Tuesday, October 20, 2009

U.S. Senator Johnny Isakson (R-GA)
Hearing on the State of the Nations Housing Market
Banking, Housing and Urban Affairs Committee

ISAKSON: Well, thank you, Chairman Dodd and Ranking Member Shelby and other members of the committee. I appreciate the opportunity to be here. Quite honestly, I've never been on this side of the dais before. It's really a treat. And I'm not learned enough to write for Brookings or do analysis for Heritage, but I have 33 years of experience in the business actually doing it. And I do have some comments, I think, that are relevant to the housing market.

You know, I started in 1967 in the housing industry.

An average sales price that year for me was $17,900 -- all FHA and VA houses. In 1968 the first recession that I experienced took place in housing when the FHA 235 no down payment sweat equity program collapsed and foreclosures proliferated around the country.

In 1974 I was a branch manager for a company when the biggest housing crisis prior to this one actually took place. And the solution to that housing tax credit was a tax credit. Congress passed a $2,000 credit for anyone who bought and occupied as their principal residence a standing vacant house. There was a three-year supply of standing vacant inventory on the market at that particular period of time.

Later on I became president of the company in 1981 when we had the triple misery index: double-digit inflation, double-digit unemployment, double-digit interest rates. In fact, I actually sold houses with 16.5 percent interest on the houses and negative amortization on the loans to get the payments to an affordable level.

And then finally in '90, '91 after the collapse of the savings and loan industry and the creation of the RCC, I was in the business running that company and went through those difficult times. They were all bad, but they were nothing like times are today.

In 1995, I was asked to serve on Fannie Mae's advisory board, so I have some experience in what happened at Fannie Mae in the late 1990s. And I retired from real estate in 1999 and came to the Congress of the United States of America.

In my 33-year career, I experienced four difficult recessions, but nothing like the collapse we have today. Our nation's facing a total collapse in new residential construction and development. And this fact, combined with the unemployment rate and the highest sustained foreclosure rate since the Great Depression, is having a terrible effect.

I'd like to refer to the first chart. Put that first one back up, if you would.

This chart -- these are all -- this is all from Smart Numbers, which is a company in Atlanta that does all the analysis for the lending industry and the real estate industry. But in the metropolitan Atlanta 23-county MSA, you see the beginning and the latter part of 2006 and accelerating, if you see the orange bar, that's the median price decline of housing over the last 3.5 years.

That last level is the first quarter of this year, where housing was -- the average price of houses were down 27 percent. Mr. Chairman, in my state prices are down between 20 and 40 percent.

And if you'll put the next chart up, I'll give you one example of what's happening to housing and Atlanta and in most major SMSAs around the country.

This is the house that sold in 1993 for $216,000 in Clayton County, Georgia. It re-sold a couple of times in between, but after 533 days on the market, on the 22nd April of this year, it sold for $136,500. Now, that's a house that 15 years earlier had sold for $216,000 to give you some idea of the draconian drop in terms of housing values.

Why is this happening, you might ask? Well, it's happening for two very important reasons. One is the unemployment rate. There are people who are losing their jobs and having their houses foreclosed on. But quite frankly, it's happening because the incentive to stay in the house doesn't exist nearly like it used to.

Mr. Chairman, if someone bought a house in 2002 in Atlanta, Georgia, with standard financing 90 or 95 percent, statistically the odds are their houses worth less than what they paid for it. That means people are looking at a monthly payment, they're looking at the value, and they're finding it easier to walk from that investment and let it be foreclosed than stay and manage the house.

This is the Marietta Daily Journal, which is my home county, and I brought this from Friday, and I'm not going to enter it into the record, because it would waste too much government money printing it, but there are 68 pages of foreclosures in one county in metropolitan Atlanta -- 1,157.

When you read the foreclosure addresses, it's not the subprime locations. It's not the lower end housing. It's mainstream America. It's the move-up marketplace where these houses are now being foreclosed on. And that, quite frankly, is a crisis.

I would like to enter for the record an article that appeared in The Atlanta Constitution, yes, Sunday's paper, the title of which, "My $290,000 Home Is Worth What?" about a family who bought a house, paid $290,000 for 10 years ago, remodeled it, had it reappraised to refinance, and it reappraised for $115,000. This is the type of experience people are seeing all across the country, which is causing a serious erosion in confidence.

Quite frankly, Mr. Chairman, and I think you know this, most people's equity line of credit is the equity in their mortgage. And money market accounts and secured equity lines of credit, where most people have sent their kids to college, have financed substantial purchases, that value is not there anymore. With credit cards down, with housing values down, middle America is really stretched, and they're stretched to the core.

I'm asked oftentimes, "Well, Johnny, how long do you think it's going to take to get out of this? You went through four of these." My answer, reluctantly, is five years or longer unless Washington does something.

One is a tax credit. I appreciate the comments of the chairman. I appreciate the chairman's support for the $8,000 credit and for its extension now. I believe it's important, as we look at the current termination on November 30th, to consider what's going to happen if we don't extend that credit.

What's going to happen is you're going to go into the three worst years -- months of the year in housing sales, December, January and February, where the only incentive out there for a normal sale to take place is gone.

Now, I'm not a believer in -- in extending the tax credit forever. In fact, its scarcity or its sunsetting is actually an incentive to drive people to the marketplace. But it needs to be extended, and it needs to be broadened in the following ways.

One, it should be broadened to any homeowner who buys and occupies it as their principal residence for three years, as long as their joint family income is no more than $300,000. That -- that covers most of the move-up market, and it brings a lot of Americans to the marketplace that is sitting on the sidelines today. It will have the effect of stabilizing home values, and then on their own velocity as business returns, they'll be able to build back.

If we don't do this housing tax credit, in my personal opinion, and extend it through midyear next year and take away the first-time homebuyer means test and raise the income qualification, we will have a dramatic and awful situation in the United States of America from which recovery is going to be even more difficult than we've experienced already.

There's a second thing we need to do as well. And with all due respect to the FDIC and the tremendous stress that they're under, the draconian interpretation of FASB Rule 114 in mark to market and community banking is having a terrible effect in terms of liquidity, in terms of credit availability, to potential developers and potential borrowers around the country.

And unfortunately, many of the AC&D (ph) loans, the acquisition, construction and development loans to build subdivisions, which are main portfolios on the asset side of the balance sheet of most community savings and loans, or most community banks, are being driven down by mark to market so much so that the bank is constrained in its capital, has to raise its loan loss reserve, in some cases recognize as losses that really haven't existed.

In 1975, right after the '74 crisis, the same thing took place. And after a short period of time of massive foreclosures on these acquisition and development loans, the banking community turned and started to make their debtors their partners.

Now, granted, bad loan should be foreclosed on. But in real estate over time you can work your way out of many situations, and I think it's critically important that we try our best to work our way out of the lot inventory that stands out there today, rather than for closing on it and bankers becoming the owners and the operators, which historically they've done a very bad job of doing.

I'd like to show you the third chart to make this point, and then I'll close. This is a little bit misleading, because it looks like things are improving, but these are the 23 MSA counties in the metropolitan Atlanta MSA, and that -- the -- the bars reflect the number of developed lots on the market unsold in those markets.

Bartow County, which is the highest one, has a 360-month supply of developed lots. Mr. Chairman, that's almost 30 years. The biggest counties in metropolitan Atlanta -- Fulton, Gwinnett, Cobb -- have supplies of six to 12 years. The average of the metro market, when you put them all together, is it 10-year supply of developed lots unsold, sitting vacant.

That's the loans of that I'm talking about, and that's where the partnership between the banking people that have the loan and the developer who has the debt can hopefully help us to build out of them, rather than have the effect of the short sales taking place on those lots, which further depreciates the value of housing.

I appreciate very much the opportunity to be here, and I have tremendous respect for this committee, the chairman and ranking member and all the other members, Senator Corker -- I'm very aware of his experience in the real estate industry. And I look forward to answering your questions.

But I will tell you this. History is a great teacher. There are things in the past this country's done that worked, and there are things that didn't work. The housing credit of '75 brought this country from the second worst housing recession ever. The extension of this credit, I think, will be the foundation to do so as well.

And when we turned the corner and stabilize the bottom in terms of home values, employment will improve, lots will begin to be absorbed, and our economy will get back on its footing, and we'll get back to the prosperity that all of us hope America enjoys sooner rather than later.

And, Mr. Chairman, I appreciate the opportunity to testify.

DODD: Senator, thank you very, very much -- and very eloquent testimony again, based on a lot of personal knowledge over the years, which is very valuable, I think, to the committee.

A couple of just quick points I want to raise with you, if I could. One is about the move-up market. And I'm worried in a way, because we were talking before the committee started the formal hearing this morning, and -- and it occurs to me that the first-time homebuyer -- and again, I'm painting with a broad brush here -- but that first-time homebuyer, usually it's a stretch when they're buying that home first time. So the likelihood that they are going to go out and furnish that home or to do major repairs to it is in many cases you're just trying to get in there. You're living on a futon in a -- in a bare bones deal, because you -- you got that house, and you live it, and you're trying to make ends meet.

It's that move-up market where you start to get what I call sort of a ripple effect that is always so important in housing, and housing and autos being such a major part of our recovery historically, but those people then buying those carpets, buying those furniture, hiring again that carpenter or whatever, putting that extension on the home is more likely to occur in a move-up market than it is in a first-time homebuyer market.

At least that's -- that's the impression I have. And I wonder if you'd pick up on that point, whether or not there's a legitimacy to that point about the move-up market, which is what we are talking about here, going beyond the first-time homebuyer to the -- to that move-up market.

ISAKSON: Well, the chairman makes an excellent point. If you look at the sales of the first-time homebuyers, they are generally at the lower end of the market price range. They're at entry level pricing and housing, somewhere $150,000 to $200,000 in most metropolitan markets.

But the move-up market is absolutely dead. I'll tell you a couple of stories recently. A Pulitzer prize-winning writer from Atlanta was transferred to Washington. She's a very good friend of mine. I had lunch with her a week ago. She complained that she had to rent her house in Atlanta and rent a house in Washington, because she couldn't sell her house in Atlanta because it was in the move-up price range of $300,000 or $400,000.

Mr. Chairman, I hate to bring this up, but it's the best example I can think of. When UPS left Connecticut and came to Atlanta, Georgia a number of...

DODD: Thank you, Johnny, for talking about it. (LAUGHTER)

ISAKSON: ... and came to Atlanta, Georgia, a number of years...

DODD: I'd give a better example around here.

ISAKSON: I knew it would hit home, but it works both ways. But the point I want to make is I handled that relocation for the UPS Corporation. They could not make that move in the climate today, because the houses in Connecticut would not have sold; therefore, the people moving could not have bought in Atlanta. And there are moves out of Georgia to other parts of the country where the same thing is true.

The corporate relocation market is basically dead. Companies -- companies don't know where the bottom is, so they're scared to offer their transferee, who they're trying to move to wherever they are, Hartford or wherever, a buyout on their house, because they don't know where the bottom is. The banks won't finance it. The lines of credit are nonexistent for corporate relocation. So the heart and soul of the American housing market is still sitting on the sidelines.

DODD: Yes. I thank you very much.

Senator Shelby, any comments or any words?

SHELBY: Yes, I just want to commend him for his testimony and his -- giving us his -- his 30-something years of experience in the business.

Senator, we all know -- and, gosh, you know it better than we do, probably -- that the housing crisis is real. It's not getting better. You know, you might read the -- the Case-Shiller Index, but overall it's not getting better everywhere, and we got to do something. But we got to score all this, and we've got to see -- see what it does, because if we don't do something, we're damned, and if we do something, we might be damned, so let's figure it out right. And I know you will.

ISAKSON: Well, in response to that, I -- and I'll get my staffer to submit it for the record -- but we have a CBO score on the extension that Senator Dodd and I have proposed.

SHELBY: OK.

ISAKSON: That score is $16.7 billion, if the tax credit is extended to June 30th. And I'm perfectly willing to find pay-fors in the system to pay for it, but I would make this point quite clear. Nobody argues that the tax credit has worked. I mean that's why there's interest in extending it.

SHELBY: Absolutely.

ISAKSON: Of all the trillions of dollars the Federal Reserve has spent, of all the hundreds of billions of dollars Congress has appropriated, the one thing we can reliably point to that's made of positive change for the country is the tax credit. And it's the smallest expenditure of all those things that we've made, so relatively speaking, I think it's important for us to find a way to finance it, because I think it's our way out.

DODD: Well, I don't -- I don't disagree with...

SHELBY: We're all going to be better off, if we can get housing back on moving again.

DODD: And I don't disagree. If we can find a pay-for, I'm all for it, because we've seen over the years we've had a lot of -- we've had a lot of tax cuts in the past, but we haven't had offsets for them as well, where they've made a value. This one is so important, in my view, that it deserves special consideration.

Senator Tester?

TESTER: Yes, Senator Isakson, welcome. You -- you -- if you could pull back into your database, you said in '74 there was a $2,000 tax credit for vacant houses. Could you give me an idea on if -- if we're talking about the same thing here, because it appears to me to be -- that would be a little more confining. And -- and did that work? And how long did it last for?

ISAKSON: Well, it's a great question, Senator Tester. The -- and Bob Corker will remember the Butcher brothers and some of the banking -- liberal banking that took place in the -- in the 1970s.

What happened was a three-year supply of new construction on the market. I mean if you had a pickup truck and a hammer, you could get a construction loan, whether you were qualified to build a house or not. And metropolitan Atlanta was one of the poster children for just a entirely overbuilt market.

ISAKSON: That was the problem in most of the country. It wasn't resale. So that's where the tax credit was focused. And it was for a year. It was for the purchase of any standing, vacant house -- not an occupied house.

And things have changed a lot. There are not a lot of new houses sitting on the market now. They've been sold, foreclosed on, taken over. The plethora of houses on the market today are residential resale houses that families live in Montana and Georgia that they can't sell for what's owed on them. That's the problem. And the further complication of that problem -- they've lost their equity or substantially most of their equity, which means they've lost most of their net worth. And they've lost most of their ability to borrow.

It's the single biggest compounding effect on the consumer confidence level of anything that's going on. And until we turn it around, there's not going to be consumption necessary to have a vibrant economy.

CORKER: I'll be very brief. I -- I know that this issue will be debated and I know pay-fors will be looked for. And I just want to say we've had senators testify in various committees. I don't think I've ever witnessed one that is more grounded in knowledge and with greater clarity. And I just want to say to Senator Isakson that the people of Georgia have to be awfully proud. And I thank you for your great testimony today.

ISAKSON: Thank you.

DODD: Thank you very much.

Senator Merkley?

MERKLEY: Thank you, Mr. Chair.

And one thing I wanted to ask you about is, you noted in your comment that you don't support an extension of a credit on a permanent basis.

And I just wanted to ask you a little bit about that. Many, many years ago when I was working for Habitat for Humanity and working with low income families, when they would buy a house, they would often get no value out of the home mortgage interest deduction, which was a major subsidy for the purchase of a home, because they earned very little money. And they were buying very modest houses. And so the interest didn't exceed the standard deduction or if it did, just did just barely.

And so here we had a program that at that time was a $70 billion a year program. This is probably 20 years ago. And low income families were getting virtually no help to buy homes. And I thought at the time, "Boy it would be -- it would make sense to have a tax credit as a base for home ownership in America, because then we would be helping all families, not just more affluent families buying larger houses.

Is there any case to be made for a permanent extension at some lower level of a -- of a tax credit for first time homebuyers?

ISAKSON: Well, that's a good question. There might be a case in a narrow focus, but I would personally think you would lose all the value of the tax credit if it became a permanent accepted credit in the general marketplace. The -- one of the benefits of the tax credit is the -- is the certainty that it's gone at a date certain.

You're going to hear some testimony in a minute from a couple realtors who will tell you that right now in America every real -- contract for the purchase of a house that is written has a contingency in it. And it says, "This contract is contingent on this property being able to close by November 30th, 2009." The reason for that is, if it goes past that the tax credit goes away and they don't get the incentive.

So the sense of urgency of having a sunset is very important in the marketplace. But I -- and in answer to your question, it might be targeted at the low end. In certain cases it might make a difference, and that might be something to look at in terms of helping people as Habitat has helped people get into houses. But I would not in general favor a tax credit that became an accepted norm in terms of housing.

You need a normal marketplace that's ebb and flowing with demand and supply where knowledgeable buyers and willing sellers are -- are out there in great numbers, which we don't have today. But it's a -- it's something to consider at maybe the low end or in a targeted special market. But I would not say across the board, no.

MERKLEY: Well then let me ask you one other question about the -- the model that's being put forward. As I understand it, the vision that you're suggesting would expire -- the tax credit would expire June 30th of 2010?

ISAKSON: Correct.

MERKLEY: Which is going to be here so quickly. And so it will be the middle of next year. I think we're in a long recovery. A long recovery will have a lot of triple option loans that are -- are kicking up and driving foreclosures next year. We've got -- on the commercial side we've got a tremendous number of seven year balloon loans that are going to be -- companies are going to have difficulty rolling over.

So I think we're still going to be in -- deep in the woods if you will the middle of 2010. Will it really be feasible at that point to have a significant tax credit disappear in the middle of the year? Or would it be better to have it at some more modest level and extend it through the balance of 2010?

ISAKSON: I've learned a long time ago in government that legislation is about the art of the possible. And I think the art of the possible is very -- better than the improbable. So it's improbable that this body or that this administration would support an extension longer than June 30th or greater than $8,000. I've done a lot of talking with the administration and economists and with a lot of you all.

And so it's the art of the doable and the art of the possible. But let me make a point here that's so great. Real estate is an interesting dynamic. And once you have a confidence level in values, you will recover relatively quickly. And by a confidence level in values, what I mean is a buyer feels comfortable about the price they're paying. And a willing seller is able to accept it because it's competitive or it's fair.

We don't have that situation right now. You have willing sellers who are just getting out -- walking away. And you have knowledgeable buyers who aren't quite certain where the bottom is yet and they're sitting on the sidelines and this is particularly true in the move up market. So it's -- I think if -- I do think the tax credit extended to June 30th will accomplish three things.

Number one, it will take us through the three worst seasonal months of the year in real estate sales historically, and that's December, January and February. Number one.

Number two, we'll enter the best four months of the year which are March, April, May, and June which is the spring market with some velocity and some movement. And values will have stabilized, so people will come back to the marketplace. What's going to happen on November 30th of this year is the market is going to die a sudden death, because the only impetus that exists is a credit for a narrow band of buyers being the first time homeowners.

And with still the uncertainty as was put in by this article that I entered into the record, you're not going to have people coming back. But if we can extend it through that June 30th date, go into the spring market of next year, I think you can stabilize the values at the bottom and the market will bring the values back, once people have a confidence level in those values.

MERKLEY: Thank you very much for sharing your expertise with the committee.

ISAKSON: Always happy to have my neighbor here. Thank you.

DODD: And that point you made just -- made about coming to those three best months I think are very, very valuable. And that's why I think -- and maybe not the June 30th deadline -- if you can get something on the -- get this really an engine moving, those three months can really help as well.

Senator Bunning?

BUNNING: Thank you. Good to see you, Johnny.

ISAKSON: Thank you. Congratulations on the Phillies winning.

BUNNING: And boy oh boy -- how they won was more important.

Let's get back to the housing market. The original plan that you proposed was a $15,000 tax credit for new and existing homes. Is that correct?

ISAKSON: That is correct.

BUNNING: And we were able to do only the $8,000 new only housing...

ISAKSON: No. It's new or resale, but it's first time homebuyer only.

BUNNING: It's first time home buyer. But that really limits the market.

ISAKSON: Correct.

BUNNING: Remember the, what did you call it? The step up?

ISAKSON: Move up.

BUNNING: Move up? Move up market? Those are not necessarily first time home buyers. Those are obviously people that were in their house and are looking to move up in the marketplace.

The proposal you have before the Congress presently is a renewal of the $8,000 tax credit. Is that for move up and new buyer -- new home buyer?

ISAKSON: Yes, sir. What I've done is Senator Dodd and I and Lieberman and others who were sponsors of it, we will remove the first time home buyer qualification or means tests. So it's for any buyer.

BUNNING: Any buyer?

ISAKSON: As long as they're going to occupy it as their principal residence for at least three years. It's not for investors. It's not...

BUNNING: No. No, no. This is -- this is somebody who wants to live...

ISAKSON: Yes. And also the current tax credit -- you're limited to an income for an individual of $75,000 or a couple filing jointly $150,000. We raised that limitation to $300,000 for a couple filing jointly to accommodate the incentive for the move up market.

BUNNING: OK. Well I think it's absolutely necessary and being in finance, as I was for 30 some years, if you don't have a stable housing market, and the equity and the wealth or whatever you want to call it that's in the housing market for the people who own those houses, you don't have a stable financial situation.

And you are absolutely right. We have to stabilize the home buyer's market. And in so doing we may -- we might even stabilize the credit markets. Because those are a direct result of the home markets -- home buyer's market not being stabilized. And if we can do that, and find a bottom -- I don't care where the market -- the stock market is. I don't -- because we are still a long way from stabilizing this economy.

And if we can do it with that kind of incentive rather than throwing Federal Reserve money and TARP money and all the other money we have thrown at this economy to try to stabilize it, this stabilizes at the bottom -- the basic economy that we have to stabilize -- or else we're not going to be able to come out of this thing in a normal fashion like you did in 74 or 75 or whenever.

We have a business cycle that takes time. And this one is a lot deeper than most of them. And I hope and pray that we are able to do this in a reasonable fashion. And if necessary pay for it like we did on other occasions. We have to find pay for's on -- to do things for the American people.

So I wish you good luck with your -- your legislation, John, because I think it's the basis on which we will start forward.

Thank you.

ISAKSON: Well I thank you.

And there's one thing that you said that should be underscored. There is a direct absolute correlation between home values and consumer confidence. And one of the reasons you have a declining retail marketplace right now, and the problems you're seeing in the retail industry, shopping centers, commercial loans, is because we've got a very low level of consumer confidence. And stabilizing housing and building those equities back will bring that back quicker than anything.

DODD: Senator Bennet?

BENNET: Thank you, Mr. Chairman.

I would just say returning again this week from Colorado was a reminder that for our working families this economy is still nowhere near appearing to get better. And I think proposals like the one that Senator Isakson are making are critical to moving this forward.

I just want to thank you for being here and sharing your expertise. It's wonderful to hear from somebody who actually knows what they're talking about. So thanks for being here.

ISAKSON: Thank you very much.

DODD: Senator Johanns?

You might want to stay here all day getting all these compliments to you.

JOHANNS: Getting a lot of compliments, but well-deserved.

As I thought about the charts that you put up there, Senator, it occurred to me that we could build those charts in just about any market in the United States -- really in any market in the United States. And it's hard for me to imagine that you get recovery -- economic recovery unless you start to see some lift in the housing market.

So I really don't have any questions for you. But I did want to indicate I like what you're doing. Very anxious to work with you to try to get this done. I believe it's a step in the right direction. Quite honestly, I wish we could do a little bit more. But I appreciate the reality of the economic circumstances we're dealing with also, and budget issues. But be willing to help in any way I can to try to get this to the finish line.

ISAKSON: Well thank you very much, and I appreciate all the kind comments. And I'll add one closing remark. I neglected in my testimony to mention one other change that we put in this amendment. Senator Shelby and Senator Bunning both I think will be interested in this.

The original tax credit -- if a veteran...

JOHANNS: Yes.

ISAKSON: ... or a member of the armed services used the tax credit, but they had to sell the house within the three year period of time of eligibility they had to pay it back proportionately, we waive that provision for any member of this armed services who's deployed overseas if they are forced to sell because of that deployment. It will -- it's a small number of people, but they're the number one people in my heart. And we don't need them penalized just because they are defending our country.

I also want to thank the committee, thank the chairman, and the ranking member. It's been an honor to be here today, and I enjoy serving with each and every one of you.

DODD: Thank you, Senator.

And our -- the co-sponsorship -- this bill is available to members. And Senator Isakson will welcome anyone who wants to join us in this effort. And we hope to get it done in the next few days.

ISAKSON: Thank you, sir.