The Right Place

Bailout not for all
MORTGAGES | Freeze on adjustable rates could compound woes

December 6, 2007
BY SALLY DUROS Real Estate Editor/sduros@suntimes.com

Some Chicagoans who took out exotic mortgages in 2005 at the peak of housing prices might want to step out of their mortgages now rather than wait through the five-year freeze on interest rates pushed by the Bush administration.

Bush and banking executives have reportedly agreed on a plan to freeze interest rates for certain troubled subprime mortgages for five years. The plan is aimed at absorbing the blow to holders of mortgages with adjustable interest rates -- rates that soon will be re-set much higher than the original loan.

Those home buyers expected the equity in their homes would have soared during their short ownership, enabling them to cash out or refinance with a fixed-rate mortgage. But reliable data shows that since 2005, Chicago area home prices have tumbled 15 percent.

The Bush plan would ask mortgage servicers to voluntarily freeze rates on subprime loans made to borrowers with weak credit. Details will be unveiled today.

The freeze could stem a tide of foreclosures nationwide -- estimated by knowledgeable sources to exceed 2 million.

Such a one-size-fits-all solution might not be the most effective strategy for many Chicagoans, said professor James Shilling at DePaul University's business school.

He said homeowners who already owe more on their mortgages than their homes are worth, might find themselves deeper in debt if they wait and if home prices continue their downward tumble.

"If I got 100 percent financing in 2005, then I have lost probably 15 percent of the worth of the asset," Shilling said. "Then the issue becomes would you rather be out the 15 percent today or be out 20 percent in two years or be out 30 percent in three years cumulatively as prices continue to drop."

Homeowners who put up some kind of down payment probably would benefit from the Bush plan.

"We are trying to have a blanket policy to affect everyone," Shilling said. "This is a case-by-case basis. For some people out there who only borrowed 80 percent in the subprime market in 2005, chances are they might benefit from having a freeze on the mortgage payments so they can keep their equity."

Recent data from RealtyTrac placed the number of properties in foreclosure in the Chicago MSA at 17,424, or one foreclosure for every 190 households at the end of the third quarter of 2007. Foreclosures in Cook County alone totaled 11,032, or one foreclosure for very 194 households.

Geoff Smith, research director at the Woodstock Institute, said that "of all the proposals out there, this is one that we think has the ability to make the biggest impact."

Contributing: AP

Investors hold about 9% of loans
SUBPRIME LOANS | llinois failings rise scant 3%
November 18, 2007
BY SALLY DUROS sduros@suntimes.com

An analysis by Chicago's Woodstock Institute of subprime lending patterns in metro Chicago suggests the percentage of troubled loans held by real estate investors -- those buying real estate for speculative purposes or as rental properties -- was about 9 percent in 2006.

"We mapped the percent of mortgages that were on non-owner-occupied properties in 2006, and it was 9 percent," said Geoff Smith, research director at the Woodstock Institute. "Those are loans on nonowner-occupied mortgage units. It could be an investment property. It could be rented out."

He said loans on second properties could be first to go if the property owner finds himself short of cash. Still, the estimated number of investors for Chicago is less than what has been tracked nationwide.

"Nationally the numbers we've seen have been larger. The last number we saw nationally was 27 percent of mortgages were on investment properties."

Smith said some neighborhoods, such as Englewood, West Englewood, New City/Back of the Yards, North Lawndale, Riverdale, the Loop, and the Near North Side show a larger percentage of non-owner-occupied mortgages.

His research also looked at the areas that failed lenders, such as Fremont and New Century, had been operating in. "If a borrower has a loan with one of these institutions it might be more complicated to reach someone," he said.

Meanwhile, the latest data from Irvine, Calif.-based RealtyTrac showed foreclosures in Illinois rose a scant 3 percent between the third quarter of 2006 and the third quarter of 2007.

The data found that California, Florida and Ohio were home to more than two-thirds of the 25 metropolitan areas in the U.S. with the highest foreclosure rates as subprime borrowers and property speculators fell behind on their adjustable-rate mortgages.

Foreclosures are increasing as homeowners face higher payments on their adjustable mortgages. Home prices in 20 metro areas declined for the eighth straight month in August, according to the S&P/Case-Shiller home-price index, making it harder for homeowners to sell or refinance without losing money.

The Midwest is home to one city deeply plagued with foreclosures: Detroit, which had one foreclosure filing for every 33 households, an increase of 93 percent.

Meanwhile data from the Mortgage Bankers Association showed that mortgage applications in the U.S. rose last week as refinancing jumped to the highest level in more than two years and filings for purchases rebounded.

And the National Association of Realtors released data that forecast sales of existing homes in the United States will decline to a five-year low in 2007. The trade group also said the outlook for 2008 is worsening. The ninth-straight downwardly revised monthly forecast from the NAR calls for U.S. existing-home sales to fall 12.7 percent this year to 5.66 million.

--Bloomberg News contributing.

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