Many borrower’s unaware of mortgage interest rate details, consequent foreclosures affect neighbors

July 25, 2007 - 3:47pm

Too many borrowers have ended up with loans that were
barely affordable during a brief introductory period, but quickly became
burdensome or even ruinous after the interest rate ratcheted upwards. A recent poll suggests that fully one third
of borrowers who have taken out adjustable rate mortgage loans are uncertain they
will be able to afford the loan after the introductory rate and another third
simply plan to refinance. Even more
troubling, the wide variety of exotic loan products being aggressively marketed
to potential homebuyers has created an environment where 34 percent of
borrowers do not know whether their mortgage has an adjustable or fixed rate.

As a result, foreclosure rates have spiked. Between 2005 and 2006, the Chicago region saw a one year increase of over 36 percent––with every indication that the trend will continue into 2008.

The Office of the Comptroller of the Currency estimates that banks lose between $40,000 and $50,000 per foreclosed home, with some lenders reporting loses of 50 cents on the dollar. Many of the largest mortgage lenders in the country have folded as foreclosures continue and losses continue to mount. But there is another side to the story, one which is too often overlooked by banking regulators and mortgage professionals.

In Chicago, Woodstock Institute has found that for every home where a foreclosure is initiated, there is a significant negative impact on property values of the surrounding homes. In fact, for each foreclosure that is initiated, there is about a one percent decline in every other property located within an eighth of mile. This finding corresponds to a city-wide loss in single-family property values of just over $1.39 billion and an average cumulative property value effect of more than $371,000 per foreclosure. And that’s just Chicago.

Foreclosure rates are readily available at the regional and national level. But as part of a new initiative to shed light on the neighborhood impact of predatory lending, Woodstock Institute will continue to track foreclosures and will release a year-to-date analysis of foreclosures in mid-2007, giving community organizations and policymakers the up to date tools they need to make informed decisions.