More mortgage distress in the air - Price slide likely to continue as shadow inventory comes to light

More mortgage distress in the air - Price slide likely to continue as shadow inventory comes to light
By Mary Ellen Podmolik
Copyright © 2010, Chicago Tribune
September 30, 2010
http://www.chicagotribune.com/classified/realestate/ct-biz-0930-distressed-properties-20100930,0,5192202.story


Several years after the foreclosure crisis hit the Chicago area, a quiet new storm of homeowner troubles is on the horizon.

New data suggest that the number of homes taken back by lenders represents only a small percentage of the distressed residential real estate out there. There are many more homeowners struggling to make their monthly payments.

In the eight-county Chicago area, 19 percent of mortgages — representing nearly 1 in 5 residential properties with a loan — are delinquent by at least one month, helping create an inventory of almost 204,000 homes at risk of reverting back to lenders, according to data provided to the Chicago Tribune by John Burns Real Estate Consulting in Irvine, Calif. That "shadow inventory," as experts define distressed homes not yet put up for sale, is the largest in absolute terms for any metropolitan area in the country.

Based on its calculations, the firm believes that 80 percent of those homeowners eventually will lose their property, either through foreclosure or a short sale, in which the lender permits the home to be sold for less than the value of the loan.

These numbers are troubling for the economy because they reflect the deep problems many families are facing. But there is a significant spillover effect for all homeowners: Many of these houses eventually will go on the market, sold as distressed properties that will impact the value of all homes in their neighborhood.
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Distressed sales, which are expected to account for 41 percent of activity nationally this year, should peak at 45 percent of all sales completed next year, according to Burns Real Estate Consulting. In September, 45 percent of single-family home and condo sales tracked by the Chicago Association of Realtors were foreclosures and short sales.

For Cook, DeKalb, DuPage, Grundy, Kane, Kendall, McHenry and Will counties, the shadow inventory number translates to 22 months of distressed housing supply. The combined shadow inventory for Lake County and Kenosha County, Wis., where the delinquency rate is 18.4 percent, is more than 22,000 homes, or a 23-month supply.

"A fifth of people (in the Chicago area) aren't paying their mortgage," said Wayne Yamano, a vice president at John Burns. "Next year is when you're going to have the most competition in the market and the proportion of distressed sales will be the highest."

An analysis of mortgage delinquencies in the Chicago area compiled for the Tribune by research firm CoreLogic demonstrates that the housing crisis is far from over. It shows that in many communities, less than 1 percent of homes in a given ZIP code were bank-owned at the end of June. Add in properties where the mortgage payments are at least 90 days past due and considered seriously delinquent and the percentage of affected properties grew by five-, ten- or twentyfold in some communities.

Some snapshots:

•In Evanston's 60202 ZIP code, for example, only 0.55 percent of homes were foreclosed upon and reclaimed by lenders in June. However, almost 7 percent of mortgages were at least 90 days delinquent, putting the future of those homes at risk.

•In Chicago's 60611 ZIP code, part of Chicago's affluent Streeterville and Gold Coast neighborhood, only 0.52 percent of properties were bank-owned in June, but 5.31 percent of homeowners hadn't paid their mortgages for 90 days.

•In Montgomery in June, less than 1 percent of properties were bank-owned, but almost 13 percent of mortgages were seriously delinquent.

Overall in Illinois, the drumbeat of foreclosures has continued. In August, according to RealtyTrac, foreclosure proceedings were initiated on 6,912 homes; 5,412 homes went to court-ordered foreclosure sale; and 4,484 homes were taken back by lenders. One in every 314 homes with a mortgage received some sort of foreclosure filing in Illinois in August.

Local governments are concerned about the increases and their impact, but they say they have struggled to keep track of the growing numbers.

Some municipal governments, Lansing among the most recent of them, have enacted vacant property ordinances to hold property owners, whether individuals or banks, responsible for a home's upkeep. Others try to keep tabs on foreclosures by tracking court filings and talking with local real estate agents.

But in an era of strapped budgets, communities don't have the financial resources to track foreclosures already in their neighborhoods, much less the future ones that may occur.

The village of Lincolnwood this year has logged the most property maintenance complaints in at least seven years, as residents call about vacant homes in their neighborhoods with high grass, broken windows and unattached gutters. The village tries to keep up with the complaints and file liens against property owners, but it is in the third year of a hiring freeze and has eliminated positions.

In June, 6.43 percent of mortgages in Lincolnwood were in foreclosure and another 7.3 percent were at least 90 days past due, according to CoreLogic's data.

"We don't have the mechanism in place to actively track it," said village administrator Timothy Wiberg. "We hope we've hit rock bottom, but we don't know with any clarity what's going to happen."

There is little doubt that more homeowners will lose their homes next year as foreclosure prevention efforts meet with limited success and an unemployment rate near 10 percent puts pressure on new homeowners.

Earlier this month, the Treasury Department reported that only 33 percent of the 1.3 million trial payment plans begun under the federal government's Home Affordable Modification Program had been converted into permanent mortgage modifications. Meanwhile the number of modifications that were made permanent in August was down almost 27 percent from July.

"Modifications have delayed distressed homes from coming onto the market," Yamano said. "We think most modifications are going to fail, and the (government-sponsored enterprises) are starting to ramp up foreclosure starts."

During the year's second quarter, foreclosure starts of Fannie Mae- and Freddie Mac-backed mortgages increased 12 percent nationally, while completed foreclosure sales and other sales increased 15 percent. Short sales and deeds-in-lieu of foreclosure, two loss-mitigation efforts encouraged by the government because they cause less harm to a borrower's credit score, rose 27 percent during the second quarter, according to the Federal Housing Finance Agency.

"You're seeing more product come into the marketplace, absolutely," said Mabel Guzman, president-elect of the Chicago Association of Realtors. "They want to get the product moved."

In DuPage County, where community groups are trying to educate borrowers on their options, the DuPage Homeownership Center sees 15 to 30 new faces each week at group orientation sessions designed for struggling homeowners. "I think there are people right now hanging in limbo because servicers are dealing with (loan modification) backlogs," said Dru Bergman, the center's executive director. "I get a sense that there's still a lot clogged in the pipeline."

Some real estate agents say they're seeing an increase in the number of financially strapped homeowners interested in listing their home as a short sale. They're also fielding questions from traditional sellers who held their homes off the market this year with the expectation that their home will fetch a better price in 2011.

"I'm not sure that's going to happen," said Mary Ann Manna, an agent at American National Real Estate in West Chicago. "I know what's out there and I know the pipeline is pretty full, and banks aren't even putting all the properties they have on (the market). This is not over."

mepodmolik@tribune.com