming loan.


Preserving Neighborhoods

Battiata, who says he has six sales agents “hammering away” at banks to return calls, says short sales at least allow banks to recoup some of their debt. They also keep neighborhoods from deteriorating, whereas foreclosed properties sit empty for months. The lawn may be unkempt. Some homes get vandalized.

“I suppose one thing is: The bailout bill will give banks money to hire enough loss mitigators and negotiators to get these short sales through,” Battiata said. “These guys have a couple hundred files on their desk. They’re overworked, undertrained and completely overwhelmed.”

Sen. John McCain, R-Ariz., during the Oct. 7 presidential debate, proposed lowering mortgages to current market value.

Battiata says that, too, would have unintended consequences, penalizing those who put equity into their home on the front end.

“If I can just call to get that balance reduced to whatever the market value is of my home, you’re going to be pretty upset that you put your own money into your home,” he said.


Political Posturing

Local mortgage broker Mark Goldman says the financial bailout is loaded with political posturing toward homeowners.

“At least they tried,” said Goldman, a San Diego State University lecturer. “When Treasury Secretary (Henry) Paulson originally came to Congress, he said, ‘Give me the money.’ He did not want to report to Congress and was immune to any prosecution.”

Congress rejected an initial draft of the proposal. It demanded provisions to prevent excessive compensation for executives and added other provisions, such as tax incentives for alternative energy and increased Federal Deposit Insurance Corp. limits on bank accounts.

“Instead of asking questions about what to do with the money or how to fix the problem or what is the problem, they said, ‘We need to look like we’re going to help homeowners,’ ” Goldman said.

What’s causing values to plummet is lack of affordability , a combination of falling income, tight credit and no expectation for property appreciation, he says.

“Where is the bottom going to be?” Goldman asked. “Equilibrium will occur when housing gets down to an affordable level, which is a function of financing.”


Regional Focus

Jim Bliesner, executive director of the San Diego City-County Reinvestment Task Force, which leverages investment for housing, says solutions should be tailored to each region, instead of a blanket approach out of Washington, D.C.

“I’m recalling days of the RTC and what it did to the property values,” he said, referring to the Resolution Trust Corp. formed in the late ’80s during the savings and loan crisis to liquidate assets of bankrupt thrifts. “It will just prolong the economic decline of property values and resale opportunities.”

Dumping all of the bad mortgages on the market, for example, would lower home values universally, he says.

“Everything is based upon comparables when you get into appraisals so if the RTC sells a house down the street for $100,000,” he said, you’ve lost the market value of your home.

Bliesner says the government should turn the homes over to a network of asset managers and mortgage holders, who can manage the sales slowly.

“Most investors have multiyear strategies,” he said. “I would make the pitch to sell them to us at a San Diego land bank. Either way, the solution needs to also focus on the homes themselves.”

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