Lenders repossessed an average of 52 REO properties a day in South Florida in the first quarter of 2008 from borrowers who failed to pay their mortgages, representing a 255 percent spike compared to a year earlier, according to a new report from Condo Vultures® LLC.
Local courts granted lenders the ownership of 4,762 REO properties in Miami-Dade, Broward, and Palm Beach counties in the first three months of the year compared to 1,343 actions during the same period of 2007, according to the data compiled by Condo Vultures® using local government records.
On a county-by-county basis, Miami-Dade had the greatest number of repossessed properties - called Real Estate Owned (REO) by lenders - but Broward experienced the greatest jump in repossession actions on a percentage basis. Palm Beach, by comparison, experienced the least activity with only a 149 percent increase in bank repossessions.
Lenders took back 2,395 Miami-Dade properties in the first quarter of the year compared to 619 in 2007, representing a 287 percent increase year-over-year.
In Broward, lenders took ownership of 1,671 properties through the court system compared to 418 properties in 2007 for a 300 percent year-over-year increase.
In Palm Beach, lenders were granted ownership by the court of 696 properties in the first quarter of 2008 compared to 306 repossessions in 2007, according to the data.
Lenders ended up with these REO properties after foreclosing on borrowers and not being able to sell the properties at the minimum price set at the court-ordered auction.
When a lender gets a property back, the institution shifts the repossessed real estate into a REO category. To get to the point of a property being designated as an REO, the lender has typically gone through a six to eight month process where the expenses incurred easily surpassed $40,000, industry watchers said.
It is common to see lenders that have just repossessed properties suddenly change their strategy from trying to get the highest amount possible to simply trying to unload the product fast.
“Bankers tell me that they don’t want to own real estate,” said Peter Zalewski, a principal with the Bal Harbour, Fla.- based consultancy that produced the report. “Unfortunately for the banks, foreclosure properties in South Florida are failing to sell at court auctions due to judgment amounts that are simply too high compared to today’s market value. Therefore, properties are increasingly reverting back to the lenders.”
Many banks usually need about 30 days to prepare to market an REO. A bank must obtain an appraisal, find brokers and often make repairs. Taxes, homeowners association fees and maintenance are among costs from the start. These costs are among reasons banks usually do not wait for the market to recover before selling REOs.
Most local banks usually sell properties one at a time to buyers who are clients of real estate brokers.
The Federal Deposit Insurance Corp. has said that it encourages banks to sell REOs as quickly as feasible, because they are non-earning assets. FDIC rules permit banks to hold REOs for up to 10 years. But carrying costs make that schedule unrealistic even in the sourest of markets -- where South Florida ranks among the top.
Many industry watchers are optimistic the recently approved Economic Stimulus Package passed by Congress and signed into law by President Bush will jumpstart the real estate market.
A key part of the package increases the mortgage limit amount of $417,000 on conventional loans to a ratio based on median sales prices in the area where the property is located.
This is crucial because conventional loans are practically the only mortgages being written today because banks and/or originators can still sell paper off to Fannie Mae or Freddie Mac, and not have to portfolio it. Anything higher than the conforming loan amount is a jumbo mortgage and usually can only be sold off to private investors, who just aren’t buying today.
For several years many South Florida banks issued loans with monthly option Adjustable Rate Mortgages, which allow borrowers to pick different payment amounts each month. The monthly option ARMs are controversial because it enables the borrower to defer interest on the loan which is added to the overall debt amount, creating what is called negative amortization.
Many of the properties going into foreclosure and ultimately being repossessed by the lenders are financed with exotic loans such as ARMs.
At the pace experienced in the first quarter, banks would take possession of 19,048 properties in South Florida in 2008.
By comparison, banks took back 10,087 properties in 2007. If this pace continues, 2008 would represent an 89 percent spike in REOs compared to 2007, which was already the worst year in recent memory for the loss mitigation and/or special assets departments of banks.
South Florida’s REO problem appears worse than the national trend.
Foreclosed condos, townhouses and single-family houses owned by Florida banks soared 620 percent in 2007 to $144 million from $20 million in 2006, according to a recent Condo Vultures® report based on FDIC data through Dec. 31, 2007.
Nationally, the banking industry experienced a 128 percent increase in bank-owned foreclosed condos and houses, totaling $6.6 billion in 2007 compared to $2.9 billion in 2006, according to the data.
The latest statistics on bank-owned REO properties represent near-record highs in both Florida and nationally. And, the numbers provide one of the clearest pictures yet of the exploding foreclosure problem.
This FDIC data represents only those properties that federally regulated lenders have taken title to through the foreclosure process.
The bulk of the nation’s residential REOs are owned by mortgage companies and other non-bank lenders that serviced the mortgages on those homes or by Special Investment Vehicles (SIVs) and other new Wall Street-created entities that purchased mortgages as part of securities.
The diverse ownership is what makes this crisis different from previous housing downturns.
Historically, commercial banks and savings & loans held much larger percentages of their mortgages in portfolios and thus got stuck with higher numbers of foreclosures.
What hasn’t changed since the last housing crisis is the psychology of the lenders that are in possession of REOs. In the last year, a growing number of banks and other companies have set up divisions exclusively to sell REOs.
Most are trying to sell condos and houses as close to market value as possible. Until the quantity grows to the point of desperation, the institutions in possession of REOs hope to avoid sales at deep discounts.
Fortunately for buyers, the days of banks selling REO at par are probably a thing of the past as more REOs are becoming available. The surging volume is expected to prompt more and more financial institutions ready to accept discounts, and thus avoid lengthy costs of maintaining properties.
The FDIC data shows the country’s banks had $51 billion in non-current residential mortgages at the end of 2007, with $1 billion at Florida-based banks. Non-current loans are 90 days or more delinquent or are no longer accruing interest.
Banks list REOs on their books at the market value of a property, based on a new appraisal or review of recent comparable sales.
The FDIC does not report on the number of REOs held by the banking industry or by individual banks.
Florida-based banks, large banks based from out-of-state and Wall Street-related investors are among owners of these troubled Greater Miami properties.
The FDIC does not provide breakdowns on banks’ REOs by states and counties.
Florida’s 317 commercial banks and savings banks held $144 million in residential REOs at the end of 2007. This amount includes an undetermined number of properties in other states.
Peter Zalewski is a principal with the consulting company Condo Vultures®LLC and a licensed real estate broker with Condo Vultures® Realty LLC. Peter can be reached at 305-865-5629 or by email at peter@condovultures.com. Be sure to check out Peter’s blog at CondoDump.com. Don't forget to sign up for our weekly Market Intelligence Report.
Copyright © 2008, Condo Vultures® LLC
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