Given the improvement in local and state residential real estate demonstrated by last week's 2012 Florida Realtors statistics, there's a lot of positive buzz, and possibly a bit of wishful thinking taking place among would-be sellers, Realtors, mortgage brokers, appraisers, developers and contractors.
But a reality check still shows a murky future: Up to a tenth of Florida homes, and almost a fifth of Manatee-Sarasota area homes are in some state of distress, raising concerns that a tsunami of bank sales could increase inventory, depress prices and lengthen closing times for residential sales in 2013 or even longer.
That view is "overly pessimistic," said Florida Realtors chief economist John Tuccillo. But, he concedes, Florida has "a third of the nation's 'shadow inventory,' a term used to define homes more than 90 days delinquent, or already in foreclosure, and that is very, very high."
After the misery and displacement of the Great Recession, everyone, including President Obama, wants to believe that a broad-based real estate recovery is well and truly under way. In his State of the Union message, Obama announced that "the housing market is finally healing from the collapse of 2007. Home prices are rising at the fastest pace in six years, home purchases are up nearly 50 percent and construction is expanding again." So far, so good.
But then, Obama put his finger right onto the tricky bit when he said, "Even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected. Too many families who have never missed a payment and want to refinance are being told no. That's holding our entire economy back, and we need to fix it."
Banks and mortgage lenders -- many of whom received federal assistance to the tune of $700 billion in the controversial 2008 Troubled Asset Relief Program (TARP),
which was designed to address the subprime mortgage crisis -- are simply not lending to would-be buyers.
And maddeningly, sellers, frequently the very same banks themselves, clearly prefer cash buyers to avoid burdensome, messy and uncertain mortgage applications, and all-but-frozen secondary mortgage markets.
In fact, the big banks and other financial institutions that, in the heyday of mortgage madness, shoveled money out the door to "anyone with a heartbeat who could also fog a mirror," are today part of the obstacle to a sustained real estate recovery, says Jack McCabe, CEO of McCabe Research & Consulting, a Florida-based real estate and economic analyst.
He pointed to the February 2012 joint state-federal settlement with the country's five largest mortgage servicers Ally/GMAC, Bank of America, Citi, JPMorgan Chase and Wells Fargo, in which roughly $25 billion in relief was earmarked for distressed borrowers and various local and federal jurisdictions.
"Since the lawsuit has been settled, those banks are no longer holding back on foreclosures, which is one reason why real estate inventory levels were limited, and why prices rose in 2012," said McCabe.
"Of the 475,000 completed Florida foreclosures since 2006, banks, realty funds and other financial players still hold an estimated 200,000 housing units," said McCabe. That is roughly equivalent to the total number of 2012 statewide single-family home sales as reported on Monday by the Florida Realtors.
"There are currently 377,000-plus open foreclosures in Florida state courts, and 80 percent of them will become distressed transactions in the coming two to three years," McCabe estimated. "The remainder will likely get loan modifications and possibly some relief from the lenders."
But that is the tip of the iceberg, says McCabe.
"Another 550,000 additional Florida homeowners are 90 days-plus delinquent and thus subject to future foreclosure filing," he said. "Taken together, there are 1.1 million distressed residential properties in the state."
Given that the U.S. Census shows Florida has 9 million housing units in total, that means about 11 percent of the state's housing stock is experiencing some level of distress.
The 11 percent distressed figure sounds "entirely plausible" to Anne Ray, Florida Housing Data Clearing House manager at the Shimberg Center for Housing Studies at the University of Florida, the official repository for state housing data. Ray estimated more than 320,000 open foreclosures statewide, close to McCabe's figure.
Ray also pointed out that the Manatee-Sarasota MSA, one of the state's best performers in sales increases, "had a foreclosure rate of 13.77 percent as of September 2012, and a 'pending' rate of an additional 3.36 percent." Taken together, it means more than 17 percent of the area's homes are in some state of distress.
But Florida Realtors argue that those statewide figures might be double-counted.
According to Sept. 30, 2012 estimates from CoreLogic, a leading provider of real estate and financial data, 562,664 homes have mortgages delinquent by 90 days or more, 389,149 are in foreclosure and 36,284 are REO (Real Estate Owned) loans, property in the possession of a lender as a result of foreclosure, says Florida Realtors research economist Brad O'Connor.
"Loans that are counted in foreclosure and REO estimates can also be counted in the 90-day plus delinquency estimate, so it would be erroneous to add them together to obtain a count of distressed loans," O'Connor said. "Unfortunately, the statistics we receive from CoreLogic do not provide us with any counts of how many loans are both 90-plus delinquent and in foreclosure/REO status."
One reason many banks are not lending is that with undigested and often unsavory inventory in their bellies, many may be at or near the regulatory threshold for the portion of their portfolios dedicated to residential lending, said McCabe.
Charles "Charlie" Brown III, chairman and CEO of Insignia Bank, a Sarasota-based community bank which includes Manatee in its core market, says "there's a big difference between what the large institutions may be contemplating, and what's going on at locally owned and operated community banks, where I'm seeing a flood of portfolio lending nationwide."
"Insignia is making portfolio loans, typically five- to 15-year fixed mortgages, has excess capacity and could double its current mortgage portfolio on top of its total of $113 million, 200-plus loan portfolio," Brown said.
A portfolio mortgage is one that the bank itself holds to maturity, as opposed to secondary mortgages which are usually sold to government-sponsored enterprises, including mortgage giants Fannie Mae, Freddie Mac and others. That secondary market is where the squeeze, and most of the money and problems are, says Brown. He's in a position to know, since he recently completed his second two-year term as one of 14 members of the Federal Deposit Insurance Corp.'s Community Bank Advisory Board in Washington, D.C.
Brown said that getting loan approvals in the secondary market where the GSE's set the base standards is an ever-shifting and increasingly difficult process.
"They are continually tightening, tweaking and revising performance standards," Brown said. "It's very difficult to get a 'conforming' GSE mortgage and many banks have thrown up their hands altogether. I'm sensing both tension in the GSEs, as well as political pressure."
But real estate attorney Anne Weintraub of Sarasota's Band Weintraub says the larger banks are tired of being sued and are starting to cooperate with homeowners.
"They are tired of spending monies on attorneys to fight borrowers and realize owning a home is not ideal," she said. "Most homes are abandoned, left in a state of disarray and the volume of abandoned homes is so enormous some banks don't even realize they own the homes."
In either scenario, banks can be both lenders and sellers, and typically hire the appraiser.
"Until the banks get the foreclosures off their books, they are sellers who want to get the best possible prices," McCabe said. "Due to the legal wrangling, foreclosure sales in 2012 were basically 'on the shelf' while banks saw prices increasing, so now, after the settlement in a 'perceived recovering market,' I'd expect foreclosure filings and bank sales to accelerate this year and next."
Bank-retained private appraisers also can be part of the problem, he contends, if their low valuation compared to the contract sales price inhibits lending.
Uncertainty surrounds issues
Additional flies in the recovery ointment are state and federal issues that may have adverse impacts on sustainable realty recovery.
In Tallahassee last week, a bill designed to speed up the foreclosure process passed the Florida House Civil Justice Subcommittee on a 10-3 vote. Foreclosure monitoring service RealtyTrac reported that "House Bill 87 allows third-party lienholders to start foreclosure proceeding and rushes final judgment of foreclosure if a homeowner doesn't file a defense. The bill aims to streamline and expedite the foreclosure process." RealtyTrac termed the bill a controversial piece of legislation in Florida -- the state that leads the nation in foreclosure filings.
Immediately, more than a half-dozen law firms and attorneys aligned to defeat the bill, including St. Petersburg's Matt Weidner, Mark Stopa and Charles Gallagher, a member of Florida Consumer Justice Advocates, a self-funded consumer lobbying group.
"Our fear is the current due-process rights of homeowners are being further diluted by the provisions of HB 87 and if passed, this bill would further handicap homeowners from defending their foreclosure and provide banks with little judicial resistance from the speedy foreclosure of their homes," said Gallagher.
Tuccillo, the Florida Realtors' chief economist, says the bill has "its pros and cons, and while I'm not a raving fan of HB 87, I would like to see it passed." He called the slow judicial process a primary contributing factor to the huge build-up of the state's shadow inventory.
"It's been a long, long time" that banks have held onto the troubled mortgages, and "it's time to get all this garbage out of the way," he said.
In Washington, the Consumer Financial Protection Bureau -- the agency that holds primary responsibility for regulating consumer protection with regards to financial products and services in the United States -- is viewed by some as part of the problem.
The CFPB, in its attempt to protect consumers, is creating a "bigger mess" as compliance and risk escalate with every new rule they put out, Charlie Brown says. CFPB sends out revised guidelines "almost every 30 days that are scaring off mortgage lenders due to litigation and compliance risk." The situation with the secondary market and the CFPB is "extremely difficult, and very much worries me," said Brown.
It could get uglier.
"About 40 percent of Floridian mortgage holders who are current on payments are nonetheless underwater," meaning that their current mortgage balance is greater that the market value of their property, says McCabe. That portends an expanding horizon of potentially distressed properties coming onto the market.
Veteran Florida real estate analyst Lewis Goodkin agrees.
"There used to be a stigma attached to foreclosures, but no more," Goodkin said. "I know people making good money, professionals, whose homes are underwater and they have decided to simply stop making payments and put the money into the bank instead.
"In one case, fully 21 months after not getting payments, the bank finally foreclosed. When banks unload property, they are so leery of mortgage availability that they only take cash offers, which means they sold at prices 20 percent lower than they normally could have," he said.
Those buyers are either large specialized Wall Street funds that have been snapping up distressed property, or foreign buyers.
"Over half of the (2012) transactions in the Miami market were cash-only deals, which means that a normal person with a steady job is unable to compete, or even to buy at all," Goodkin said.
So what do the numbers mean?
"Bottom line is that, if you only pay attention to Realtor data, everything looks great," summarized McCabe. "However, if you remove the blinders and consider underlying financial market activity and data, there's still trouble in paradise and it'll take another two to three years to achieve a normal healthy real estate market."
Goodkin echoes that time frame.
"It's not a very dynamic situation and we're not out of the woods yet, and probably won't see a normally functioning market until mid-2014, unless we have a depression, God forbid," he said.
Realtors and hopeful sellers and buyers who cheered 2012's rose-tinted Florida housing report as an indicator of better things to come in the short term are "smoking Hopium," said McCabe, adding tongue-in-cheek that he "trademarked the term" for the duration of the Great Recession.