Flippers' role in housing flop larger than thought

More than 30 percent of Florida homebuyers during the boom year of 2007 had two or more mortgages, evidence of rampant investment that is partly blamed for real estate's ruination, a recent federal report says.

A Federal Reserve Bank of New York study released this fall uses previously undisclosed credit and loan information to show that home flippers played a bigger role than previously thought in bringing down the market.

In 1999, just 16 percent of Florida homebuyers had two or more loans.

Chronicled on the Fed's blog this month, the report singles out the hard-hit states of Florida, California, Arizona and Nevada to compare real estate purchases between 2000 and 2010 with the rest of the nation.

In 2006 in these so-called "sand states," the report reveals, 10 percent of home purchases were made by people with four or more mortgages on their credit reports. That's an increase from about 3 percent in 2000.

Nationally, about 5 percent of home purchases in 2006 were made by people with four or more homes.

"We conclude that investors were much more important in the housing boom and bust during the 2000s than previously thought," the report notes. "In the end, even the value of the 20 percent down payments made by responsible, prime borrowers was wiped out, leaving the housing market, and the economy, in the vulnerable state we find them in today."

But not everyone is ready to skewer investors, many of whom are now buying up the glut of foreclosures and turning them into rentals - a practice of buying and holding, rather than buying and flipping.

"In hindsight, we can point out a lot of demons, but I don't think flippers were any more responsible for the problems than anyone else," said Ken Johnson, a financial and real estate professor at Florida International University in Miami. "Flippers saw an opportunity to make an investment and get an abnormal return on what they were putting in."

Johnson's bigger concern, and one shared by the report's authors, is making sure the real estate bust is not repeated.

Johnson blames reduced underwriting standards for allowing unworthy borrowers to buy a home and investors to run up pricing.

"You could basically say anything on your loan application, and they weren't going to verify it," agreed Bill Richardson, president of the Realtors Association of the Palm Beaches.

"Flippers are partly responsible for what happened, but it was the government and their underwriting standards that made it possible for the flippers to flip."

The federal report notes that by 2006, 38 percent of the risky subprime loans nationwide went to homebuyers with little employment or salary documentation. The loans were sometimes called "liar loans" because of the ease in manipulating information to gain hefty mortgages.

In 2001, just 22 percent of subprime loans required little or no documentation, according to the report.

Subprime loans also came with higher interest rates. But because flippers had no intention of keeping a home, interest rates were of little concern. Because the return on investment was so high, they also cared little for how much they had to bid to make a purchase, the report says.

That led to average home prices that more than doubled in high-risk states between 2000 and 2006.

In July 2000, the median home price in Florida was $119,600, while Palm Beach County's price was $142,500, according to the Florida Realtors.

By July 2006, Florida's median price had risen 109 percent to $250,800. Palm Beach County's jumped to $390,100 - a 174 percent increase.

In November, Florida's median sales price was $130,100, while Palm Beach County's was $183,700.

"The problem now is it's very difficult to get a mortgage," Richardson said. "First they messed up the market by making it too easy to get a mortgage. Now they're messing up the recovery by making it too difficult."