Nose-diving home equity means slower Florida recovery
TAMPA - If anything can tell the story of Florida's housing boom and bust it's this: In early 2007, Floridians were drawing nearly 20 percent of their total incomes from home equity loans and credit lines. Property values rose so high, so fast, people couldn't resist treating their homes like piggybanks. In Tampa, these "home equity extractions" made up 14 percent of people's total incomes – nearly double the national average. And that's nothing compared with Miami, where it made up 26 percent of their incomes, according to Moody's Analytics. Then, the bottom fell out of the housing market, and scores of patio and pool builders and home remodelers who were paid out of home equity loans nosedived. Lately, the volume of new reverse mortgages has fallen by more than half in the Tampa Bay area, partly because of the decline in people's equity.Some people see a silver lining to the equity collapse. People are feverishly paying off home equity loans and other debt, which should leave them better off in the long run. But the lack of an easy source of cash means Florida will recover from the recession very slowly, said Sean Snaith, an economist with the University of Central Florida. "Now, no longer is (the home) this little honey pot; it's now a liability," Snaith said. During the rip-roaring mid-2000s, pool builders such as Dan Johnson couldn't believe how loose banks were with home equity loans and credit lines. Banks began offering people loans backed by home equity they didn't even have, said Johnson, a veteran of the industry with Swim Inc. in Sarasota. For example, someone with a $100,000 home might have only had $20,000 of equity at the time. Still, banks were willing to give home equity loans for $60,000 – on the assumption the home would rise by that much after the pool was built. "Even at the time, I said, 'What are these guys doing?' That's crazy. They just couldn't loan money fast enough," Johnson said. Some home equity lenders began offering commissions to pool builders if the builders would steer customers their way. Floridians jumped at all the money banks were dangling in front of them. In January 2007, home equity extractions – or money people collected from home equity loans and credit lines – accounted for 17 percent of Floridians' total income from all sources, including wages, dividends and benefits such as Social Security payments. That was more than double the national average of 8 percent. But, then the housing bust took hold, and today nearly half of Florida homeowners are underwater on their mortgages, or owe more than their homes are worth, according to a recent study by the CoreLogic real estate Where home equity loans once were a source of income, they're now a drag on incomes, said Chris Lafakis, an economist at Moody's Analytics who follows Florida. As of last December, home equity loans and credit lines accounted for -8.1 percent of Floridians' income. The figure is negative because no one is able to draw cash out of their homes, while many people are paying off their home equity loans – eating into their incomes, Lafakis said. That's not healthy for the economy, Lafakis said. He'd like to see Floridians drawing a modest amount of money from home equity, maybe 2 to 7 percent of their incomes. The fallout from the disappearance of so much equity is still rippling across the state. Among the people and businesses coping are: • Reverse mortgage companies. In the fall off 2007, celebrity charmers such as Robert Wagner and Pat Boone were all over TV pitching reverse mortgages. In reverse mortgages, which are available to seniors, the loan company makes payments to a homeowner over a period of years and interest builds up on those payments. The lender eventually is repaid the principal and interest after the homeowner dies or moves out. But the system depends on the homeowner having enough equity in his house. In the Tampa Bay area, the number of new reverse mortgages backed by the Federal Housing Administration has fallen by more than 60 percent since early 2008, according to FHA data. That's worse than the rest of the nation, where FHA-backed reverse mortgages are down about 35 percent. The FHA backs the vast majority of reverse mortgages nationwide. Some people still have equity and lenders are still making loans, but reverse-mortgage brokers are seeing too many deals collapse when a homeowner's house is appraised too low. "I have to say, 'I'm sorry I can't help you,' more often than not," said Pat Smoot, a broker with Integrity Financial Services in St. Petersburg. • Small businesses. By 2006, home equity had become the go-to source of financing for small businesspeople, said Jim Parrish, a financial advisor at the Small Business Development Center at the University of South Florida. Businesses looking for money could get a loan backed by the Small Business Administration for 2 3/4 percentage points over the prime rate. But, they could get a home equity loan for 1 point over the prime rate, he said. "Home equity loans weren't their first choice when they walked in, but it became their most obvious choice," Parrish said. • Banks. Obviously, many banks that made home equity loans now hold loans that are completely unsecured, because the equity in people's homes that backed them has disappeared, said Doug Winton, market president for Republic Bank of Florida. Not surprisingly, more people are running late on their payments. In the fourth quarter of last year, about 4 percent of all home equity loans nationwide were at least 30 days late, according to the American Bankers Association. That's more than double the delinquency rate from 2006, when less than 2 percent of such loans were delinquent. The ABA didn't have state-by-state figures, so it's possible Florida's delinquency rate is worse, an ABA economist said. Despite all the worry about Florida's unemployment rate, economists such as Snaith say the destruction of real estate wealth is just as troubling for the economy. It's a big reason he expects the state's recovery will be slow and U-shaped instead of a quicker V-shape. Still, there is reason to be optimistic, economists say. People are busy paying off their debts, and since they can't tap into home equity anymore, they're not racking up as many new debts. "This is a health thing," said Lafakis, the Moody's Analytics economist. "Eventually it will enable consumers to spend more."
Reporter Michael Sasso can be reached at [email protected] or (813) 259-7865.