All of the traditional news outlets seemed to be overwhelmingly optimistic about the prospect of economic recovery today after the Dow Jones Industrial Average crossed and then settled above the 10,000 mark for the first time in over a year.
Fueling the run up in stock prices today was the billions of dollars in 3rd quarter profits reported by a few of the large banks. JP Morgan & Chase Co.’s investment banking division pushed the financial giant to a $3.6 Billion dollar profit and such news gives rise to the hope of many Florida residents that the worst of the recession is behind us and that sunny financial times are just around the corner. Surely this newly rediscovered prosperity will translate into a visible recovery in a housing market overrun with FL foreclosures.
But before we break out the champagne let’s be sure to take a deeper look at the numerous weighty circumstances that may translate into continued decline in real estate values, increasingly tight lending standards, and other factors that could contribute to FL foreclosures continuing to be the single most significant factor influencing Florida’s housing sector for years to come.
1) “Phantom” Profits – sure the banks are reporting massive profits, but what’s the real story here? The South Florida Business Journal published an opinion from the Treasury Department which estimates that for every foreclosed property that has been processed and placed on the market for sale there are 9 more FL foreclosures still in the pipeline waiting to be taken back, accounted for, cleaned out, and assigned to a Realtor for sale.
Such dismal truths paint a harsh picture for JPMorgan stockholders. It would probably be wise for that company to sock away every penny of that reported profit to cover the tidal wave of losses that are headed for Florida’s shores.
2) Loan Modification Quagmire – back in 2007-2008 during the Presidential election race, the Democrats running for office were often heard to say that we had been lead into a “Quagmire” in Iraq. According to Dictionary.com, a quagmire is defined as “a situation from which extrication is very difficult”.
Such is the case with the massive number of loans that supposedly qualify for modification. Instead of seeing armies of success stories being heralded statewide by every media outlet as the cure to Florida’s foreclosure problem, we instead are told that only a small portion of the loans targeted for modification are actually seeing positive changes taking place.
This is due to the fact that unemployment is no longer this year confined to Michigan and Ohio, but instead has skyrocketed from coast to coast with the figure expected to exceed a 10% average before new jobs begin to pull that figure down.
While missed payments can be overlooked and late fees and penalties wiped clean when modifying a loan, common sense tells you that if you rework the mortgage of someone that is unemployed and not producing an income then all you’ve accomplished is to push the foreclosure sale date further out in the future. That leaves the bank with the unappealing prospect of doubling down on the eventual losses that they’ll ultimately realize after these “mercy mortgages” go bad for the second time. Such a cycle could easily extending the impact that FL foreclosures are having on the market for as much as 5 additional years!
In addition to this major hurdle are additional factors such as the overwhelming number of modification requests that are swamping every bank these days and the lack of communication that many troubled homeowners receive from their mortgage company.
Possibly one of the worst factors that has slowed the number of successful modifications to a relative trickle is the fact that most banks (with the notable exception of Homecomings and GMAC) are almost universal in their refusal to aggressively begin a systematic process of aggressive principle reduction across the board for troubled homeowners. This resolution is more commonly known as a Short Refi and it does happen for some, but those cases are few and far between.
These factors and others have sabotaged the government’s push to curb the problem at its source by making it a priority to find a solution before a house goes to the auction block. Loan Modification failures are directly related to the steady rise in the number of FL foreclosures which have swelled by 25% in the last year alone.
3) Alt-A Crisis – while the Subprime Mortgage Meltdown is considered to have been responsible for the foreclosure crisis and served as the kickoff for the recession, another batch of exotic loans known as Alternative A credit mortgages, or “Alt-A” for short, were being given out in increasing numbers right along side the subprime loans but only to customers with great credit who may not have met some of the other conventional lending qualification criteria.
An example would be a self-employed person that expenses out as much of their income as possible in order to save on taxes. This type of individual may very well be able to make some tweaks to how the money flows through their business in order to be able to make a larger mortgage payment, but as their circumstances left them outside of traditional Fannie Mae/Freddie Mac guidelines, they were not able to secure traditional financing.
Enter the Alt-A loan. Like subprime, these loans were often lent out without any income verification. Unlike subprime loans, which were usually adjustable rate loans with a 2 or 3 year introductory teaser interest rate, Alt-A loans were a mixture of 2/3 year arms, interest only loans, negative amortization loans, and a “Pick-a-Payment” type of mortgage known as the Pay-Option Arm.
These exotic mortgages traditionally came with a 4 or 5 year introductory setup which enabled the homeowner to pay only interest, or worse yet, less than the full interest amount resulting in a “negative amortization” scheme. In simple terms that means that for every month someone with one of these mortgages made the minimum payment on their loan, they actually owed MORE on the home than the month before!
To make matters worse, once the 5 year introductory term is up the entire loan structure reverts to a 30-year amortization meaning that the homeowner now has to pay back the amount financed plus any negative amortization amount in just 25 years vs. 30. This can often lead to payments not just increasing by a couple hundred dollars per month, but the new figure can often double!
Scary, I know, but this horror show doesn’t end there because it is currently estimated that there are over three times the number of these Alt-A loans as there were subprime and the amounts financed tended to be almost 50% more than the average subprime loan.
Those who are excited about a housing recovery based on the current stock market trends need to know that the major flood of Alt-A loans began to mature out of their “affordable” introductory terms in the fall of 2008 with these loans which are due for adjustment not being expected to peak until the end of this year.
Right now the Alt-A Mortgage Meltdown is set to eclipse the subprime mess. If it took a full 24 months after the collapse of the subprime industry was finalized before experts considered the fallout as being mostly contained then a repeat of that pattern with the Alt-A group of mortgages will mean that there won’t be any real change in the number of FL foreclosures being processed each month until the year 2012!
4) Lack of Investor Funding – a traditional concept help by the mortgage banking industry is the idea that a person will pay for the roof over his head before he will pay for the roof over his tenant’s head. Thus mortgage loans on investment properties are considered higher risk than those on owner occupied properties.
In a day and age when risk is anathema, banks have made it prohibitively hard for investors to buy rental properties in large numbers even as the number of people whose credit has been ravaged by job loss and foreclosure has increased exponentially. More people than ever need to rent homes but investors (even those with good credit and a good job) are limited as to how many mortgages they can have at one time.
An easy way to reduce the number of homes on the market in a short period of time is simply to allow low-risk borrowers to purchase investment properties with 10% down or less and remove the limits on how many mortgages they can have at one time.
Investors would then purchase FL foreclosures en masse causing the stock of vacant properties would dwindle. Even taking the Alt-A problem into consideration, values would most likely stop their decline and remain steady instead of continuing on a consistent decline.
5) Foreclosure Fatigue – we may all know of some shrewd individual that realized that he owed $425,000 on a house worth only $210,000 in today’s market and decided to let the house go back to the bank; perhaps after buying a similar house at the lower price with a mortgage in the wife’s name.
Some of us recoil when these stories come out, feeling that they violate our moral code. We wonder how people can so easily forsake their word, their promise to repay in such a openly devious way. Others feel that such idealism is ill placed when you consider the multiple bankruptcies that well known, wealthy business men like Donald Trump have used to get their own real estate investing businesses out of hot water. “It’s not personal for the rich, it’s just business…so why should it be any different for me?”, right?
Whichever side of this argument you fall on doesn’t really matter. What DOES matter is that the longer prices continue to fall, for any number of reasons, the more we’ll see people giving up on clinging to their moral high ground, letting the home go back to the bank while they either rent or buy a similar house (or even a better house) for far less of a financial obligation.
All indicators point to the fact that the current state of affairs can only continue for so long before the number of people who decide to “Buy and Bail” increases sharply resulting in more FL foreclosures.
The number of people living day-in-day-out in “imminent default” has evolved into an underground phenomenon. There is no way to track them or make an accurate guess as to how many Florida homeowners are giving serious thought to such a course of action at this very minute.
6) Failure of FHA – a recent review of the current state of the FHA lending program by Ian Cooper of iStockAnalyst.com points to the possibility that FHA will run into a situation where they need another government bailout in order to avoid a total financial collapse.
While Florida is not as reliant on FHA funding as many other states due in part to the number of houses that are bought as second homes, vacation homes, or investment properties vs. being purchased as a primary residence, FHA is still a major force in the Florida real estate market. Of major import is the fact that FHA loans are virtually the only consistent place people can turn to when they want to buy a house but don’t have a significant amount of cash available for a down payment and closing costs.
The FHA program has taken a beating over the past two years in line with traditional banks because of the record number of FL Foreclosures that have had to be absorbed by HUD when the underlying FHA loans went into default.
In conclusion, I hope that I’ve successfully scared off the financial rainbows, sunbeams, and butterflies that the media is now prone to propagate whenever a shred of positive economic news comes to light. We’d all be wise to look at the army of darkness assembled against us just over the horizon before we declare victory. Don’t let yourself be the one that starts singing the songs of recovery prematurely.
The final verdict is that if any one of these 6 major problems does not find a solution quick, then the number of FL foreclosures that could flood the market in the very near future might closely resemble something akin to a Biblical plague.