Florida’s Underwater Mortgages

PBS Newshour aired a segment on Tuesday’s show called “Mortgage Defaults” as part of its “Making Sense” financial series (click here for video, segment aired 25:45 to 35:00). I highly recommend that anyone interested in real estate watch this segment.

Newshour picked three example Floridians who are dealing with defaults on their mortgages:

A restaurant manager has not paid his mortgage in over two years and is essentially squatting in his Fort Meyers condo. Its value has dropped from $210,000 during his 2005 purchase to today’s $45,000. He said he is willing to work with the bank, but it refuses to deal. He noted that he has already paid his fair share given the $20,000 down payment and about $30,000 in interest-only payments.

A pro golfer who is now $100,000 underwater on his mortgage described his refusal to pay as a good “business decision.” He expects that it will be faster to rebuild his credit score (which will suffer for the next seven years) than to regain the lost equity in his house.

A businessman lost 50% of the value in his $750,000 home and has lost everything, including his job and his family. He is displeased with people who choose the route of a strategic default, claiming that these people have “no right” to do so. He thinks that being underwater on a mortgage is no different than losing value on a car the minute an owner drives it off the lot.

Newshour also interviewed a Floridian banker who explained how strategic defaults hurt the bank’s ability to make loans to other people. Steeped in sarcasm, he noted that when housing prices were soaring, no one came back to offer the bank extra money as part of the windfall. So, he argues, why should the bank be expected to take the hit when the house loses value?

Finally, Newshour provided examples of large businesses across the country that have essentially engaged in strategic defaults in commercial real estate.

Here are two disturbing statistics quoted in the segment by an analyst who fears that a new deflationary spiral is imminent because of strategic defaults:

  1. Strategic defaults are about 1/3 of all foreclosures in the U.S. This is a significant increase from last year.
  2. Nearly half of all mortgages in Florida are underwater.

I realize that it appears the housing market has finally stabilized and prices have likely bottomed. But when I continue to hear stories like the ones above and read these kinds of statistics, I cannot help but feel that the structural fundamentals of the housing market remains seriously flawed.

Be careful out there!

Full disclosure: long TOL puts

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