The phrase I have heard most frequently regarding foreclosures and declining property value is “death spiral”.
Homeowners increasingly have “upside down” mortgages- they owe more than their properties are worth.
With increasing foreclosures, homeowner associations ultimately face the choice between not maintaining the common property, or levying special assessments which homeowners can’t afford. Increased assessments then lead to more delinquencies and foreclosures, further depressing property value.
Florida is especially hard hit. In 2008, California and Florida accounted for nearly half of all the foreclosures filed. The crisis started with subprime mortgages– no-doc loans (no proof of income required), and high risk loans -- causing a flood of bad debt. But the problem has spiraled far beyond that.
On December 14, 2008, a program on CBS’s “60 Minutes” discussed the second wave of foreclosures. Mortgage defaults on ALT-A and Option ARMs mortgages are expected to dwarf the subprime mortgage crisis.
The declining economy and rising unemployment further aggravate the problem.
On Jan. 19 of this year, an article in The South Florida Business Journal suggested that South Florida foreclosure filings could double in 2009.
To make matters worse, Fannie Mae – which buys mortgages and funds loans, owning about half of the mortgages in Florida- tightened lending requirements on January 15. It will no longer fund loans in condo developments where 15% of the total number of units are late in assessments by 30 days or more. This will affect lending for purchases and refinancing of condo units, and make it even harder to sell condos, leading to further depressed home values and foreclosures. Although this now applies to only condos, it would not be surprising to see a constricting of HOA lending, as well – especially those with significant common property or shared facilities.
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