South Florida, a boom region in the best of times, is seeing the downside of the subprime mortgage fallout and tightened lending practices, and the real estate industry has been devastated.
“One of the of the first places hit by the credit crunch, and the subprime problems everybody has been talking about for the last couple of months, was South Florida,” according to Y. David Scharf, partner at Morrison Cohen, a law firm representing large real estate developers in the region.
Fueled largely by second- and third-home buyers and investors who retreat when credit tightens, the real estate market in South Florida, said Scharf, “is the first to go” in tough times, serving as the country’s real estate canary in a coal mine. And gone it has.
A report in early September issued by the Mortgage Bankers Association said that the number of foreclosure notices across the country hit a record high in the second quarter of 2007, with former boom areas like South Florida taking the biggest hit.
It’s impossible to determine the extent of the damage now, according to Ana Wilbanks, a loan officer for Keyes Mortgage, an affiliate of Wells Fargo Bank. “I don’t think we’ve seen the worst of it,” Wilbanks said. “The foreclosure notices just went out. It takes about one year in Florida for a foreclosure to go through. People are still living in those homes.”
Mortgage brokers have already been hit hard. According to Scott Neitzel, president of HomeServices Lending, “The amount of loan programs available — the most liberally underwritten programs — have either disappeared or have been reined in dramatically. I don’t know if you could put a number to the people who will no longer qualify under the new guidelines.
“Every time a new building comes on line,” added Neitzel, “everybody’s holding their breath. The building might be 100 percent sold, but if the buyers can’t show up with the mortgage or the funds to close, it’s a problem.”
Neitzel says even loan instruments that have been immune to defaults, such as jumbo loans above $417,000, are less attractive now because of higher sales charges. He said it’s a result of the bad press subprime loans have been getting.
“It’s a case of the baby being thrown out with the bathwater,” he said. “Jumbo loans had been performing just fine. But because all these hedge funds and international institutions were buying financial instruments that contained subprime mortgages,” when the subprimes started to go bad, they treated mortgages of every sort like poison, selling them all.
As a result, said Neitzel, “there’s such a supply of these jumbos on the market, their pricing has gotten substantially worse.” A $650,000 loan will cost the borrower $500 more per month than it would have just three months ago.
“Many buyers are sitting back and waiting for this mortgage mess to be over,” said Neitzel.
But a subsidiary of the real estate conglomerate HomeServices America, Neitzel’s branch of HomeServices Lending, has still been doing steady business, he said. They are in a joint venture with Wells Fargo in the financing of the large Metropolitan Miami mixed-use project downtown. With so many smaller mortgage brokerage companies going belly up, “we have a bigger piece of a smaller pie,” he said.
Mortgage brokerage companies that expanded during the boom are now struggling to remain in business.
“I’m a one-man band at this point,” said Freddy Maldonado, president of Miami-based First Premier Mortgage. “I used to have a full team with more than 15 loan officers. Now all my loan officers have part-time jobs. I’m going to be answering the phones, doing the processing, doing originating and the management of the sales.”
Maldonado’s wife was working with him at the company but has had to leave the business to work as a nurse to keep the household going. “When you have an overhead of $12,000 a month,” he said, “and you’re only closing one file — that’s $3,000 — what are you going to do? This is the only thing I know, that I’m good at. We’re hanging in there, trying to make it.” He’s going to find a smaller office, he said, to trim expenses.
The credit crunch has stifled new development as well, said Charles Foschini, managing director for CB Richard Ellis in South Florida.
“If you’re a builder of condominium projects today, even with a strong location, strong pre-sales and strong deposits, it is very difficult to get funding,” Foschini said. “That said, the best sponsors with the best locations have the ability to weather those storms and still come out of the ground.”
One such survivor is Sky Development, which, according to COO Gavin Susman, “is still in active buying mode for residential apartment buildings in the right location. For the right price, we believe there are still opportunities out there.”
To be sure, added Susman, “lenders are tightening the reins on everything. We had one very large construction loan pulled from us by the lender on the very day of the closing on a property. A $78 million dollar loan on the day of closing! That would have killed most companies.” Sky was able to find alternate funding.
Even with ample construction money, a developer will have a hard time finding a land deal that makes sense. “The land loan deals have almost disappeared,” said Susman. “None of the banks want to touch land. It’s too speculative. They’ve seen too many projects that have already been approved and partially funded go south.”
Susman said 8 or 9 percent financing on land is a thing of the past. “You have to resort to the more expensive money — 12 to 13 percent. And then they only want to do 40 to 50 percent [loan] to value.”
Susman said the pain caused by the credit crunch has extended to every sector of the real estate industry. “It has a ripple effect on the entire economy. The construction people have slowed down. Architects are calling for work — and engineers, lawyers, title agents and mortgage brokers.”
It will take at least three years for the repercussions of the credit crunch and the housing glut to shake out, Susman figures, and by the end of that time, he said, “you’re going to have two types of companies: those that will survive and make money with this downturn and those that will be hurting.”
There are some outstanding values out there for investors like Sky Developers who have or can find the resources to make deals, according to Susman.
“Right now,” said Susman, “I’m looking at an office building that is going into foreclosure. This guy bought it for $9 million and owes the bank $8 million. We can probably cut a deal with the bank to sell it to us for $6 million. They walk away, and we bought a building at a $3 million discount.”
There also may be fortunes to be made in the wholesale acquisition of condominiums at substantial discounts. “We’re seeing a tremendous appetite by hedge funds and private equity funds looking to acquire properties in bulk — condo conversions or failed condo towers,” said broker Peter Zalewski, principal of Condo Vultures.
“Today I was brought a 330-unit bulk deal out of a 750-unit project in West Palm Beach,” Zalewski said. “I sent it out to 29 hedge funds and private equity funds, and within 45 minutes, I had four responses.”
One source of funding for real estate in Southern Florida that has remained steady is the foreign buyer.
“The appeal to the Europeans hasn’t disappeared,” said Alicia Cervera Lamadrid, president of Related Cervera Realty, marketing agent for the Related Group of Florida. “It’s getting more and more active. Miami is becoming a world-class city.”
Indeed, said attorney Scharf, “One of the things that may help slow the market fall on the east coast of South Florida is European money, particularly British money, with the strength of the pound sterling to the dollar. We’re starting to see bargain hunters come in from Europe, buying second homes. They’re not relying on the credit market. They don’t need to take out loans from U.S. banks.”