Subprime Mortgage Mess, Across Metro Orlando
The risky loans aren’t just in lower-income areas — they are common in Avalon Park, Celebration, Winter Garden, Deltona . . .
Orlando FLORIDA - May 18 2008 - In a historic shift that continues to fuel the housing crisis here, high-priced mortgages known as “subprime” loans broke out of Central Florida’s mostly poor and urban neighborhoods in recent years and multiplied by the thousands in the region’s suburbs, according to an Orlando Sentinel analysis of federal lending data.
More than 200,000 subprime mortgages were issued across the region from 2004 through 2006, the Sentinel analysis found. That is about three of every 10 mortgages made during the three years studied.
Only eight of the top 100 U.S. census tracts with the most subprime loans in Central Florida are in low-income, urban areas such as Pine Hills and Azalea Park, according to the analysis. The rest are in suburban communities such as Avalon Park, Celebration, Winter Garden, Deltona, Poinciana and the Four Corners area near Disney World.
The stampede to the suburbs, which resulted in about $30 billion worth of subprimes in a seven-county area, was triggered by Wall Street’s desire at the time for high-return investments based on the high-risk mortgages, according to a former senior economist with the Federal Reserve.
“There were just not enough people in inner cities to allow subprimes to grow into a really significant portion of the mortgage market,” said Anthony Pennington-Cross, the former Federal Reserve Bank of St. Louis economist, who now teaches finance at Marquette University in Milwaukee.
The Sentinel analysis, which also included foreclosure filings compiled by RealtyTrac, a private company that collects public records, did not track individual mortgages through the foreclosure process, but it did measure and compare the number of subprime loans and mortgage defaults in each of the region’s 608 census tracts. It found that:
*The more subprime loans there are in a census tract, the more mortgage defaults there are.
*Mortgage defaults in the region spiked to about 22,000 last year, more than triple the number of defaults in 2006.
*All seven counties in the region — Brevard, Lake, Orange, Osceola, Polk, Seminole and Volusia — ranked in the top third of Florida counties in the number of subprime loans issued from 2004-06.
“There are too many” subprimes in Central Florida, said Larry Tobin, president and chief executive officer of Orlando-based Fairwinds Credit Union, who called the 200,000-plus figure “significant.”
“It is certainly not going to be this year that we will be able to work through all that,” said Tobin, whose credit union largely avoided the subprime market during the housing boom earlier this decade. “It is definitely going to be years.”
How the mess happened
Just last week, the chief economist for the National Association of Realtors blamed most of the nation’s 2-year-old housing slump on the “subprime mess.”
“In fact, if you look at where home prices fell the most, it’s the markets where subprime loans were prevalent,” economist Lawrence Yun said during a Washington conference. Among the biggest examples, according to Yun: Miami, Orlando and Cape Coral in Florida, as well as Detroit; Las Vegas; Phoenix; and Riverside, California.
A subprime loan is typically defined as one having an annual percentage rate at least three points above what U.S. Treasury securities of similar maturity are offering investors at the time the mortgage is issued, which makes a subprime more expensive for the borrower than a conventional, or “prime,” loan.
If you bought a home in Central Florida in the past few years, you might have one and not even know it.
For years, subprimes were generally few in number and limited to low-income, urban neighborhoods with large minority populations, where would-be homeowners had minimal down payments or spotty credit records — or faced discriminatory barriers when trying to obtain standard loans.
Banks used to issue both prime and subprime mortgages primarily with money deposited with them by savers. But in the 1980s and ’90s, lenders increasingly drew on a new source of funds for home loans: investors.
Government-sponsored enterprises such as Freddie Mac and Fannie Mae “bundled” prime loans into large investment packages, for sale as bonds on the open market. But they largely avoided subprimes. So investment banks and other financial institutions began bundling subprimes into securities on their own, offering investors higher returns as compensation for the increased risk of default.
As lenders shipped more of their newly approved subprime mortgages to the open market for sale to investors, instead of holding them on their books as assets, they also loosened the credit standards they used to judge borrowers, a Federal Reserve Bank of Dallas report concluded last year. Some gave loans to buyers lacking down payments or proof of income.
The result was a huge jump in the number of subprime loans issued across the U.S., the Fed report noted.
“The ugly thing is, you have originators and lenders selling mortgages inappropriate for borrowers, to satisfy the desire for higher returns in the financial market,” Pennington-Cross said.
The easing of qualifying standards coincided with a “sizable rise” in the use of adjustable-rate mortgages, or ARMs. Lenders often used ARMs to entice borrowers into higher-priced, subprime loans by touting low “teaser” interest rates that adjusted upward to much higher rates a few years later.
For example, 92 percent of the subprime loans issued in 2006 that were later sold as investment securities had adjustable rates, according to the Fed report.
The housing boom initially kept many of these mortgages from defaulting because rising property values allowed borrowers to easily refinance or sell their homes. But last year, a momentous change occurred: The nationwide median price for a home dropped for the first time in decades.
And the subprime market started to unravel.
“They [subprime loans] were never about homeownership. They were all about generating billions of dollars in fees for Wall Street,” said Bruce Marks, executive director of the Neighborhood Assistance Corp. of America, a nonprofit group that helps troubled borrowers renegotiate their mortgages. “Homeownership historically has been ‘I have a mortgage payment that I can afford for the long term.’ ”
Adjustable rate in fine print
Martin and Linda Conroy bought a four-bedroom, three-bath home about three years ago in the Four Corners section of Lake County. They wanted a family-oriented neighborhood for Torie, their recently adopted, 9-year-old son, as well as room for when their adult children visited.
Their lender was BNC Mortgage, a subsidiary of Lehman Brothers Holdings Inc., a global investment bank that during the housing boom was among the leaders in packaging subprime loans into securities for sale to big-time investors.
BNC gave the Conroys a $300,000 mortgage. The retired firefighter and his wife say they don’t know whether their loan is subprime, though it possesses many of the characteristics associated with one. For example, they must pay a penalty — about $8,000, Martin Conroy says — if they attempt to improve the terms by refinancing the mortgage before the end of 2009. Yet if they keep the mortgage beyond that point, their introductory interest rate of 7.125 percent could jump initially to 10.125 percent and reach 14.125 percent within two years.
“I was under the impression it was a fixed rate,” Martin Conroy said of the mortgage. Not until adjustable-rate loans became a regular subject of news reports did the Conroys reread their loan documents and discover they had one.
They quickly put their house up for sale, but not a single person has come to see it in six months, they say.
One problem is that their home is sandwiched between a house already repossessed by its lender and another that has been vacant and for sale for about a year. The lender on the foreclosed neighbor was Aurora Loan Services LLC — another Lehman Brothers mortgage unit that was renamed Lehman Mortgage Capital a couple of weeks after Lehman Brothers shut down BNC Mortgage.
While waiting for a buyer, Martin Conroy has taken a part-time job as a bus driver at Walt Disney World to generate extra income. But this is not how the couple envisioned their Central Florida retirement.
“What we really need to do is downsize,” Linda Conroy said. “Have a smaller place and half the mortgage.”
Selling for less than owners owe
The Central Florida suburbs with the most subprime loans in 2004-06 are also the ones with the most mortgage defaults now, according to the Sentinel analysis. And the resulting distress is getting worse, according to court and real-estate records.
In Tradd’s Landing, the Conroys’ Four Corners subdivision, about a half-dozen of the 300 or so houses have already been repossessed by lenders, property records show, and at least 22 others are the target of foreclosure suits pending in state court. The neighborhood sits in a census tract with more than 2,500 subprime loans.
In Brighton Lakes, an Osceola County subdivision about a decade old, half of the 78 homes for sale through Realtors at the end of April were “short sales,” meaning their asking prices were less than what their owners owe on the residences, according to Richard Carpentieri, a broker with Flat Fee Realty LLC in Kissimmee. The development is in a census tract with more than 1,300 subprimes.
In Winter Garden’s Stoneybrook West golf community, brochure containers attached to scores of mailboxes subtly offer properties “For Your Consideration.” About a quarter of the 85 homes for sale there through local Realtors at the end of April were short sales, Carpentieri said. The community is in a census tract with more than 1,400 subprimes.
In Avalon Park, the owners of at least 76 homes have been sued in state court so far this year for delinquent mortgage payments, according to Orange County Clerk of the Court records.
Avalon Park and the neighboring subdivisions of Waterford Lakes harbor more than 3,000 subprime loans — more than any other census tract in Central Florida. The same east Orange County tract also ranked third in the region last year in number of mortgage defaults, with 311, the Sentinel analysis showed.
Housing troubles have become so commonplace in Avalon Park, a decade-old community whose growth straddled the housing boom, that the neighborhood Roman Catholic church recently organized a Foreclosure Forum to connect parishioners and residents with short-sale experts, mediation specialists, bankruptcy lawyers and anger-management therapists.
“They are angry at themselves. It hurts marriages and kids,” said the Rev. David Scotchie, pastor of St. Maximilian Kolbe Catholic Church. “It’s not just individuals. It’s families, and it affects the community.”
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