Caught in a rate trap
From Miami to Pensacola, Florida is bloated from high-interest-rate loans.
By Times Wires
Published October 12, 2007
As the country feasted on high-interest-rate home loans in 2005 and 2006 to feed the housing boom, Florida sat at the head of the table.
An analysis of a decade's worth of loan data by the Wall Street Journal showed that high-interest loans were pervasive throughout the country in recent years, a phenomenon now being blamed for a rash of foreclosures.
But Florida stood out. Last year, Florida led not just in the number - 447,983 - but also in the percentage - 36.9 percent - of high-interest loans, typically viewed as those carrying an interest rate above 8 percent. The state was No. 2 in both categories in 2005.
In the Tampa Bay area, the volume of high-interest loans ballooned to 36.1 percent of all of its loans in 2006 from 19.4 percent of loans in 2004.
That's nothing compared to Miami, which last year led not just Florida but also the nation in taking out those loans.Nearly half of Miami's home loans fell into that category.
The percentage of such loans in Fort Myers, Lakeland, Fort Lauderdale and Orlando also surpassed that of Tampa.
"We had an aggressive home-mortgage industry trying to get people into homes they couldn't afford at a time when home prices were very high. It turned out to be a house of cards," says Karl Case, an economics professor at Wellesley College in Massachusetts. "We're in the early stages of the cleanup."
After sifting through more than 130-million home loans made over the past decade, the Journal concluded that these loans became popular well beyond the stereotypical subprime loans made to the inner-city poor.
From 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage firms made $1.5-trillion in high-interest-rate loans. Most subprime loans, which are extended to borrowers with sketchy credit or stretched finances, fall into this basket.
About 10.3-million high-rate loans, out of a total of 43.6-million mortgages, were made in the past three years. Although the concentration is higher in poor communities, numbers show that high-rate lending also boomed in middle-class and wealthier communities.
One of the raw spots in Florida is Fort Myers, fast earning a reputation as an example of the deepening U.S. mortgage crisis. The area's median sales price for existing homes is down 22 percent since December 2005. Foreclosures are at an all-time high.
Between 2004 and 2006, the Cape Coral-Fort Myers area absorbed more than $8.5-billion in high-rate mortgages. The loans encouraged borrowers to stretch more than ever, which helped inflate real estate prices.
Seven of the 10 large metro areas now struggling with the highest foreclosure rates - including Miami, Detroit and Las Vegas - saw borrowers barrel into high-rate loans much faster than the country as a whole.
It's not all gloomy. Last year, the number of new high-rate loans fell 2 percent, to about 4-million, after jumping 88 percent in 2005. That reflects the collapse of some of the most aggressive lenders and tightening credit standards. Slowing home sales have put the brakes on demand, and borrowers have grown more wary of gimmicky mortgages.
Yet last year's data show that even as the housing market was weakening, some lenders still leapt into making riskier loans. SunTrust Banks Inc. of Atlanta, long known as a conservative lender, more than doubled the number of high-rate mortgages.
Higher-income home buyers began using such loans for larger purchases. Among white borrowers with annual incomes of at least $300,000, the number jumped 74 percent last year.
Lenders did little to discourage speculation by real estate investors, which contributed to rising home prices. Last year, 13 percent of all high-rate home loans were for properties not occupied by owners, up from about 9 percent in 2004. Such investment properties are becoming a higher foreclosure risk in the Tampa Bay area.
In the hardest-hit areas, the numbers could batter borrowers, lenders and builders for years to come. This year, through July, the rate of mortgage-default and foreclosure-auction filings in Lee County, where Fort Myers is located, was second highest in the United States, according to Foreclosures.com. The inventory of unsold homes has swelled to about 15,000, and some investors who had hoped to flip houses at a profit are walking away from sales contracts.
"We view Fort Myers as likely the worst housing market in the country," J. Larry Sorsby, executive vice president and chief financial officer of Hovnanian Enterprises Inc., complained last month.
Times staff writer James Thorner contributed to this Wall Street Journal report.