Two of Every Three Homes in Sarasota/Bradenton are in Negitive Equity
Two factors appear to loom large in determining whether the Obama administration’s $75 billion foreclosure plan will bring significant relief to Southwest Florida: “underwater” mortgages and federal loan limits governing who can qualify for mortgage modifications under the new plan.
Borrowers severely underwater in their mortgages — owing more than the value of their homes — might find little relief in the plan. That could include an enormous swath of homes bought during the boom in this region, according to analyses by several national real estate data companies.
Zillow.com estimates that two out of every three homes bought in Sarasota Real Estate market during the last five years are now in negative-equity territory. The phenomenon is even more pronounced for those who bought at the height of the boom, when fierce competition among speculators drove up values to unsustainable levels: Zillow estimates that 84 percent of Sarasota-Bradenton buyers who bought their homes in 2006 are underwater. It is 78 percent for those who bought in 2005 and 73 percent for those who did in 2007.
The problem is huge in the Sunshine State as a whole.
As of October, 29 percent of all single-family residential properties with a mortgage in Florida were underwater, according to First American CoreLogic, a California-based real estate data company. If mortgages within 5 percent of going under were also factored in, then one out of every three Florida mortgages was in trouble.
Borrowers who are current on their mortgages but cannot refinance into lower interest-rate loans because they are underwater are eligible to refinance into a 30- or 15-year, fixed-rate loan under the plan, but only if their loan is held by Fannie Mae or Freddie Mac. Owners cannot owe more than 105 percent of their home’s current value on their first mortgage.
Another complication for Manatee, Sarasota and Charlotte counties — where prices for homes in the $500,000 and $600,000 range were common in many neighborhoods during the height of the boom — are the requirements for relief under the Homeowners Affordability and Stability Plan. To qualify for a mortgage modification, the house must be a primary residence, the mortgage payment must be greater than 31 percent of their monthly gross income and the loan must not exceed Fannie Mae and Freddie Mac loan limits.
In May, Fannie and Freddie boosted the Sarasota-Bradenton’s conforming loan limits by a modest $25,500 to $442,500. That could conceivably preclude a large group of home buyers who used so-called “jumbo loans” during the boom to purchase their houses.
But Tom Flood, with Covenant Mortgage, said while the plan is geared toward conforming mortgages only, the overall push to get banks to the negotiating table could spill over into a willingness to address jumbo loans as well.
“I think this plan is designed to get the big banks to be in the mindset of modification and negotiation, which would certainly be a welcome development,” he said.
Troublesome to other observers of the Obama plan is the lack of focus on solving the underwater mortgage problem by writing down boom-time loan amounts to bring them in line with current housing values.
Fort Lauderdale-based real estate analyst Jack McCabe said the vast problem of underwater homeowners will not be solved simply by refinancing to lower interest rates.
“If you have a $300,000 loan on a property that’s now worth $150,000, how are you going to refinance that?” McCabe said. “Without doing a principal reduction of the loan, there’s going to be no incentive for someone to stay in that house.”
McCabe said the government’s focus on reducing monthly payments for troubled borrowers will only postpone the inevitable — as homeowners who are still underwater by $100,000 or $200,000 will eventually have to make up that difference if they ever try to sell.
“If they don’t have the money, they’ll just wind up in foreclosure and turning in the keys anyway. So really this is just offering people in desperate positions of losing their homes an opportunity to be glorified renters,” McCabe said.
Part of the Obama plan calls for borrowers who stay current on their refinanced loans to receive government-funded principal reductions of $1,000 a year for five years.
Kathy Marlowe, an agent with Keller Williams Realty specializing in foreclosures, said $5,000 is barely a blip considering how underwater most owners are in Sarasota-Bradenton.
“The people that are upside down around here, they’re not upside down by $5,000, or by $20,000. They’re upside down by $100,000 or even more,” Marlowe said. “So unless that fact is addressed, what incentive do people have to stay in that home and continue paying on it, knowing that the whole point of home ownership is to eventually own the home outright? Given they’re so far behind, that simply will never happen.”
But Flood, with Sarasota’s Covenant Mortgage, doubts that the majority of underwater homeowners will simply abandon their houses.
“There are stiff consequences for walking away. You’re looking at giving up home ownership for at least five years,” he said.