Local Mortgage Foreclosure Rates and Sub-Prime Loan Issues

This article was submitted to the Community Action Agency Board of Sarasota County:

Statistics speak volumes in understanding the foreclosure rates in the Sarasota – Manatee area.

Foreclosures 1/1/2006 – 9/10/2006: 716
Foreclosures 1/1/2007 – 9/10/2007: 2560
Percentage Increase 357%

Sadly, the news is likely to get worse, as lenders are letting loans go longer in default before the Lis Pendens is filed with the Court commencing the foreclosure case. Lenders have delayed foreclosure in some cases because of the accompanying FDIC requirement that such loss be adequately reflected in reserves. While speculative, it is estimated that foreclosures will increase in the next 6 – 12 months as lenders have no option but to pursue foreclosure.

The Sarasota market was most greatly affected by the pyramid of growth in housing prices that occurred between 2001 and 2006. Investors rushed into the area because of the 23%+ housing cost growth rate, buying and selling properties in a virtual frenzy. But like most pyramids, the pinnacle is reached and those left holding at the top are now suffering the consequence. Although unable to find quantitative data, many of the foreclosures now reflect those investors’ losses. Many investors left holding have decided not to spend more money in holding cost when they found themselves unable to resale or lease the property. They have good credit, but make the business/investment decision not to continue to feed a now bad investment. Some of the foreclosures reflect the problem of adjustable rate mortgages now increasing. And some also reflect the kick-in of the higher property taxes after the first year of purchase. And more sadly, some of the foreclosures reflect a reduced job market when building industry jobs, such as Realtors, mortgage brokers, construction workers, and property service-oriented jobs had to be cut. Those families now struggle with the ramifications of re-education and re-employment in perhaps lower paying job sectors. Unable to sustain mortgages based on former pay, they must let go and find rental housing, return North, or find family or government support.

The world credit markets are reflecting these same concerns. Since August 8, 2007 world financial markets have been pumped with more than US$400 Billion of liquidity to prevent the collapse of world markets. In the United States, this infusion of capital is the Feds’ first since September 11, 2001. Half of the amount is from the European Central Bank, reflecting the fact this issue is not confined to the United States. The concern is that even if this artificial infusion of cash succeeds in calming the markets, will it have any long term effects on the economy? In other words are we just postponing the inevitable recessionary spiral?

Bill Jamieson of Scotsman’s Guide (the professional bible of the mortgage industry) commented that “Estimates of losses on poor quality (sub-prime loans) now stand, on Bernanke’s own reckoning, at $100bn. Other estimates range up to $300bn. And the shock waves have extended to giant Wall Street investment firms such as Goldman Sachs, which announced last week that it was pumping $2bn into one of its struggling hedge funds.”

Jamieson continued, “The worry is that it appears to let the wild hedge funds and leveraged private equity promoters off the hook while keeping the screws on US households and consumer lending and spending.” (emphasis added). In other words, there is a “too big to fail mentality” and some companies have deftly used infusions of capital to create insider-trading-like bailouts. The latest example is the $2bn bailout of Countrywide by Bank of America. Countrywide was priced at $15 per share, yet after the bailout shares jumped more than 20% in “after-hours” trading. Who gets to trade during “after-hours” time period? The big banks like Bank of America, of course. Further, one needs to consider whether Bank of America was encouraged or even given concessions by the Fed to make this infusion.

There are also serious allegations that hedge funds that were purchasing subprime mortgages, did not properly disclose the risks of such investments. Hedge funds operated by Goldman Sachs that purchased subprime mortgages, which would generally be seen as a much higher risk investment, were rated high in comparison to the investments made by the fund. So the ratings process is now being called into question, and investigations are being called for to determine whether collusion existed by the rating company and the hedge fund managers.

The effect of the large bail-outs and the ensuing turmoil has left the normal lender skittish about extending additional credit, even to prime customers. Prime customers with credit scores above 600 will have to jump through more hoops, while any jumbo loans above the $417,000 limit for automatic purchase, will have characteristics of subprime mortgages due to the apparent additional risk exposure.

The subprime customers will have basically three choices: 1) unaffordable conventional financing, which is likely to price most borrowers out of the market because of the higher expectation of yield, 2) a return to seller carry-back financing, or 3) no purchase at all and an overall failure of the American dream. Subprime borrowers will generally not qualify to purchase a home under FHA guidelines because of past credit history requirements, including issues of bankruptcy, late payments, foreclosures, collection, judgments and Federal debts such as for tax liens or student loans.

In an informal survey of owner-carry back note payors, the inability to pay medical bills is the largest reason why a person has become subprime (letting a credit score fall below 600). If an American falls ill or a family member falls ill, and neither has sufficient or health insurance, it is very likely that they will join the ranks of the subprime payors. In order to repair the system, one may need to look at what is reported on credit reports. Should we always judge a person’s ability to pay based on their ability to pay for medical bills? Should medical bills be considered an off-credit report liability? Further, if the subprime person has been paying his/her rent and utilities on time, should not the credit bureaus be REQUIRED to report that good payment behavior to offset the those creditors that do report?

As for the Florida market, noted Economist Hank Fishkind, stated that he believes “the market reached a bottom a few months ago.” Fishkind based his statement on treads in real estate statistical releases, stating that “things may not be great but there’s also no indication that they’re getting worse.” The press release issued by the Florida Association of Realtors, who obviously hired Fishkind to give his expert opinion, continued by stating, “Fishkind does not believe Florida home prices will decline any further over the next 18 to 36 months, but he does expect them to remain generally flat, depending on where they’re located in the state.” Note that the press release was only dated 2007 and it is not apparent if the recent Fed activity since August 8, 2007 has been accounted for in his statements.

I disagree with Fishkind’s assessment based on the problems facing the mortgage and lending markets, and the further destabilizing effect this will have on the financing of property purchases. I believe the Gulf Coast’s already stagnant market is likely to remain so for quite some time. With the average sales price of a residential property in Sarasota County in July 2007 at $436,907 (down from $461,533 in July 2006) and with Sarasota’s FHA Lending Limit at $336,100 for a single family home, it is unlikely that the median market will pick-up under current lending limitations.

While some argue that baby boomers will continue to retire and move to Florida, these are the same baby boomers that may have experienced the financially crushing blows of uninsured medical costs, additional inflationary costs compared to their retirement income, and the general uneasiness of the economy. Many, in fact, are now strapped with the problem of assisting their adult children and grandchildren afford today’s burdensome cost of living, particularly in light of the fact that those born in 1960 or younger will likely not have pensions, retirement funds or the luxury of medical insurance as companies have cut these benefits to the bone in many cases. Many baby boomers may find it hard to retire in Florida when their own family is in such a state of financial hardship.

In addition to the credit markets, Sarasota County’s employment figures are not positive. According to the Sarasota County Economic Report, June 2007 based on federal and state government sources including the Bureau of Labor Statistics, Bureau of Economic Analysis, census Bureau, Office of Federal Housing Enterprise Oversight, and the Florida Agency for Workforce Innovation, the Report states:
“Wages are still well below other regions and the nation, yet slowly continue to gain ground on state and national averages. In 2002, the average county wage was 78% of the US average, and in 2005 the average wage was 86% of the US average. Given high housing costs and a low unemployment rate, wage pressures can be a challenge to the region that is trying to attract quality jobs and traded sector industries.”
The Report compared 6 metropolitan regions on “Housing Wage Ratios” (including Sarasota-Bradenton-Venice, Atlanta, Austin, Raleigh, Miami-Ft. Lauderdale, and Tucson) and found that the, “Sarasota-Bradenton region had the lowest average wage, yet the second highest housing cost. This combination of low wages and high home prices gave the region one of the highest housing-wage ratios (the ratio of average homes price divided by annual wage).” In fact, the table provided by the report indicated that the index was almost four (4) points higher than that of a similar community. Lower wages generally means a lower ability to pay for housing, thus further complicating the already complicated Sarasota housing market.

Finally, the upper-end market [non-conforming mortgages defined as “a mortgage that do not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.” ] which includes those homes above $417,000 will be dampened by the layers of additional lender requirements and higher rates for jumbo loans that were not seen in the past several years. Fewer funds (insurance companies and other institutions) are willing to stake their investments in real estate-backed securities in light of the recent credit market fall-out.

In summary, I believe Sarasota County will likely see a long period of adjustment in the housing market. Unless state or Federal intervention assists those in greatest need, the market is likely to take 3 to 5 years to recover. As members of the Community Action Agency Board we should question how a person becomes a subprime borrower, whether adjustments in the credit reporting system should be sought, and what can be done to educate borrowers about credit use. Additional funds should be used to entice businesses with higher wages to locate in Sarasota County. Industries such as the tech, financial, educational, or publishing would fit well into the Sarasota community.



Submitted by Divina K. Westerfield, JD, September 13, 2007
If you have any questions please contact her at info@NationalNoteAssociation.com or 941-922-6000.