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Foreclosures squeeze South Florida

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The relentless climb in the number of defaults on mortgage loans and foreclosures on properties in South Florida is hurting all sectors of the real estate community, including lenders, mortgage brokers, developers and investors.

The number of foreclosure actions filed against homeowners in Miami-Dade and Broward counties in January and February 2007 was three times the number for the same months last year, according to a recent report in the Miami Herald.

According to Rick Sharga, vice president of marketing for RealtyTrac, publisher of the U.S. Foreclosure Market Report, several cities in South Florida are among those with the highest foreclosure rates in the nation. Fort Lauderdale tops the list, followed by Miami.

While foreclosures are up all over the country, Florida’s suffering is particularly acute because of the buying spree that took place just a few years ago. Speculators drove property values up quickly and some lenders issued mortgages with dangerously lenient terms.

“The bill’s coming due for a lot of what the industry refers to as ‘liar loans,'” says Sharga.

A “liar loan” is a financing where the borrower’s income is overstated on the mortgage application. Most liar loans are subprime, made to borrowers who cannot qualify with a mainstream lender.

“The fraud is either outright,” says Sharga, “with somebody putting down the wrong numbers, or incidental, where somebody overstates their income because they got advice from the broker, who might say, ‘I can’t tell you what to put on that line, but I think this loan is only available to people who make $80,000 or more.'”

A recent report by Deutsche Bank said that 40 percent of the subprime loans issued nationally last year were liar loans, with income overstated to some degree — up from 25 percent in 2001, before the real estate boom went into high gear.

According to First American Loan Performance, a mortgage research firm, 23 percent of Miami-Dade loans and 18 percent of Broward loans are subprime, and of those, some 6.7 percent are 60 days overdue.

During the boom years, some developers made buyers offers it seems they couldn’t refuse. According to Freddy Maldonado, mortgage broker and president of Miami-based First Premier Mortgage, “Developers offered mortgage payments for one year or one year’s condo association payments — all these sweeteners.”

Then there’s the “payment-option,” says Maldonado, “the 1 percent mortgage some mortgage brokers offer to clients, but don’t explain completely.” With this mortgage product, brokers often fail to inform the client that they’re paying only a portion of the real interest. The rest of the interest, the deferred portion, is tacked onto the loan’s principal. “By the end of the year,” says Maldonado, “they’re negatively amortized.”

In 2006, more than 15 percent of new home loans in South Florida were payment-option loans.

Some brokers enabled clients to enter real estate deals cash-free — to take “piggy-back” loans on their properties, borrowing 80 percent from one lender and 20 percent from another.

When the sweeteners and introductory loan rates come to an end after a year or so, the buyer might be stuck with payments for more than they can afford. Refinancing is not an option in a downward market, since the house or apartment is likely to appraise for less than the borrower paid for it.

The buyer might want to appeal to the bank, but often the original lender has sold the loan to an investment group (such as a hedge fund, pension fund or insurance company) as part of a package. If the buyer cannot make payments, he or she will eventually lose the property in foreclosure. Ownership of the devalued property will revert to the investment group, which will end up losing the monthly payments that drew it to buy the loan in the first place.

Aventura-based attorney Robert Stok puts it this way: “Because so many mortgage securities have been packaged and sold in the secondary market, investment banking firms and their customers are suffering. They bought these mortgage-based securities thinking they were going to get a steady interest income stream, and now they’re finding they might be owning some real estate.”

In 2003, a record $3 trillion in mortgage-related securities were issued, according to data reported by the Bond Market Association. Last year, $1.93 trillion worth of such loans were made, reflecting a decrease in the volume of home sales.

Until recently, the growing rate of foreclosures in South Florida was a local issue. “It didn’t hit the hot button nationally,” says Sharga, “until it was associated with a related problem, like the fact that subprime lenders are melting down right now. It has a ripple effect that goes beyond just the subprime market.”

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“When Wall Street starts to get impacted,” he adds, “the media tends to pay very close attention.”

As recently as mid-March, the Dow Jones average fell more than 200 points the day after the Mortgage Bankers Association issued a report showing record foreclosures for the last quarter of 2006.

Investor worry over the subprime securities market was likely the cause, according to an analysis in the New York Times.

The next class of mortgages that could be affected if defaults increase are “Alt-A” loans, which are issued to borrowers whose credit lies between prime and subprime.

In addition, even prime loans can push borrowers into default, especially given that many are three- or five-year adjustables. “There’s a very combustible mixture of loans in the mortgage pool right now,” says Sharga. “We don’t have a precedent to say how bad it can get. We’ve never had this many adjustables, subprimes and odd mixtures of the two.”

The simplest cure for the mortgage market, of course, would be a rebound in sales activity, which would stabilize home prices and staunch the downward market spiral that could lead to increased numbers of foreclosures.

“If we start to see an increase in the number and rate of home sales,” says Sharga, “a lot of these problems will work themselves out pretty quickly. You could see this happen in the second half of the year. And the icing on the cake: the lenders would have learned their lesson from the period of excess and won’t do this again.”

On the other hand, if underwriting standards get too tough and money for home sales and refinancing becomes scarce, foreclosures will increase, driving down the price of surrounding homes.

This will be a year of reckoning for lenders as they discover how many of the loans they are holding go bad. Lenders specializing in subprimes are particularly vulnerable.

According to attorney Stok, “Lenders who have engaged in all kinds of creative financing schemes have a lot of bad paper on their books.”

Some lenders are already closing shop. “Argent Mortgage just called,” says Maldonado, “letting me know they’re closing their work centers here. They’re suffering a major loss and will have to let go of employees.” An affiliate of Ameriquest Mortgage Co., Argent, which is one of the country’s largest wholesale subprime lenders, consolidated its consumer call centers down to just one location and laid off close to 3,000 employees, news service Mortgage Line reported late last month. Calls for comment to the company were not returned by press time.

Mortgage brokers are also feeling the sting, Maldonado says: “My colleagues are finding that it’s difficult to refinance, difficult to find deals, and they’ve lost their connections with developers and realtors. So they’re looking for salaried jobs now in the mortgage industry.”

Meanwhile, lawyers who specialize in real estate have as much work then they can handle. According to Stok, “Attorneys are filing foreclosures and defending foreclosures and a lot of people in the real estate business are seeking protection in bankruptcy.”

Also, he says, “sometimes a borrower will go into bankruptcy to try to save their home and lenders file a relief from stay motion to try to get the case back on the foreclosure track. There’s a lot of litigation in terms of foreclosures.”

Real estate brokers are not affected by foreclosures per se, as their profit is taken at the close of a sale. And for the most part, they’ve been spared the brunt of the finger pointing on the whole business of dubious loans. But as market activity has ground down, the agents who came in at the height of the boom will also likely be looking for salaried jobs.

Some brokerages are switching gears. Mark Zilbert’s Miami-based CondoFlip.com was a real estate brokerage firm with a strong Internet marketing component during the boom years. But, says Zilbert, “We eliminated the brand because the market changed. We had thousands of sellers and no buyers.” The new enterprise, CondoSuperCenter.com, specializes in high-end luxury condominiums.

“The doom and gloom,” says Zilbert, “we’ll see some of it. Our country goes through recessions, but the luxury continues to sell. Ford Motors doesn’t fare so well, but Mercedes still sells its E-classes and S-classes. There’s always a market for it.”

And for the less-privileged buyer, says Maldonado, “the person who has some money right now, has good credit and wants to upgrade to a bigger house — it’s an excellent time to buy.”

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