South Florida foreclosure tsunami to continue for at least two years

The Mortgage Bankers Association, RealtyTrac and other foreclosure data providers have ranked Florida in the top four foreclosure states for four years running. Many times the Sunshine State has been at the top of the heap, so to speak, at number one in foreclosures in the nation.

The statistics, culled from the MBA and my consulting company, are staggering — 23 percent of Florida home loans were either delinquent or in foreclosure at the end of the second quarter in 2009, South Florida’s three counties are on target to surpass 200,000 new filings this year, marking a historical record and this year county judicial systems across the state are setting aside several days each month to exclusively hear uncontested foreclosure cases in what’s commonly called “rocket dockets,” attempting to clear the logjam in the courts and foreclosure.

The following conditions cumulatively created the toxic stew of massive foreclosures in South Florida:

• Speculative over-construction combined with speculative investor purchases
• Highly volatile, adjustable-rate mortgages and even riskier low documentation, payment option, negative amortization financial instruments granted to anyone with a pulse.
• Wall Street’s design of a separate, secondary mortgage market of high-risk loans packaged as securities with triple AAA ratings marketed to unsuspecting investors, increasing pools of capital available for additional risky mortgage loans.
• Failure of municipalities to exercise restraint on unbridled growth requests.
• Hype and fluff advertising by South Florida’s real estate sales and marketing community and economic growth business associations.
• The breakdown of the appraisal process — overvaluing properties at artificially inflated prices utilized by loan originators’ for collateral and mortgage approval.
• Well documented proof of mortgage and real estate fraud that artificially inflated values.

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This year, residential foreclosures and other distressed sales have become the barometer and standard driving residential prices.

The tsunami of foreclosures will continue in South Florida for at least the next two years, possibly longer. The area is in the midst of the first decline in population since 1943 while unemployment is above 10 percent, more than double the rate in 2005, and is expected to keep increasing. Two million ARMs have yet to reach first-term adjustments that will require higher payments on properties worth much less than mortgage notes. Refinancing of mortgage debt on South Florida properties is difficult if not impossible to acquire and the 2009 federal housing stimulus plan is ineffective in helping Florida homeowners due to qualifying methodology and refinancing criteria.

Next up: Is it possible to stem the wave of foreclosures?

Jack McCabe is CEO of McCabe Research & Consulting in Deerfield Beach, Fla. He is an independent real estate analyst and consultant to major developers, lenders, and investors.