October 2008

Moderator: Welcome to the Federal Reserve Bank of Atlanta's EconSouth Now podcast. Today we're talking with Ana Cruz-Taura, community development director in the Community Affairs Division of the Atlanta Fed's Miami office. Ana is involved in foreclosure issues in South Florida. The current issue of the Atlanta Fed's EconSouth magazine features a cover story on foreclosure in the Southeast. So we've asked Ana to join us today to discuss some of the issues with regard to foreclosures, specifically in Florida. So thanks for joining us, Ana.

Ana Cruz-Taura: Oh, it's my pleasure.

Moderator: Now, Ana, you're right there in the Miami area, so you're seeing what foreclosures are like there. Can you give us a snapshot of how the housing situation has changed from just three years ago when Florida foreclosures were actually below the national average?

Cruz-Taura: Well, Charles, you know, three years ago we had buyers flipping contracts on units that were still under construction. There was a definite real estate frenzy in our market, with an unusually high number of people that were working in and connected to the real estate industry. Many of our foreclosed homes are condos and brand-new single-family homes that don't really stand out, like the boarded-up homes with knee-high grass, that is expected when one speaks about high foreclosure rates. But there's plenty of that as well. And many of those unkempt lawns and vacant homes are in some of our more expensive neighborhoods. Foreclosures are plaguing high-end and more modest neighborhoods alike. I think that many of the foreclosed homes are being sold now at auction, though I've heard that some of the auctions actually don't generate the amount of sales that they expect.

Buyers are hesitant, and when they do decide to make a purchase decision are often frustrated by the financing process. Short sales are generally taking six months or more to materialize, which makes it hard for those properties to compete with so many other homes on the market that are faster to close. So it's a frustrated and complicated real estate market right now for us down here. And those that don't have to be in it are generally opting to stay away. This is, of course, unfortunate for many lower-income people, middle-income people that could take advantage of buying homes in a reduced market like we're seeing today.

Moderator: From a standpoint of a community, what is the impact of foreclosures in Florida? How is it spilling over into neighborhoods and related industries?

Cruz-Taura: Well, I think anyone looking to find a place to live right now—whether to own or to rent—can tell you that the market is less than friendly. I just explained some of the barriers to buying homes for the average South Florida resident, but renting is also problematic. We had many rental buildings convert to condos over the past six years. This means that a higher proportion of rental units, including homes, are privately owned, and this represents a number of risks to renters now because many of these investors are in the midst of foreclosure, either because they can not cover the mortgage payment with the rental income or because they are having problems with their own home, or have lost jobs or reduced their personal income and are using the rental income to keep their own personal mortgage current. And when foreclosure takes place, the renter is displaced.

So, we have a growing number of victims of foreclosure, direct or indirect, that are looking for housing right now. And, of course, when you talk about the economic impact, we've lost a lot of jobs in south Florida. But many of these are in construction and in the mortgage industry where business has suddenly dried up. One of south Florida's challenges is that its economy is not as diversified as many other large cities. So for these individuals, it will take some time before they can find alternative employment within their field or related field, and many of these people will not be able to replace the level of income generated in those real estate fields, or maybe those that are still in real estate have seen that their incomes have been reduced. So with the economic slowdown, and the redirection of resources to focus on foreclosure, many community revitalization programs are seeing their strategic initiatives being thrown off track, and right now, for community and economic development efforts that are targeting the impact of foreclosure, it's hard for them to keep resources targeted toward home ownership and business development, which were their original goals. So we definitely see the rise in foreclosures rippling through our entire community, even in the drop of school enrollment in certain neighborhoods.

Moderator: What do consumers faced with foreclosure need most right now?

Cruz-Taura: Many consumers still need to have accurate information provided to them so that they can identify and evaluate alternatives to foreclosure and then decide what's the best for them and know the clear steps they have to take to work toward that end. Lenders are often trying to contact borrowers to discuss alternatives but find that consumers are avoiding them or that they don't have the financial background necessary to understand and analyze their options effectively. So community organizations have provided foreclosure counseling, and they've been very helpful in promoting this dialogue between the borrower and the lender. On the other hand, the organizations have also been very helpful with borrowers that cannot locate their original lender because we've seen a lot of mortgage companies go under; they no longer exist. But consumers also need to have more alternatives become available to avoid foreclosure. For example, more flexibility from investors to allow for partial charge-offs, or modifications that can accommodate an equity loan tied to the same property.

Here in South Florida, for example, the prices went up so quickly that many homebuyers were financing 100 percent of the home price in order to buy a home because they had to use their savings to cover the closing costs. In order to avoid mortgage insurance, or because the primary lender wouldn't allow for the whole 100 percent financing, many of the buyers then financed 80 percent with a first mortgage, and then the remaining 20 [percent] with an equity loan. We call these "piggybacks," or 80/20s. Now, if these homeowners are facing any type of problem with their loan or are looking for alternatives to foreclosure, they have to negotiate with two separate lenders, and it's often hard for them to reach a good alternative or a good solution for their problem. Unfortunately, there are many individuals that were victims of mortgage fraud or other deceptive practices in our market also, and these consumers will need legal assistance, in addition to the financial counseling. And there continue to be less than ethical service providers out there skimming the pool of desperate homeowners. So clear and truthful information sources remain very high in terms of our priorities.

Moderator: What is the Federal Reserve doing, both regionally and nationally, to help with the foreclosure crisis now and for the future?

Cruz-Taura: Well, let me tell about what Community Affairs' efforts have been in the last year because that's what I've been most closely tied to. We've worked very closely with our community, local government, and lender partners to develop extensive outreach and education efforts to reach homeowners that are in distress and help them assess their financial situation and identify and evaluate the alternatives available to them. The primary goal of these efforts has been to mitigate foreclosure by allowing lenders to reach borrowers, request current financial information from them, and then look for ways to keep the family in the home by modifying or refinancing the existing problem loan. The Atlanta Fed launched a Foreclosure Resource Center Web page earlier this year that's available under the Community Development Resources at the Atlanta home page. And this site provides a number of useful, informative links on foreclosure-related topics and, more importantly, provides information on local contacts throughout the district and outreach events that individuals can attend locally.

The Federal Reserve was also one of the early partners in the Hope Now Alliance and Hope Hotline established by the NeighborWorks America organization to reach out to inform borrowers of their possible alternatives to foreclosure and how to take action to save their home. There are a number of national lenders that have partnered with the alliance and are hosting numerous community foreclosure clinics throughout the country.

But in addition to mitigation, we're also looking with NeighborWorks to address the postforeclosure challenges faced by families, by neighborhoods, and by communities that have fallen victim to high concentrations of foreclosed property and the ensuing home value depreciation. I'd say that a great deal of research and analysis is also taking place to better understand the effects of the current economy and the economic and credit environment on the market and the consumers. And we are working with community organizations and other entities to help provide data and to assist in the analysis of data to better focus the foreclosure mitigation efforts that are under way. The problems within the mortgage industry, and the challenges being faced by the homeowners and communities are far-reaching and very complex. I think that we all have to recognize that no one entity's going to be able to make a big difference alone and that the collaborative nature of the community development world has been able to leverage resources very quickly to respond to community needs in this case, as is generally true.

Moderator: All right, Ana, thanks so much for your insights today. We've been speaking with Ana Cruz-Taura of the Atlanta Fed's Miami office, and this concludes our EconSouth Now podcast on foreclosure issues. For more information on this topic and others, please see the third quarter issue of EconSouth magazine. From the Atlanta Fed Web site you can read all the stories in the magazine or also subscribe. So thanks for listening, and please return for more podcasts. If you have comments or questions, please e-mail podcast@frbatlanta.org.