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August 19, 2008 |
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The five key issues that must be addressed to reduce the neighborhood impact of lender-owned properties as investors shun Chicago region foreclosure auctions.
In total, over 22,500 properties entered the real estate
owned (REO) portfolio of lenders through foreclosure auctions between 2005 and
2007. In the Chicago area in 2007 alone,
nearly 13,000 properties with an aggregate auction value of $2.5 billion dollars
became lender owned. In the first half
of 2008 alone, over 10,000 properties became lender owned. This was nearly a 98 percent increase over
the first half of 2007. As the
foreclosure crisis continues, the focus of policy interventions will likely continue
to shift towards dealing with the growing inventory of vacant properties.
- How can lenders and servicers increase efforts to
reach troubled borrowers prior to foreclosure? Lenders and servicers must
proactively modify loans so that borrowers can afford monthly payments over the
long term and stay in their homes.
However, given the growing number of homeowners in distress and the
unsuitable loans many borrowers received, it is likely that not everyone will
be saved.
- How can municipal governments develop or enhance
strategies around vacant building ordinances that places additional
responsibilities and costs on owners of vacant properties? Many smaller municipalities lack the
administrative authority to implement more aggressive vacant building policies, but the often complicated ownership status of vacant buildings makes such
ordinances a challenge to enforce.
- How can locally- or regionally-based government or
quasi-government entities acquire vacant foreclosed properties from
lenders? The recently signed federal
Housing and Economic Recovery Act of 2008 will make $4 billion available to states
and municipal governments for the acquisition of such properties. While the act will provide some new resources, additional resources are critical, given the billions of dollars in lender-owned properties for sale in 2008 alone.
- What are the best strategies to remove the obstacles
created by complicated ownership structures and disposition guidelines and
ensure that REO properties can be purchased in bulk? With the growth of securitization in the
mortgage industry, the “lender” who owns the REO property typically is not a
bank, but often a pool of investors in a mortgage-backed security. Decisions on the disposition of these
properties typically are not made by individuals, but by servicers whose
actions are often limited by loss mitigation guidelines specified in pooling
and servicing agreements. Questions also
remain about the structure such a vehicle would take. Lenders, municipal governments, and
regulatory agencies will have to work closely to develop efficient strategies
for the transfer, management, and disposition of REO properties.
- How can community-based organizations play a role in
the process? Neighborhood-based
organizations might be best positioned to monitor on-the-ground activity in their
neighborhoods, and community residents will be the group most significantly
impacted by the outcomes of such an effort. But they can not solve the problem alone.
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