Foreclosures chill once-hot Southeast housing market

EconSouth, Fall, 2008 by William Smith

When such events lead to numbers of foreclosures in a subdivision or community, the consequences can be severe--not just for those who lose their homes but also for builders, lenders, and others in the community with good credit. Examining how these various stakeholders are adjusting to the impact of foreclosures in the Southeast provides a window into the housing crisis in the region.

Homeowners work out the workout process

During the first half of 2008, the Consumer Credit Counseling Service (CCCS) of Greater Atlanta experienced a surge of calls from homeowners delinquent on mortgage payments, said Suzanne Boas, the agency's president. Nearly as many people--some 30,000--turned to CCCS for housing counseling sessions in the first six months of 2008 as in all of 2007.

The increased housing counseling at CCCS this year reflects a deepening foreclosure crisis that began with low-income borrowers and spread to families with more substantial means. For the first time in 2008, the average household income of CCCS clients seeking housing counseling exceeded $40,000.

Along with additional foreclosure-related activity, CCCS has continued to receive calls from people struggling with credit card bills, medical expenses, and other types of unsecured debt.

"Demand for our counseling services is rising significantly as people try to avoid foreclosure and bankruptcy, as well as cope with rising gasoline and food costs," Boas said.

In response, CCCS is hiring about 80 more counselors using the proceeds of a $2 million grant from the Ford Foundation. Counselors help borrowers negotiate with loss mitigation departments of mortgage servicers and often help provide information that can lead to a loan modification, or workout. Typically, workouts involve investigation and time-consuming back-and-forth negotiations that vary depending on the situation. Such delays can be costly for borrowers and lenders alike. Recently, however, CCCS began testing a new software program to standardize and speed the workout process, Boas said.

A window on Florida's housing woes

With their patience and knowledge of the financial landscape, credit counselors and other nonprofits have played a crucial role in helping address the foreclosure crisis in south Florida, said Ana Cruz-Taura, regional community development director in the Atlanta Fed's Miami Branch.

In the climate of rapid house price appreciation between 2002 and 2006 in south Florida, many potential homebuyers abandoned the traditional go-slow approach of saving for a down payment to buy a house. Rather than paying more later by delaying their purchase, they instead chose to take a chance on a subprime loan in the hopes of getting into a home before property values increased further. Speculators fueled house price increases and worsened the affordability problem that drove ordinary borrowers into risky mortgages.

But when the housing market cooled and prices began to decline, overextended borrowers began to have credit problems. Between May 2007 and May 2008, Miami-area house prices fell by more than 28 percent, according to the S&P Case Shiller 20 City Composite Index, which tracks home values in 20 markets around the country. Still, even with this recent drop, house prices in Miami now are still much higher than in 2000.