This document summarizes how home foreclosures in Pinellas County affect the local economy. It outlines the typical steps in the foreclosure process and explains that foreclosures are rising due to job losses, adjustable rate mortgages, and falling home values. Rising foreclosures lead to lower home sales prices, higher vacancies for retail and office spaces, and budget shortfalls for county governments as property tax revenues decline. To address budget shortfalls, local governments are increasing various fees for services.

1. 1 How Foreclosures Affect the Economy of Pinellas County. Alex Greenfelder. Brenden Barber.

2. 2 Outline. Homeowner Foreclosures. Steps in a Home Foreclosure. Mortgage Defaults. Depreciating Home Values. Unemployment. Commercial Foreclosures. Retail/Office/Industrial Foreclosures. Developers and Builders. County Tax Revenue. Revenue Shortfalls. Government Fee Increases.

3. 3 Homeowner Foreclosures. Three Reasons Homeowners may Foreclose: Adverse “Trigger Events” Foreclosure can be caused by job loss, divorce, illness, or something else that can lead to an unexpected, dramatic drop in household income or increase in expenses. Mortgage Payment Shock Unexpected increase in a household’s monthly payment obligation. Adjustable-rate and “hybrid” ARM loans with initial fixed period followed by future rate adjustments. Negative Home Equity The home is worth less that what is owed on it. The homeowner has an incentive to default and give the home to the bank.

4. 4 Steps in a Home Foreclosure. Step One: The Homeowner misses a monthly mortgage payment. Usually within a month the lender sends a warning letter/notice of default inquiring about the late payment.

5. 5 Steps in a Home Foreclosure. Step Two: The Lender files a Lis Pendens against the homeowner in court. This Lis Pendens is a pending case. Usually lenders wait until payments are at least three months late before filing. Many cases do not go to court for 6 - 12 months.

6. 6 Steps in a Home Foreclosure. Step Three: The Homeowner has about 20 days to respond to the Lis Pendens. A judge can grant a hearing, but that depends on the response from the homeowner. The homeowner has several options at this point: Short Sale Loan Forbearance Deed in Lieu Loan Modification Bankruptcy

7. 7 Closer Look at the Borrower’s Options. Short Sale The Lender accepts less than the outstanding mortgage due if a legitimate buyer is found. Homeowners must be at least two mortgage payments behind. Loan Forbearance The Lender forgives part of the loan amount due. Deed in Lieu The Lender takes back the property (title) if there is enough equity in the house to pay off the loan balance.

8. 8 Closer Look at the Borrower’s Options. Loan Modification The Lender changes the terms of the loan. Bankruptcy Chapter 7 / Chapter 13 Temporarily halts the foreclosure legal proceedings.

9. 9 Steps in a Home Foreclosure. Step Four: Many Homeowners do not respond to the Lis Pendens. The Lender then asks the judge to issue a judgement against the borrower and it usually results in an auction of the property. The owner has a “Right of Redemption” up to the auction date.

10. 10 Steps in a Home Foreclosure. Step Five: The home auction happens at the courthouse. The Lenders usually set a minimum price. If nobody bids on the house, the lender takes the property back.

11. 11 Steps in a Home Foreclosure. Step Six: The title transfers to the new owner (auction winner or lender) within 10 days. If the former homeowner has not left the house, a sheriff deputy can break the lock, evict the occupants, and move the contents of the house to the curb. If the lender becomes the owner it will usually list the property for sale as REO - “Real Estate Owned”.

12. 12 Mortgage Defaults. Homeowners are falling behind on their mortgages nearly twice as often as they did a year ago. The delinquency rate was 11.9% this year versus 6% last year. According to a study from credit rating firm Fitch Rating Ltd., homeowners who fall behind on their mortgage payments are much less likely to catch up again. Homeowners may stop making payments when the value of their homes fall below their loan balances because there is little hope of recovering their investments. Due to widespread backlogs and delays in the foreclosure process, some people who stop paying their mortgages stay in their homes for more than a year before being evicted.

13. 13 Mortgage Defaults. We are starting to see a shift in the types of houses being foreclosed on. According to Zillow.com, foreclosures are now beginning to rise in more expensive housing markets. 30% of foreclosures in June ’09 involved houses in the top tier of housing values (based on median home price), up 16% from three years ago. The bottom one-third now accounts for 35%, down from 60% three years ago.

14. 14 Depreciating Home Values. Median sales price for a single-family home stood at $135,200 in April ’09. It was as low as $122,400 in January ’09 and as high as $135,800 in March ’09. According to the Pinellas Realtor Organization, homes repossessed by banks sold for an average of $70,050 in April ’09, less than half of conventional home sales. Most economists tracking the housing market predict prices to crawl along the bottom for months, or even years, before appreciating again because supply outstripped demand.

15. 15 Depreciating Home Values. 15

16. 16 Unemployment. Job losses have left some borrowers unable to make payments. The flow of workers and retirees to Florida has slowed with many homeowners underwater and/or unable to sell their homes. Many construction workers, real estate agents, and mortgage brokers are out of work. The construction industry has shed more than 30,000 jobs since 2006. Economists have predicted it could take years before the unemployment rate returns to a more healthy range of 5% - 6%. High unemployment rates could add more inventory to the growing foreclosure real estate market.

17. 17 Unemployment.

18. 18 Unemployment.

19. 19 Commercial Foreclosures. Retail/Office Foreclosures Florida’s west coast has more than double the retail space of the national average in some counties. Nationally, developers have outfitted every American with 28 square feet of retail space. Pinellas County averages 54.7 square feet per person. Commercial properties purchased during the real estate boom years were leveraged by 70% - 80%. Commercial property loans previously underwritten were based on pro forma cash flow streams that didn’t anticipate a market crash. Current rental rate decreases are making it difficult to service the debt obligation.

20. 20 Retail Foreclosures. Property values are dropping, owners are having a difficult time refinancing, and lenders are having a tough time recovering the losses when they sell. The recovery rate for 2009 has been around 46%. The retail vacancy rate rose to 9% in August. South Pinellas County and the Gateway area are some of the weaker spots, with rents dropping 17% and 27%, respectively, since January. There are two abandoned Kmart department stores on U.S. Highway 19. There are three vacant Publix grocery stores. Pinellas Park South Pasadena Seminole

21. 21 Retail Foreclosures.

22. 22 Office/Industrial Foreclosures. Pinellas County had a 12.2% vacancy rate for office space in the first quarter of ’09. In the industrial market, the average rate per square foot has dropped from $7.79 two years ago to $7.12. Prices are down about 20% from their peak, propelled by decreased consumer spending.

23. 23 Office/Industrial Foreclosures.

24. 24 Developers and Builders. Local Developers and Builders in trouble: Grady Pridgen - Pridgen has faced multiple foreclosure lawsuits on office and industrial properties in Pinellas and Pasco counties. Capmark Bank foreclosed on $25 million in loans on Pridgen-controlled entities. Paradise Development Group - A developer of shopping centers, this firm, which touts 47 completed Publix centers, recently handed seven Florida project back to creditors. Kearney Construction Co. - This 53 year-old firm filed for Chapter 11 bankruptcy protection in August. One lender threatened to seize its work trucks, a bank pulled a line of credit, and their surety bond provider severed its relationship with the company. Wells Fargo Bank - Took back the BayWalk shopping center as the only bidder at a foreclosure sale of the St. Petersburg property.

25. 25 County Tax Revenue. Revenue Shortfalls Pinellas County is facing budget shortfalls from plummeting housing values, shrunken property taxes, and tax reform legislation. In February ’09, the Pinellas County General Fund Forecast recognized that revenues were estimated to come in $12 million less than the Fiscal Year ’09 (FY09) projection. The County Administrator requested that all county departments and agencies in the General Fund reduce FY09 expenditures to 97% or less to close the gap. The General Fund includes the primary governmental functions of the county, with property taxes comprising more than two-thirds of the fund’s revenue.

26. 26 Revenue Shortfalls.

27. 27 Revenue Shortfalls.

28. 28 Revenue Shortfalls. The Tourist Development Council Fund supports the St. Petersburg/Clearwater Area Convention and Visitors Bureau through taxes collected on rents for temporary lodgings (“Bed Taxes”). The revenues are much lower than budgeted as the tourism industry has been seriously impacted by the recession. Compared to the FY09 budget, the bed tax will decrease 10.3% based on the six month moving average. The bed tax is a relatively volatile revenue source and is sensitive to economic conditions due to the discretionary nature of tourism expenditures.

29. 29 Revenue Shortfalls.

30. 30 Government Fee Increases. State and Local governments have been reluctant to increase homeowner property taxes, which would be used to balance budget shortfalls from the economic recession. Many have turned to fee increases to plug the revenue gap. Florida lawmakers are relying on a cigarette tax increase and fees for everything from court filings to license plates. The Pinellas County school board has approved a tax rate increase in the next year’s fiscal budget.

31. 31 Government Fee Increases. Additional fees affecting Pinellas County: Construction Services Division increased the tree removal fee from $35 for three trees to $128 for each tree. City council will increase waste water rates by nearly 34.5% over the next three years. Class E driver’s license fees increase to $48 from $27. Driver’s license renewals will cost $48 instead of $20. Auto registrations will cost $225 instead of $100. Certificates of title will now cost $70 instead of $24. Foreclosure filing fees increase from $295 to a range from $395 - $1,900. Tenant eviction filings are now $270, up from $80.

32. 32 Tying it All Together. Foreclosures affect sellers by increasing stock of available houses that are competing for buyers. Foreclosed homes can negatively affect the price of nearby houses. The rise in foreclosures also lowers new home construction, meaning reduced spending and jobs in the construction industry. Overall consumer spending decreases, which decreases the nation Gross Domestic Product. Foreclosures affect local government finances, which rely heavily on property tax revenue. All this adds up to increased fiscal deficit and currency devaluation. This means that, at some point, all Americans will feel the pinch caused by foreclosures.

33. 33 References. Albright, Mark. “Retail Space Out of Balance.” The St. Petersburg Times. 20 Sept. 2009: p1d. “Economic Hammer Pounds Developers.” The Tampa Tribune. 11 Oct. 2009: p1. “Eviction Fees For Landlords Up Dramatically.” The Tampa Tribune. 1 July 2008: p1. “Fewer Catching Up on Lapsed Mortgages.” The Wall Street Journal. (2009). “Foreclosures Grow in Housing Market’s Top Tiers.” The Wall Street Journal. (2009). “Governments Eye Taxpayers’ Wallets.” The Tampa Tribune. 23 July 2009: p1. Huettel, Steve. “Foreclosure Rule Backfires.” The St. Petersburg Times. 5 June 2009: p4b. “New Evidence on the Foreclosure Crisis.” Wall Street Journal. 3 July 2009: p A13. Thorner, James. “Home Sales Keep Rising.” The St. Petersburg Times. 28 May 2009: p1b. Throner, James. “No End to Foreclosures.” The St. Petersburg Times. 10 Sept. 2009: p1b. “U.S. Foreclosure Threatens World Market.” 17 Oct. 2009. < http://ianalysis.blogspot.com/2009/10/before-we-get-into-critical-invisible.html.> Zywicki, T.J. “What to do About Foreclosures.” Hoover Digest. Winter 2009: p35-9.