The Florida mortgage crisis is maybe not as close to over as people want to believe.  The boom days of the real estate bubble, 2005, 2006 and 2007, were when the negative amortization loan was "king".  Now the 5 year clock is ticking for these loans to "recast".  Let's go through an example to see how this all works.

Why someone would want a negative amortization loan is a story for another time.

Take a typical loan in Florida in 2005.  Sale value of the house is $250,000.  The appraisal is $300,000 - of course high appraisals didn't really happen.  The loan is 80% loan to value, or LTV.  The interest rate is 7.5%.  Principal and Interest on a 30 year loan at 7.5% is $1678.11.  The interest only payment is $1500.  The total PITI is $2344.11.

Now this is where it gets really interesting.  Wamu, Countrywide, IndyMac, World Savings, etc. all of which no longer exist, allowed you to pay back at a 1.5% rate for 5 years or until you got to 125% or the original loan.  The loan then would "recast" and now you would have to pay principal and interest to pay back the balance in 25 years, not 30.

Here are the scary details of how this worked.  The interest only payment on the original loan would have been $1500.  At 1.5% payment rate, NOT the loan rate, you are only paying $828.29.  This is $671.71 less than the interest only payment so you are adding that amount ($671.71) to the back end of the loan each month.  In effect you are borrowing $671.71 every month so that at the end of 5 years you have added $40,302.60 to your original loan.  Now you will be at 125% of the first loan and then the loan will get recast. 

Fast forward to 2010.  Now the market value of your home is $150,000 and the appraised value is $140,000.  80% LTV is now $120,000.  You now owe $300,000 at 7.5% on a $150,000 property AND you only have 25 years to pay it off.  The 25 year loan of $300,000 at 7.5% brings a new payment of $2216.97, plus the esccrow, for a new total of $2882.97.  This increases your payment by $1388.68.

Here is another problem, you owe $300,000 on a $150,000 home and are shopping around for refinance loan.  And, in 2005, you got a stated income or no documentation loan.  Today you have to verify the income that you claimed with no hard paperwork. 

This is one outline of why there are so many short sales and bank foreclosures, especially in Florida.  Even the homeowners with the very best intentions are now in very difficult situations because of the precipitous drop in housing prices that they had no control over.  Now the banks have really tightened their lending requirements, making it very difficult for even qualified borrowers to get financing.

Let's wait and see how this plays out, however, don't expect Florida housing prices to suddenly rebound to 2005 levels.  We are years away from that, or even decades.