South Florida Banks Pile Up $3 Billion in Real Estate Loan Losses Since 2008 Market Crash

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According to Bal Harbour, Florida-based Condo Vultures, troubled real estate loans have triggered nearly $3 billion in losses for South Florida-based banks in the last three years of the real estate market crash.

Banks headquartered in the South Florida region of Miami-Dade, Broward, and Palm Beach counties lost $1.8 billion in 2008, $802 million in 2009, and $368 million in 2010, according to the analysis based on data from the Federal Deposit Insurance Corp., which guarantees funds up to $250,000 per account.

During the same three-year period, the number of banks based in the tricounty region has decreased by eight institutions to an overall total of 72.

"South Florida banks are dependent upon real estate lending for the majority of their loan portfolios," said Peter Zalewski, a principal with Condo Vultures LLC. "As residential property prices plummeted by more than 40 percent in the tricounty region since 2007, South Florida banks have struggled to absorb the losses associated with real estate loans. Several of the institutions have had to raise additional capital to meet ratios dictated by the FDIC to avoid the fate of the eight South Florida institutions that failed between 2008 and 2010."

The drop in prices has Florida banks reevaluating their strategies regarding distressed real estate loans going forward.

In the early stages of the real estate crash, many South Florida lenders resisted selling mortgage notes at deep discounts off of the outstanding principal, preferring instead to aggressively pursue a repossession strategy using the foreclosure process.

With nearly 270,000 foreclosure actions filed in South Florida since 2007, the state court system has been overwhelmed with cases.

The repossession process now takes an average of 18 months to complete at a cost of about $100,000 per property. Prior to the South Florida real estate crash, lenders projected a foreclosure would take six months to complete at a cost of about $40,000 per property.

Adding to the lengthy process is the uncertainty related to administrative irregularities that surfaced in the foreclosure process in late September 2010. Buyers and lenders alike shifted into a "freeze" mentality after concerns were raised about the certainty of the titles for repossessed properties.

As a result, lenders filed 61 percent fewer notices of default in South Florida between October and December 2010 compared to the same three-month period in 2009, according to the Condo Vultures.

Further pushing lenders away from a foreclosure strategy is the pricing achieved for bank-owned properties - also known as REO - compared to shortsales in the South Florida resale market.

Shortsale transactions where lenders accept less than the amounts owed by the borrowers are selling for a higher average price on the open market than properties that have been repossessed by lenders through the foreclosure process.

In 2010, the average shortsale transaction price was $173,700 per residence compared to an average of $110,900 for a bank-owned property.

On a wholesale level, mortgage notes in a first position secured by real estate now sell for about 50 percent of the current appraised value in the tricounty South Florida region.

Lenders are now accepting about 29 percent less for a mortgage in a senior position that is in default compared to the pricing schedule at the beginning of the real estate crash in 2007 in Miami-Dade, Broward, and Palm Beach counties, said Rich Meyer of the Foreclosure Academy in Hollywood, Fla.

The current pricing ratio is no longer based on the outstanding principal owed by the borrower in default, which means the discount is even greater when compared to the loan amount, said Meyer.

Meyer has invested in distressed South Florida properties ranging from foreclosures purchased at the courthouse auctions to pools of mortgage notes acquired from lenders for nearly 30 years.

As challenging as the climate is for South Florida banks, the situation is not much better statewide.

Florida had 247 state-based banks at the end of the year 2010 compared to 306 banks in the last year of the real estate boom in 2006, according to the report.

Florida banks have lost a combined $6 billion since 2008 with losses of $2.8 billion in 2008, $2.2 billion in 2009, and $1.1 billion in 2010.

By comparison, Florida banks posted a profit of more than $1.6 billion in 2006 and $673 million in 2007, the first year of the state's real estate meltdown, according to Condo Vultures.

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