By Kyle Clapham
October 25, 2011
At first glance, recent data suggests dramatic improvement in Chicago-area foreclosures.
In the six counties that comprise the region, there were 8,515 foreclosure auctions in the first half of 2011, a 51 percent drop from 17,331 during the first half of 2010, according to the Woodstock Institute. Only 3,604 properties completed the foreclosure process in the second quarter of 2011, a 27 percent decline from the first quarter and the fewest auctions in any period since the housing crisis began in 2007.
But those numbers belie a disturbing trend: The average number of days spent in the foreclosure process jumped to 359 days in the second quarter, a 25.5 percent increase from the same period last year and the highest since 2008.
As fewer properties made it to auction, the number of foreclosure cases tied up in county courts swelled, exacerbating the logjam created last year when mortgage servicers halted foreclosure filings in order to review improper document processing, also known as “robo-signing.” The moratoria lengthened foreclosure timelines and amplified the uncertainties surrounding servicers and homeowners after notices of default were filed in court.
“A prolonged foreclosure process cuts both ways,” said Sarah Duda, senior research and project associate at Woodstock, in the group’s report. “It means that vacant homes in foreclosure have more time to become blighted and destabilize neighborhoods. If a family is still in the home, however, the longer process could give them more time to negotiate a solution with their loan servicer.”
Woodstock is a nonprofit research and policy organization based in Chicago. Funded by foundation grants, consulting fees and charitable donations, the group aims to construct “a financial system in which lower-wealth persons and communities of color can safely borrow, save and build wealth so that they can achieve economic security and community prosperity,” according to its website.
After identifying nearly 2,000 vacant Chicago-area properties in January that were associated with foreclosures filed between 2006 and the first half of 2010, Woodstock worked with Ald. Pat Dowell to introduce a city ordinance that would hold banks responsible for the maintenance of uninhabited, foreclosed homes. The ordinance passed July 28 and implementation began Aug. 8.
“For some very low-value properties, the banks might do an internal calculation and decide that it’s not in their best interest to complete the foreclosure process and take ownership of it because it will cost more to maintain it than they would ever hope to get back at sale,” said Katie Buitrago, policy and communications associate at Woodstock. “[The ordinance] addresses a loophole where we need to have servicers staying active stewards of these properties and communities.”
Creating a separate court process for foreclosed properties that have been confirmed to be vacant could alleviate the backlog, Buitrago said.
“The banks have been supportive of a fast-track process for vacant properties as well because they know the longer they have to stay in court, the more legal fees they have to pay,” she said. “It’s good for everyone if the ownership issue is resolved.”
But for homeowners intent on saving their homes, an expedited court process could undermine their efforts.
“We don’t want to speed them through the process in violation of their rights or without giving them due process in terms of trying to find a loan modification or another way to avoid foreclosure,” Buitrago said. “It’s really important for servicers to do loan modifications to change the terms of a borrower’s loan so that they’re more likely to stay in their home and avoid foreclosure. They’ve been doing that to some extent but they’ve mainly focused on lowering interest rates and extending the terms of a loan. But the problem right now is people’s houses are worth less than what they owe on their loans.”
When homeowners owe more on their loans than the value of their properties, their mortgages are said to be underwater. Home values have dropped precipitously since 2008 as banks have flooded the market with foreclosures and short sales.
When banks sell foreclosed properties for a fraction of their previous worth, the sales drag down the value of homes of those who are up to date on their mortgage payments. Since 2008, the median sales price of an existing single-family home in the Chicago region has plummeted 25 percent from $245,600 to $185,000, according to the National Association of Realtors.
“If the banks and the lenders…are devaluing the properties that they are getting the mortgages on and the payments on, they’re turning them into potential new short sales and foreclosures,” said Donna Schwan, managing broker at MetroPro Realty in Chicago. “The only way to stop the cycle is to not allow these lenders to dump their property on the market. You have to put a moratorium on sales of foreclosures.”
That is unlikely to happen, but an independent agency similar to the Federal Deposit Insurance Corporation, whose purpose is to maintain stability and public confidence in the nation’s financial system, would help establish trust between homeowners and lenders, said Schwan, who has been in real estate for 30 years. “I see it becoming better within a year if they create a structure…. That’s going to protect the value of the most expensive thing any of us buy in our lifetime.”
The robo-signing scandal is still playing out.
As many as 4.5 million borrowers nationally could receive compensation as a result of an impending review of banks’ errors in processing foreclosures in 2009 and 2010. The Office of the Comptroller of the Currency, which regulates all national banks and federal savings associations, is overseeing the reassessment. The 14 largest U.S. banks signed consent orders in April with the comptroller and the Federal Reserve and hired independent third-party companies to conduct the review.
The process will seek to address the harm done by bank employees who signed off on large numbers of daily foreclosure filings and wrongly claimed to have personally reviewed each case.
“While there was no case of robo-signing in Illinois, lenders and servicers slowed the [foreclosure] process down to examine the issue and establish guidelines in the execution of affidavits,” said James Trausch, general counsel for the Illinois Mortgage Bankers Association, in an email.
Although few if any borrowers are expected to have their foreclosures overturned as a result of the comptroller’s review, an examination of how banks process foreclosures represents an effort to correct injustices in a depressed market.
On another front, government officials have been exploring ways to assist underwater homeowners refinance at record-low interest rates, which continue to hover around four percent for a 30-year fixed-rate mortgage. Allowing underwater borrowers to refinance would dissuade them from walking away from their homes and mortgages and would mitigate future foreclosures.
The Obama administration announced Monday an overhaul of the Home Affordable Refinance Program that will soften requirements and make more underwater homeowners eligible for refinancing. But the revamp applies only to those whose mortgages are held by Fannie Mae and Freddie Mac.
Some experts such as Harvard University economist Martin Feldstein believe principal reductions on underwater mortgages would be the most effective tool to assist struggling homeowners and help stabilize the moribund market.
“To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are underwater are in this category,” the former chief economic adviser to President Ronald Reagan wrote in an Oct. 12 op-ed piece in the New York Times. “If everyone eligible participated, the one-time cost would be under $350 billion.”
Banks have been reluctant to offer principal reductions because they would absorb the loss. Feldstein’s plan would split the cost between the banks and the government, but after the widespread criticism following the bank bailouts in 2008, such governmental spending is likely to meet heavy skepticism and resistance.
As the government tries to resuscitate the housing market, Trausch remains pessimistic. “I do not see the problem improving in the foreseeable future,” he said in an email. “Our state has high unemployment, an increase in taxes, jobs leaving the state and the largest per capita debt per citizen. This will keep the foreclosure rate high.”
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