he time may soon come when Phillip Biber faces “a moral dilemma” that will help shape the economic future of South Florida.
Biber, a real estate investor and appraiser, owns a Pompano Beach condo with a mortgage balance of about $225,000. The condo, purchased for $280,000 in 2005, is now worth less than $175,000, Biber said.
Should he continue to pay the mortgage and association fees on a property that is worth at least $50,000 less than he owes or should he cut his losses and walk away from his obligations?
He is current on his mortgage but wonders how much longer he will be able to afford the payments. His tenant left and without the rental income, he is having to pony up nearly $1,600 a month.
“I committed that I was going to pay this mortgage, so I do,” Biber said. “But if it comes to paying my light bill versus paying on my third or fourth property, guess what’s going to go before I throw all the cash into the wind?”
Biber, president of Watermark Valuation Services, is one of an estimated 306,000 owners of South Florida homes and condos — investors and occupants alike — whose properties are worth a lot less than their mortgages.
If tens of thousands of these property owners who are “underwater” decide to bail, South Florida would be hit with an economic crisis that will accelerate the decline in property values, cost thousands more jobs and could put hundreds of companies in jeopardy, economists, brokers and government officials warn. The scenario could re-accelerate the downward spiral in a real estate market that many hope may finally be reaching bottom and drag the broader economy down further.
Statistics of South Florida homeowners with negative equity
“If we continue to experience job loss and [property] devaluation, then, we are heading down a very serious road,” said Ned Murray, associate director of the Metropolitan Center, a think tank at Florida International University in Miami.
Nearly 70 percent of people who bought homes in the last five years owe more than the properties are worth, according to Zillow.com, a real estate valuation Web site. Half would still owe their lenders more than $40,000 if they were to sell at today’s prices, according to Zillow, which doesn’t differentiate primary homes from second homes or investment properties.
Owners have shown a willingness to endure the damage to their credit and the stigma that comes with foreclosure and walk away from their homes.
Some experts said it is unlikely a large percentage of owners who occupy their homes will walk, simply because they are emotionally attached to them. But owners of owners of rental properties and second homes don’t have that attachment.
“It is an economically rational decision to walk away if there is no prospect of a recovery of home prices on the horizon and you don’t have a long-time term horizon,” said Chris Lafakis, an economist at Moody’s Economy.com. “Some people can afford to be in a negative equity position if they don’t plan to move for five or 10 years.”
But those who do walk could fuel a disastrous third wave of foreclosures that would ripple through the South Florida economy.
The first wave came in 2007 and involved investors who bought properties hoping to make profits by quickly reselling. When the market soured, lenders seize the properties.
The second wave, in 2008, involved owners who couldn’t pay adjustable mortgages after their interest rates reset to unaffordable levels.
THE JOBLESS FACTOR
By mid-2010, unemployment in South Florida is expected to jump to double-digit rates from nearly 9 percent now. The jobless roles could hit 11.4 percent in Miami-Dade, 10.7 percent in Broward and 12.8 percent in Palm Beach County, according to Economy.com.
And a job loss could be the final thing to push owner-occupants to give up.
“So if you lose your job and are in a negative equity position, you are more likely to default,” Lafakis said. “If your car breaks down or have a death in the family or something as minute [as the need for] a home repair could push homeowners with negative equity into foreclosure. Their budgets are so tight that they can’t afford to spend extra so they are choosing to walk away. We are seeing it happen.”
Rising unemployment will also hurt owners of rental properties who are already struggling to hold onto tenants in investment properties worth less than the loan.
Jobless tenants will leave or have to be evicted, cutting cash flow in a market that has a glut of rental properties.
When Kenneth Tencer’s tenant lost his job in the car business a few months ago, Tencer lowered the rent on his Aventura condo and let his tenant pay it in installments. The renter still couldn’t afford the $1,300 a month lease and moved out in April.
Tencer is paying nearly $2,000 a month to carry his empty condo. For now, Tencer can manage the expenses.
Tencer, vice president of lending for Best Beach Lending, is seeing the crisis from two perspectives.
Many of the people that walk into his Miami office want to sell investment properties that are worth less than their debt.
Many are considering walking away from those properties, he said.
“They tell me they need to make a decision: ‘Am I going to eat, am I going to pay medical insurance for my family or am I going to pay a mortgage on a property that I don’t even occupy,’ ” he said.
Tencer tries to help them get their loans modified, refinanced or arrange for a short sale, where the lender agrees to take a loss on property that is sold for less than the mortgage.
But few of his clients qualify, and the foreclosure crisis becomes worse.
INFLEXIBLE LENDERS
The federal government has approved incentives for lenders that help primary homeowners refinance or modify their mortgages if they meet certain criteria: They can’t be more than 5 percent underwater or their mortgage, property taxes and insurance can’t consume more than 31 percent of their income.
But there is no similar help for owners who are severally underwater or have lost their jobs. And banks are reluctant to negotiate with distressed owners who are current on their payments, said lawyer Thomas Willis, with Shuster & Saben in Miami.
Some lenders feel they made legitimate loans and shouldn’t have to “absorb the losses and play ‘let’s make a deal,’ ” said James Angleton, senior vice president at Republic Federal Bank in Miami.
“We are not the ones who made the deal,” he said. “ It is the borrower that made the home loan application. So the property went down in value. Are we to be blamed for that? Why don’t these people step up to the plate and be responsible, even if they made a bad deal?”
Angleton said it was too early to predict how much worse the foreclosure crisis will become or its impact on lenders.
“There are too many variables to forecast that,” he said.
STAGNATE ECONOMY
South Florida’s economy is shrinking, and as jobs are lost, buying power declines. Tens of thousands of new foreclosures will only accelerate the downward economic trend, experts say.
Before the recession, Miami-Dade County’s total value of goods and services was about $120 billion, said Jorge Salazar-Carillo, professor of economics and director of the Florida International University’s Center of Economic Research. He estimates the county’s economy has already shrunk by $2 billion.
Salazar-Carillo didn’t have GDP information for Broward and Palm Beach counties.
“It is very simple, if people don’t have buying power, they don’t buy,” said Aaron Cushman, managing partner of Loan Solutions in West Palm Beach. “I don’t have a crystal ball and maybe I sound like a doomsdayer, but it’s bad. I’m on the front end looking at the dirt, and it is a disaster.”
Cushman helps clients modify their loans to make their payments more affordable. Yet, many can’t even afford the reduced mortgage payments, he said.
Population growth in Florida has slowed down significantly in the past year. In 2008, the state’s population grew at its slowest pace in half a century,
“[The region] is very dependant on migration coming from other states, and if there is a lack of available jobs, people won’t migrate to fill up jobs in construction, hotels and so forth,” Lafakis said. “A slower labor expansion leads to a lower economic growth.”
With South Florida particularly hard hit, the state could add an average of only 37,000 residents this year, a drop of more than 90 percent from the annual average increase during the housing boom of 2002 to 2006, said Stan Smith, professor of economics and the director of the Bureau of Economic and Business Research at the University of Florida.
Broward and Palm Beach County are expected to lose 10,000 people each in the next year, Smith said. Miami-Dade is projected to grow by 10,000 people.
“The population growth has been really a larger part of Florida’s economy in recent decades,” he said. “Population growth always slows down during recessions; but this time, the population [growth] slowdown has been the largest in Florida since the mid-1940s.”
CIVIC IMPACT
If underwater homeowners allow tens of thousands of homes with depressed values go to into foreclosure, the impact could be most severe on cities and counties already struggling with revenue shortfalls and budget cuts. The foreclosure economy will strain the level of public services, from crime prevention to education.
“Every city has have-nots, and if you increase the amount of have-nots, then you can expect an increase in the crime related to people trying to survive,” said Mark Lipof, a spokesman for the city of Opa-locka. “[There will be] everything from petty theft to armed robbery.”
Increasing user fees and taxes could make South Florida a less competitive place for businesses to open and grow, said Sam Chandan, president and chief economist of Real Estate Econometrics in New York.
“High taxes have absolutely the potential to drive businesses and people away,” he said. “The last thing you want to do to a business right now is to impose a new tax on it.”
Miami-Dade County saw its property tax revenue drop $147 million last year. To compensate for the shortage, the county is considering eliminating some county departments and programs, according to County Manager George Burgess.
“Laying off city employees just exacerbates the problem, but if we don’t have the revenue, we need to do something,” Wilton Manors Mayor Gary Resnick said.
“Cities don’t print money, so if you don’t take in, you can’t spend it,” added Resnick, who is also the president of the Broward County League of Cities.
Broward County’s tax base dropped nearly 11 percent last year. Commissioners are considering increasing property taxes for the first time in a decade to balance their budget. Palm Beach County’s taxable property value plunged by 13.5 percent.
And tax increased could push more homeowners over the brink and into foreclosure.
COMMUNITY ASSOCIATIONS
Another wave of foreclosures would also break the budget of hundreds of condominium and homeowner associations, many already in survival mode.
At the 340-unit Lakes of Jacaranda condominium in Plantation, nearly 100 owners aren’t paying their condo dues.
“So the other folks living there have to absorb more than a third of the operating budget of the rest of the units,” said Lipof, who is also a condo association board member.
“So, if on top of that you lost your job or are unemployed, your primary place of residence becomes unaffordable” and more owners will quit paying mortgages.
“Associations will have to come up with ways to increase their cash flow because if they do nothing, this economy is going to spiral down,” said Tom Roses, president of the Continental Group, one of Florida’s largest community associations’ property managers. “The garbage isn’t going to get picked up, the electricity is not going to get paid and the fear factor is only going to escalate.”
NO RELIEF ON THE HORIZON
South Florida home prices will continue to drop until early 2011 or beyond, depending on the severity of the “underwater” foreclosure wave.
By then, values will have plummeted nearly 70 percent from the peak of the housing boom in 2005, economist Lafkis said. His forecast doesn’t include condos, whose depreciation has been even steeper. Many owners will have to wait more than 20 years for their property values to reach pre-bust levels, he said.
The huge increase in foreclosures will depress prices even more and delay South Florida’s economic recovery well past the national rebound.
“Even if the pace of sales increase, which we expect that to happen, still it would take longer to rid of the excess inventory,” Lafakis said.
For now, the fear of ruined credit keeps many underwater owners from defaulting on their loans, experts said. But as soon as they begin to overcome that fear, foreclosures will spike, said Biber, president of Watermark Valuation Services in Pompano Beach.
“Many people want to continue to pay, even if they are upside down, but there is no relief in the form of a lower interest rate,” Biber said. “There is nothing coming out on the other side for borrowers in good standing.”
Paola Iuspa-Abbott can be reached at (305) 347-6657.
Illustration via Matt Morrow
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Reader's comments
jose rodriguez said:If things are so bad how come the number of underwater homes has dropped so much, while the unemployment numbers while still not good, are being reported as not as bad as expected? Thanks for the Monday morning up lift...... June 15 at 9:30 a.m.
Jack McCabe said: This was news six months ago... 9:57 a.m.
John McLeod said: I'm working on a transcript for the March 16, 2009 AEI event "Can Elements of the Danish Mortgage System Fix Mortgage Securitization?" Danes apply what they call "The Principle of Balance" to keep the number of underwater homeowners to a minimum, but at the cost of having their mortgages being recourse loans. Don't know if we want to save the situation (and the banks) by enslaving the world's middle class, though. 10:16 a.m.
mistaken borrower said: . . . . in May of 2008 an attorney at the Broward County courthouse commented that by 2011 all of Broward County will be in foreclosure . . . a better way to gauge this situation is to ask the municipalities the % of occupational licenses that have not been re-newed . . . . . and their sales tax receipts decrease . . . . 10:36 a.m.
Mari said: It is not only the fear of credit damage keeping folks in their homes - in Florida, the bank can seek a deficiency judgment against the defaulting borrower which it can enforce for twenty years. I am at least $70,000 underwater at present, and am looking at a lifetime of servitude to my underwater mortgage. The statistic quoted here, that my home may not recover for 20 years, immediately set my blood pressure off this monday morning. I am 32 years old and made the mistake of buying a home (doing everything "right", with a conventional loan, significant downpayment, home price was within my means) which will now haunt me financially for years. 11:11 a.m.
Doesn't take a rocket scientist said:Occupational licenses could be viewed as insightful. Our citizens, unfortunately, are uneducated. they do not understand they way the economy works. Remember the big minimum wage bill that passed a few years back? That stuck it to the employers of companies, many who have relocated out of state to more favorable states to manufacture and assemble goods etc. I bet the people chould repeal that one. The nonsensical thing about that law was, the free market will always dictate what an acceptible wage will be. This law wasn't ending indentured servitude or people forced to work for low wages at gun point, it wanted the emplyers to be held hostage and pay a higher minimum wage than the federal government mandated and that the employees have a guaranteed pay raise of at least 3% or CPI whatever is higher each year. The employee could have been the worst employee and they'd still receive the 3% raise. Nobody ever thought of what happens in periods of deflation where the cost of everything goes down. Nope, the employers are still held hostage. Let's repeal that law and start to encourage more businesses to relocate here again. The RE market will correct itself, but yes, there will be great losses, there is no way to prevent that. I watched unrealistic appraisals come in on properties I wanted to buy throughout the 2000's. Anyone remember the RE contracts in 2007 which made the real estate contracts not subject to appraisal? That became a standard. I never bought into the hype and now I'm buying several houses for 40-50% of what they wanted in 2005. Either the majority didn't remember the RTC days of the late 80's early 90's or are really just plain stupid. Have the county or municipalities lowered the price of occupational license fees in relation to everything else? NO. Just to get your occupational license, it will likely cost several hundred dollars, and in some types of businesses, thousands. In these times, the county and municipalities should be begging people to start small businesses not continue to tax them so ridiculously. 11:49 a.m.
srla said:"Chris Lafakis, an economist at Moody’s Economy.com. 'Some people can afford to be in a negative equity position if they don’t plan to move for five or 10 years.'” --Of course, unless one presupposes that we will have an immediate re-inflation of the biggest real estate bubble in history, it will be FAR longer than 5-10 years before people who bought at the peak get out of negative equity. If they are down 40-50% already, even if prices were to level out today (not even a remote possibility), then it would take 10% annual gains over the next ten years for those people to get out of negative equity. So unless you believe in fairy tales and an immediate resumption of double-digit price increases, it will likely be decades before such people are back in positive equity. Any wonder so many are walking? Home owners apparently are just far more prescient than your average economics "expert". June 16 at 2:06 a.m.
Kathleen said: Tencer is paying nearly $2,000 a month to carry his empty condo. For now, Tencer can manage the expenses. Tencer, vice president of lending for Best Beach Lending, is seeing the crisis from two perspectives. What this article fails to tell you is that TENCER as a mortgage broker and co owner of a mortgage company HAS to keep paying on that condo unless he wants to put his license and business in jepordy. Just as lenders have tightened up on lending money to homeowners, they have also tightened the requirements on the brokers they do business with. Credit is reviewed on a yearly basis and if the brokers shows a downward turn in person finances that could translate to a higher rate of fraud for the lender. After all it is a commission job. The same holds true if the broker is able to do FHA loans. Bad credit would affect that ability. 6:12 a.m.
Chris Gold-man said:As the ten year treasury bond drives mortgage rates higher, you will most certainly see the foreclosure rate spike, this will make what has happened so far look like childs play. Big Ben has been playing with mortgage rates and it is starting to blow up in his face. Higher rates do not dictate higher prices or a recovery. Prices were fictitional, they were distorted by an era of way too easy money and loose credit. The day this all started was August 15 1971, the day we went off the gold standard. From that day on the fed had the ability to print money at will,sounds great huh! you are now seeing the culmination of all the stupidity from that day come to a very difficult day of reckoning. You were duped into thinking these cookie cutter homes were worth 600 grand, everyone else believed it too so do not feel bad. Do the right thing and the smart thing, just walk away, screw the credit score. That is something the banks came up with anyway to get you to be a good doobie and become a lifetime debtor servant. When MTG rates hit 8 or 9 or 10 percent over the next couple of years, what do you think that will do to home prices, yes they will go down, in a very big way! Not everything works out in life, do not bankrupt yourself or put your family in harms way, get out and start over some day. I am renting now for the first time in my life and I am 39, I couldnt be happier......All the best, Chris 9:44 a.m.
Steve C said: I live in Phoenix. This story is a mirror of what is happening here.11:14 a.m.
evildoc said: ----Biber, a real estate investor and appraiser, owns a Pompano Beach condo with a mortgage balance of about $225,000. The condo, purchased for $280,000 in 2005, is now worth less than $175,000, Biber said---- I don't understand. Or... perhaps... your reporters do not understand. Mr. Biber appears NOT to "own" a Pompano Beach condo. Indeed, what he owns is an obligation to a rather huge LOAN. He is a loanowner not a homeowner. Why do reporters keep calling "owners" people who simply have a mortgage obligation. Maybe that is why so many seem to have so much trouble understanding the housing meltdown mess that is in the early phases regards evil 4:57 p.m.
prices could easily change said:one good hurricane and there could be a housing shortage.5:41 p.m.
John P said: I think people buying property at 40-50% off are STILL going to eat it....this is like nothing anyone here has ever seen5:53 p.m.
American_With_A_Brain said: A man has an obligation to himself to be self educated in all matters which have the potential to impact his life, positive or negative. I call this Self-Awareness-of-Popular-Delusion. We sold our home several years and began renting, knowing what was coming. Warned numerous friends and family, none would listen, they thought we were crazy. Now we are sitting pretty. Nobody calling us crazy lately. And, we are still renting, (a very nice house for well below what the house values at even today-if purchased). This is why we will not even think of buying another house, YET. HOUSE PRICES have much much further to fall. Only after monthly rental prices are significantly HIGHER than what the comparable PITI payment on a mortgage on the same house would be... That is the time to move from RENTER to BUYER. This RENT-to-MORTGAGE ratio was the huge red flag in the real estate market several years ago when this ratio was getting way out of normal range. This was our red flag and when we got out. I ALWAYS live by the time proven wisdom... If somthing seems too good to be true,(double digit growth in real estate values for__years) it probably is. Wise up in life people. Stop watching so much useless sports and weather, and stay educated in the "Popular Delusions" in life. No excuses !! 10:08 p.m.
Joe P said:I know someone who originates loans in Florida and he gets 1-2 calls a day from borrowers who can pay thier mortgage but are looking into the ramifications of stopping thier mortgage payments. This is primarily due to the mortgage amount being higher than what they can sell for. It is starting to become a personal business decision. A lot of the banks are not seizing the properties and telling the occupants to stay as they do not want them (taxes, insurance, maintenance).People are living in houses that have not made a payment in 12 -18 months. As more people realize that the lenders are not taking the properties look for more delinquincies. 10:30 p.m.
Derek said: This state has gone through these cycles every 20 years. Anyone remember the late 80's/early 90's? Sure, this is much worse, but no one learns. This isn't the governments fault or business or the tooth fairy. It's the people's fault. Anyone take a good look around the local mall lately? 10:40 p.m.
SpectularDeserveIT! said:Sounds like everyone on this board are speculators\last fool investors. Why should society bailout you retards for buying over inflated houses in the last eight years? Look at yourself in the mirror and take responsible and stop blaming it on someone else for your greed. 6:56 p.m.
Dennis Daniel said:Mari NO, I think you are wrong. The bank can EITHER fore close on your home, OR file a deficiency judgement. Please look into this carefully. Consult a good real estate attorney. A short sale might be an option for you also. Those rules have changed for the better for the consumer. I believe the government lifted the tax penalty on short sales.7:52 p.m. |
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