Sun Belt housing 'flips' backfire

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Housing speculators who got burned and are walking away from their investments drove the foreclosure rate on prime mortgage loans to a record high in the first quarter, with the problem most prevalent in California, Florida, Arizona and Nevada.

The trend in Sun Belt states that had greatly overheated housing markets may foreshadow problems in areas like Washington that many analysts think also experienced a housing bubble led by strong speculative buying, particularly in condominiums, during the housing boom between 2000 and 2005.

Figures from the Mortgage Bankers Association released yesterday showed that foreclosures are on the rise in nearly every category, but they are particularly pronounced in Midwest states experiencing manufacturing recessions and Sun Belt states where housing investors flocked in hopes of making quick money by "flipping" house purchases. The trend in the Sun Belt emerged only this year and has quickly driven the foreclosure rate on prime loans to a record 0.25 percent.

Many of the investors were well-off real estate professionals, riding the wave of the housing boom, as well as middle and upper-income families with good credit and cash to invest. Their dreams of getting rich quick have been replaced by fears of losing a great deal of money as prices started plunging. Rather than take the risk of suffering sizable losses in a protracted housing downturn, some investors have stopped paying their loans and turned their properties over to the bank to be auctioned off.

"If you're in a position where you can refinance or sell, but house prices have fallen below your outstanding loan balance, you're in trouble," said Doug Duncan, chief economist of the Mortgage Bankers Association. "Housing is in a recession, and we're seeing that reflected in prices."

The association's analysis highlights that the foreclosure wave is far from only a subprime problem concentrated in areas where incomes are low and the economy is sagging. It is emerging as a major problem in wealthy states where real estate itself was a principal force driving economic growth.

"The foreclosures in Florida, Nevada, California and Arizona are heavily influenced by speculators who are walking away from properties now that home prices have started to fall in areas of those states and they face resets in the adjustable-rate mortgages they took out for these homes," Mr. Duncan said. "In addition, speculators in Florida are also facing much higher insurance bills" because of multiple hurricanes in recent years.

Others will pay a price as investors walk away from their properties. People with homes in cities, resorts and coastal areas hit by heavy rates of foreclosures will see their home values driven down as houses are auctioned off at a fraction of the prices they commanded during the housing boom.

The share of all mortgages entering foreclosure rose to 0.58 percent in the first quarter from 0.54 percent at the end of 2006, the association reported yesterday, led by another spike in subprime loans entering foreclosure to a five-year high of 2.43 percent from 2 percent.

The report shows that delinquency and foreclosure rates in Washington, Maryland and Virginia currently are low by national standards. The rate of prime and subprime loans with adjustable payments that are in foreclosure in Washington and Maryland, for example, are about half the national average.

But while the 1.8 percent drop in condo and cooperative home prices in the Washington area in the past year is not as great as the double-digit losses seen in Florida cities like Palm Bay and Fort Myers, where prices have plummeted by 22 percent in the past year, it is greater than the 0.3 percent decline seen in Los Angeles. And it is on a par with the losses in cities like Tampa, Fla.; Tucson, Ariz.; New York; Boston; Providence, R.I.; and San Francisco, according to the National Association of Realtors.

Mr. Duncan sought to portray the surge in foreclosures primarily as a Sun Belt and Rust Belt problem. But in a sign that the trend is starting to hit the Northeast, condo prices have been falling rapidly in cities like Worcester, Mass.; Bridgeport, Conn.; and Portland, Maine, where the median price has collapsed by 14 percent in the past year, according to the realtor association.

The mortgage association's own figures show that Massachusetts and Rhode Island are among the top five states hit by foreclosures and delinquencies in several categories. Bargain Network, which also tracks foreclosures, said that foreclosures are up by 16 percent in Delaware and 36 percent in Vermont in the past month.

"The head economist for the Mortgage Bankers Association ... says the foreclosure situation isn't so bad if you exclude Ohio and a few surrounding states," said Sen. Sherrod Brown, Ohio Democrat. "That is small comfort for those of us who live in Ohio," which has the highest foreclosure rate ever recorded for a state.

"We need help. ... The Federal Reserve should have acted long ago to stamp out the abuses we have seen in Ohio and across the country," said Mr. Brown. "We are facing a full-blown housing crisis, and the rest of the country is not far behind us."