ST. PETERSBURG — Five years ago, Florida's real estate market was a rollicking beachfront casino where you couldn't make a bad bet.
The reckoning hit high-rollers harder than anyone. Now home loans over $1 million are failing at a higher rate than the rest, and nowhere is that failure as severe as in Florida.
Case in point: A squat concrete block home in St. Petersburg's Snell Isle Shores cost $1 million in 2006. The $2 million mortgage also bankrolled demolition and the building of a 7,000-square-foot waterfront dream house.
By May 2009, the home was in foreclosure, and sold a year later. The winning offer? $1.13 million, a 60 percent discount from the asking price.
Developers and home buyers alike had banked on quickly rising home prices, said Sam Khater, senior economist at real estate analytics firm CoreLogic.
"The average person was basically betting, repeatedly," he said. High-value loans were an even worse bet.
The bulk of million-dollar loans were written in California, and to a lesser degree in New York and Florida, according to CoreLogic. But while California's and New York's default rates on those high-value loans were near or under the national average of 13 percent in April, nearly a third of Florida's were in default.
During the boom, Florida's dramatic price appreciation enticed buyers, said Mark Vitner, a senior economist at Wells Fargo who's been tracking the Florida real estate market since the mid '80s. If you could stretch to buy a high-end home, its rising value could make you rich.
"I know people that bought … would not think of themselves as speculating on a house. But they bought a lot more house than they should have because they could get the credit, and prices were going up," he said.
Alternative mortgages, such as five-year interest-only loans, made it easy to buy more house than you could afford, he said.
It wasn't just alternative mortgages that suffered, says Khater, the economist for CoreLogic, which compiled Florida and Tampa Bay default rates for the St. Petersburg Times. CoreLogic compared types of mortgages — from standard fixed rates to "funny" products — and saw the same trend, he said.
Khater points out that this recession, unlike earlier ones, hit middle- and high-income brackets especially hard. Home values dived at the same time stock portfolios suffered.
But it's also generally true that very small and very large loans tend to perform worse than those in the middle, said Michael Fratantoni, the vice president of research and economics for the Mortgage Bankers Association. Think of a "U" shape. That's why so-called "jumbo" loans typically have higher rates, even though those who get them have mostly higher incomes.
Why would a well-heeled buyer be riskier? A higher-value property tends to have a much more volatile price because the pool of potential buyers is smaller.
"In a down market, if it sells at all, it's going to sell for a much steeper discount," Fratantoni said.
And if it sits on the market as prices fall — and bay area prices fell more than 40 percent from 2006 — the mortgage holder is more likely to owe more than the home is worth. That increases the chances of becoming delinquent, even with the best intentions to sell and pay off the mortgage, he said.
Matthew Weidner, a St. Petersburg lawyer who focuses on foreclosures, said high-end bay area buyers were able to hang on longer as home values fell and investments and jobs disappeared. But this year he's seen a spike in foreclosures among people at the top of the economic ladder.
"It went from service workers to high-end professionals who got into trouble," he said.
Weidner said they used savings and assets to supplement their mortgage payments.
"Now they're in my office saying, 'I can't do this anymore.' "
Still, those high-value foreclosures remain a small fraction of the hundreds he's seen.
Indeed, it's not clear how many million-dollar mortgages face delinquency in the bay area. Nationally, huge mortgages represent a tiny slice of home loans, less than 1 percent, according to CoreLogic, which doesn't release its raw numbers.
At that price range, buyers are more likely to use cash, or get a loan for just part of the purchase price at a lower rate. And while Florida was among the top three states for such loans, many were concentrated in Miami.
So while the Tampa Bay area had a default rate of just over 24 percent on million-dollar loans in April, the actual number of loans may be very small, CoreLogic's economists cautioned. It's more accurate to concentrate on the state and national numbers, they said.
But where those struggling loans existed in this area, there were some mighty deals.
Take local short sales, in which a bank agrees to a price that's lower than what's owed, said Frank Malowany, a St. Petersburg real estate agent who specializes in higher-priced waterfront property.
This year, among about 80 sales in Pinellas and Hillsborough counties over $1 million, about a half dozen were distressed: bank-owned homes or short sales. Those numbers don't reflect homes in default that aren't yet for sale or remain unsold, or homes with million-dollar mortgages that sold for less than $1 million.
The discounts were hefty. One St. Petersburg home was listed for $2.95 million and sold for just over $1 million in March. Another in Redington Beach had a loan for $1.5 million and sold for $1 million flat.
Short sales let banks get at least some of their money back. And they've picked up in the past few months, said Glenn Goldberg, a 43-year-old St. Petersburg real estate attorney.
Like that dream home in Snell Isle Shores. Goldberg and his wife bought it for $1.13 million in May.
"We have two kids. We wanted to buy a bigger house, and we said, 'Why not?' "
Peter Krauser, president of Mark Maconi Homes of Tampa Bay, had built it in 2007. He recalls putting $2.4 million into the project. Property values kept soaring, so they kept adding custom features.
"The banks told us that anything we could build, we could sell," he said. Then banks started to realize how many speculators they had on their hands — and stopped writing big loans. And that was it, he said. "We just ran out of cash."
The bank filed to foreclose, but let him sell it instead. He owes the bank $200,000 in the deal. At the moment, he's not building anything.
"His product was fantastic. His timing wasn't so fantastic," Goldberg said. "It's like everything you do. Timing is everything."
Becky Bowers can be reached at firstname.lastname@example.org. Follow her on Twitter at twitter.com/bbowerstimes.