Condos: It’s not a Subprime Scenario

I was reading an article from last weekend’s Washington Post (sue me, it’s been a busy week) about Condos feeling the “Mortgage Crunch.” The article explains how condos are bearing the brunt of defaults and foreclosures because condo fees are going unpaid and condo associations are being forced to dip into reserves to make repairs like fixing the roof or replacing the water heater.

But here’s the thing: I’m sure condos are feeling the pain of trouble in the mortgage market, and I’m sure that a lot of tenants are not paying their monthly fees, but I’m not so sure it has anything to do with the crisis in subprimes, as the article suggests...adjustable rates, yes, but subprimes, not so much.

Many people tend to confuse the issue of adjustable rate mortgages resetting at higher rates with the subprime borrower who got into a loan they could never afford in the first place. The huge boom in the condo market was a result of investor speculators who saw Miami, Las Vegas, Washington DC and Northern Virginia as a gamble that couldn’t lose. They saw price appreciation running like the wind, and the idea was to use an adjustable rate mortgage to cash in. You buy with an incredibly low introductory rate and then flip a month or two later when the condo is worth more. Most of these speculators never set a moving box down in the condo they bought. Some rented the properties out for a year, but many of these condos simply sat vacant, waiting to rise in value.

And a lot of people made a lot of money doing that. And then it dried up. Prices stopped rising, sales started slowing, and all those people still holding on to investment properties were stuck actually still owning those investment properties. Now their adjustable rates are doing just that, adjusting up, and they can’t afford the payments, so they’re not paying the condo fees. Maybe some of these folks were categorized as subprime borrowers, that is borrowers with bad credit, but I would venture to guess that most were just plain old investors, looking to make a killing in real estate.

Questions? Comments?