By Geoff Smith and Sarah Duda

Woodstock Institute previously reported that the number of foreclosed properties reverting to bank ownership, or becoming Real Estate Owned (REO), in the Chicago region increased dramatically between 2005 and 2007.i These types of properties are of particular concern because they are likely to sit vacant until banks are able to transfer them to an owner who is able to put them back into productive use. These properties have the potential to destabilize communities by leading to declining property values, increased violent crime, displacement of renters, and increased service burdens on municipal governments. These properties are not evenly distributed across the region; rather, they are highly concentrated in communities that are predominantly minority. These are the communities likely to disproportionately bear the impacts of vacant foreclosed properties. The following analysis examines geographic patterns of and trends in REO properties that continue to impact the Chicago region’s African American and Latino communities.

The regional share of REO properties is disproportionately greater in communities of color than in predominately white communities. As Figure 1 illustrates, in 2007 foreclosed properties entering REO status in communities that are greater than 80 percent African American accounted for 35 percent of the region’s total REO properties, even though highly African American communities account for less than 9 percent of the region’s total mortgageable properties.ii This means that African American communities’ proportion of regional REO properties is roughly four times their proportion of regional mortgageable properties. These disparate patterns are also seen to a lesser degree in census tracts that are 50 percent of greater Latino and census tracts that are 50 percent or greater diverse minority. On the other hand, in census tracts that are below 10 percent minority, the regional percentage of properties becoming REO is just 6.6 percent despite the fact that these areas contain over 23 percent of the region’s mortgageable properties. 

Figure 1:  Percent Regional REO Properties and Mortgageable Properties by Percent Minority Census Tract Demographics, 2007

Source: Foreclosure Report of Chicago, 2000 U.S. Census

The largest increase in the number of foreclosures becoming REO between 2005 and 2007 was seen in highly Latino communities. Although the disparity between the regional proportion of REO properties and regional mortgageable properties in majority Latino communities is small, year-to-year trends illustrated in Figure 2 indicate that Latino communities may be next in line as the most impacted by increasing numbers of REO properties. Although the number of properties becoming REO increased dramatically across the region between 2005 and 2007, majority Latino communities saw by far the largest increase. In these communities, the number of foreclosures that became REO properties increased by 464.7 percent between 2005 and 2007. By comparison, the Chicago region as a whole saw an increase in REO foreclosures of 231 percent over the same period. Census tracts with minority populations between 10 and 20 percent saw a 315.1 percent increase in REO foreclosure auctions.  Census tracts with large African American populations and communities with majority diverse-minority populations saw the smallest percent changes, of 198.1 and 155.9 percent respectively. 

Figure 2:  Percent of Change in Auctions becoming REO, by Percent Minority Census Tract Demographics, 2005-2007

Source: Foreclosure Report of Chicago, 2000 U.S. Census

In the first half of 2008, Latino communities continued to experience a significant increase in REO properties.  Between the first-half of 2007 and the first-half of 2008, the Chicago region saw an overall increase of 109.4 percent in the number of REO properties. However, the region’s Latino communities saw an increase in REO properties of 167.7 percent over the same period.  Census tracts with less than 50 percent minority populations were observed to have percent increases in REO properties greater than the number observed regionally in the first-half of 2008. African American communities and 50 percent or greater diverse-minority census tracts were observed to have a smaller percent increase than was observed regionally, 66.2 percent and 87.1 percent, respectively.

A significant percentage of properties entering REO status in the City of Chicago’s communities of color were small multifamily buildings. Figure 3 illustrates that, in 2007, 40 percent of properties becoming REO in the City of Chicago’s 80 percent or greater in African American communities and nearly 50 percent of properties becoming REO in the city’s highly Latino communities were 2- to 6-unit apartment buildings. Conversely, citywide 36.3 percent of foreclosed properties that became REO in 2007 were on these small, multifamily buildings. Thus far, lender and servicer behavior has suggested that they have no interest in being landlords and, to this point, REO properties are likely to be vacant.iii As such, the increase in REO properties has the potential to significantly reduce access to affordable rental housing in communities of color. For more on the impact of foreclosures on Chicago’s rental market, see Foreclosure Crisis Impacts Chicago’s Rental Housing Market.

Figure 3:  Percent of REO Properties that are 2-6 Unit Multifamily, by Percent Minority Census Tract Demographics, 2007

The increasing number of REO properties in the Chicago region as a whole presents significant public policy issues. In addition to the devastating impact that foreclosures have on individuals and families as a loss of shelter and assets, foreclosures, through their associated vacancies, have been shown to have a negative impact on communities through increased crime and property value declines, among other issues.iv The concentration of REO properties in highly minority areas should be of particular concern to advocates, municipal officials, and policy makers. Many of the region’s communities of color have been destabilized in the past by disinvestment.  Increases in vacancies are undermining the years of work done to rebuild these communities and help their residents build assets.

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