Monday, March 05, 2007

Central Florida - Toxic Financing Results in Home Turmoil

Before we move on to Freddy Mac and Fannie Mae's take on the toxic loan market, here now a local story on the effects of these "buy now, pay later" mortgags. From Rene Stutzman at the Orlando Sentinel.

'Three years after Central Florida's housing market turned red hot -- prompting families and investors to buy, buy, buy -- thousands of people are in danger of losing their homes because they can't make their monthly payments.

The number of mortgage foreclosures is soaring this year. Foreclosures had been increasing -- first steadily, then sharply -- for months during the past year.

But in January, lenders filed 1,787 foreclosure suits in Central Florida, more than twice the number compared with a year earlier, according to research by the Orlando Sentinel.

And early results for February are even worse: In the first two weeks of the month, the number of suits climbed 63 percent compared with all of February 2006.

"Clearly, we are in a cooling of what once was a red-hot housing market," said Sean Snaith, a professor of economics and director of the Institute for Economic Competitiveness at the University of Central Florida.'

"Cooling?" Yes, I suppose you could call it that. But "cooling" in this state sounds way too nice, like "I was so happy to be cooling down, after walking across the Florida Mall parking lot." Sorry, it just doesn't fit the circumstances.

How about a more accurate phrase, such as "beginning of a free-fall", "first stages of a total melt-down", or "start of a long ride to normalcy in supply and demand"?

'The pace of foreclosures is what sets Central Florida apart -- although the same thing is happening across the state and, more modestly, across the nation.

And the worst may be yet to come, according to some experts.

That's because there are so many adjustable-rate mortgages on the verge of pushing up monthly payments.

What's going on?

Many homeowners simply took on more debt than they could manage.'

That, my fellow Romans, is the key to our situation. Too much easy credit created a house of cards in this state. Far too many overpriced homes owned by people who simply cannot make the payments.

Like a spoiled rich kid who finds out that he's no longer in the will, the culture shock of our return to actual house valuations is going to be a long, painful, and traumatic process. The denial is real and entrenched - one doesn't recover from these things easily.

'Until recently, homeowners could often sell their way out of problems. Home prices were rising, and the market was full of buyers, especially speculators.

But prices have stagnated. Homes in Orange and Seminole counties now sit unsold an average of 90 days -- three times what it took to sell a residence a year and a half ago. And many speculators who helped buoy the market have disappeared.

That means local homeowners are stuck.

Feeling trapped.

"You feel so trapped," said Jennifer McCall, 30, who bought a $220,000 house near Winter Park in May, then quickly fell behind on her payments and was sued by her mortgage company in January. "It's frightening," she said. "You have a family you're trying to take care of and a mortgage that's eating you alive."

She and her husband, Jason, had never owned a home before and didn't have much in savings, but they found a mortgage company willing to use creative financing, McCall said.

"That's a huge mistake," she said.

They wound up with a first and second mortgage and monthly house payments of $1,986, she said.'

$2K a month for a $220K house? My gosh, that is really, truly a sad statement on the state of our state. And you know what? This is just one example. Multiple this couple's situaton by the tens of thousands, and then you'll get the big picture of our impending crisis.

And, I'd like to point out that I lost all respect for that guy from UCF when he made the following statement. (note, I am a graduate from that fine institution, BSEE '91)

'Although foreclosures are on the rise in Central Florida, they are not at unprecedented levels, and the local real-estate market is not about to collapse, said Snaith, the UCF economist.

Home prices remain far higher than before the run-up, he pointed out.'

Wow - no $hit, Sherlock. The key is the trends - take a look at these, and you'll be likely to see that prices are heading towards those that existed before the run-up.

Full Article


zippo said...

Man, check any financial website and/or CNBC - all they're talking about today is the meltdown in the sub-prime market.

Could it be we were the tipping point for acheiving critical mass on the issue?


Anonymous said...

Zippo - right:

And right again:

And then:

Look out belooooooooooowwwww!!!!

andymiami said...

Once Countrywide Financial crashes, true panic will spread among financial markets..we are heading into a severe recession. Essentially, the US consumer has been LBO'd first with credit cards, home equity loans, and 100% no doc loans. There will be great opportunities in credit restructuring on a mass consumer scale.

Bill Fleckenstein said...

Cursed Be He Who Moves My Bones ('Cause I Wrote Too Many Bad Loans)
Rather than going into all the details, which have been covered by the press, I'd like to talk about what I think is important. Essentially, the subprime industry is gone, and Alt A will be next (virtually eliminating approximately 40% of the market). Freemont is closing its doors, in part, according to company filings, because of new rules released Friday afternoon by the Office of the Comptroller of the Currency -- which basically require folks making loans using federally guaranteed depositor funds to behave in a somewhat intelligent fashion.
If you were to go down the list of what was once the top 25 subprimes, you'd see that only a handful are still standing at this point. And, according to my friends in the industry, there will probably be even fewer by the end of the week. This credit collapse is an unequivocally important event, because the ability of anybody with a pulse to get a loan for any amount is what drove the real-estate market, and the real-estate market is what drove the economy. Sometime in the next three to six months, the real-estate market will basically just freeze up. Of course, inventories are going to explode, and prices will eventually drop rather dramatically, as a vicious cycle feeds on itself.
Since the pendulum swung as far as it could in the direction of reckless lending, which the whole bubble was about, it will now swing back towards the quaint notion of folks being lent only the amount of money they can reasonably be expected to pay back. And, the lenders will want their loans to have a margin of safety, in the form of downpayments. Thus, I believe that the ingredients for the "next time down" are now at hand.

Alison-VolusiaCo. said...

My husband and I are 30 and have three sets of married friends who bought houses in the 220,000 to 250,000 range.

None can afford their homes. First set: 30 yo sous chef at Disney (40,000) and 25 yo dental assistant-now pregnant with very high taste. Bought 250,000 on I/O and wiped out savings when taxes came due first year.

Second set: 35 yo car salesman and 30 yo server-no kids yet. Bought 230,000 house in BFE Davenport (middle of nowhere-about 1 hour from downtown Orlando, 30 min. to Disney). Wanted to move, hate the area, can't afford the house (over 2000/month) but can't sell. Tried to sell in September with no showings for 3 months.

Third set: wrote about them last post. Just bought for 215,000. Her SAHM with new baby, him computer simulation programmer making about 60,000. Told me they really can't afford it.

This is everywhere. I honestly don't know anyone who bought in this boom that can actually afford it. When did working class young couples start thinking it was normal to buy a quarter million dollar home as their first home?

Dragasoni said...

People make bad choices when they feel desperate or think they'll find a greater fool to pass the house off to. I'm sick of renting, but I refuse to buy a house and strap myself financially, risking everything just to make a mortgage payment. Most people figured they could flip it for a profit if money got too tight; they thought wrong. And they are others would bought out a desperation, who are now facing foreclosure.

Buying at full price makes absolutely no sense. There are developer closeout townhouses from the mid $300's being built near me in Saint Petersburg. There are others for sale, privately, for over $500,000! Yet, these same townhouses are renting for $1,800 a month. Why in the hell would you buy one??

Another example, in Riverview they're building 3 bed 2 bath condo for $170,000, yet their renting as low as $850 a month! Again, why buy???

Until sale prices become inline with monthly rental prices, I think sales will come close to stagnating. More and more people are finding out that renting is far cheaper than owning right now. And as these people jump on this bandwagon, prices of homes will fall.

Mark my words, prices will begin to be realistic by 2009.


fizbo said...

Yep - one of two things gotta happen in this state:

Incomes Up

- or -

Prices Down

So, unless the average Joe Citizen gets a 50% pay increase, we all know where this is headed. Dragasoni speaks truth.

Geilt said...

Alison Volusiaco --

"This is everywhere. I honestly don't know anyone who bought in this boom that can actually afford it. When did working class young couples start thinking it was normal to buy a quarter million dollar home as their first home?"

They didn't. No one told them what was going on. Only ones with common sense decided to live with parents paying the least amount of rent possible so that when this market crashes we have enough saved to purchase a GOOD priced house. Been waiting 2 and a half years now. Crash please So I can own a home.

Realtors have swindled the working youth, because of their naivety and their inexperience (high school and sometimes college does not prepare you for a vicious business market, unless you major in business). The ones who hurt the most are the young people trying to make a living and raise a family. Parents don't pay attention to housing markets when they are not interested in owning a new home. They look at the prices, smirk, and sigh happily at their well founded and priced purchase for 10+ years ago. There is no one to guide young couples as to the vices of the real estate market and its creative financing. In effect, the youth of America is crippled due to this greed and mismanaged market.

I only wish that others are so lucky as I to be able to live with their parents or some other support until the market comes down to a level where we don't have to sign our souls away in order to own a home.

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