Business and Community Partners: Foreclosed Home Stock Balloons

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by BRIDGET O'SHEA and JAMES O'SHEA | Jul 8, 2011

Although it never shared the notoriety of Miami, Los Angeles and Phoenix during America’s foreclosure crisis, the Chicago area now has the nation’s largest inventory of foreclosed homes because it is harder to unload troubled properties here than in most other metropolitan areas.

The inventory data compiled by RealtyTrac, a California company that tracks housing sales, place Chicago first among the country’s 20 largest metropolitan areas. Real estate experts attribute the high concentration of foreclosures to numerous factors including the strong protections built into Illinois law to protect borrowers, the impact of the “robo-signing” investigation by the Illinois Attorney General, and the reluctance of banks to dump properties at prices far below the value of mortgage loans on their books.

As a result, banks and real estate firms here take longer to dispose of the properties they seize when loans go bad. The Chicago metropolitan area had 118,776 homes in May 2011 that were either owned by banks or were in the process of being taken over by lenders because the owners could no longer afford their monthly mortgage payments, according to RealtyTrac. The Chicago area in the RealtyTrac data includes Cook and DuPage counties as well as parts of Indiana and Wisconsin that are part of the metropolitan areas used in U.S. Census tracts.

The Chicago area inventory exceeds numbers in the Los Angeles and Miami areas, where the foreclosure crisis seemed particularly severe, and Chicago’s inventory of foreclosed homes is falling more slowly than elsewhere, real estate and legal experts say.

The stubbornly high level of the foreclosure inventory here also seems to have a depressing impact on housing prices in neighborhoods without a large number of foreclosures. A report from The Standard & Poor’s/Case-Shiller Index, a leading measure of the health of the residential housing market, said Chicago single-family home prices in April declined 0.4 percent from March while the service’s 20-city index rose 0.7 percent, the first increase in eight months.

“I don’t think you can say that a person in Lincoln Park will hold off buying a home because things are not going well in Pullman,” said Winifred Curran, an associate professor of geography at DePaul University who has studied the foreclosure problems in Chicago. “But there is definitely a ripple effect.” That occurs, she said, when “there is a sense that the city does not have a healthy market.”

Some real estate and foreclosure experts such as Rick Rogers of the Rogers Law Group in Bannockburn expressed skepticism about the numbers. Rogers said it often takes far longer to foreclose on properties in states such as Florida, Nevada and Michigan. Curran also said the RealtyTrac numbers trend high.

But RealtyTrac says it compiles data from more than 2,200 counties throughout the United States to create a report on the top 20 metropolitan areas that conform to United States Census tracts.

The May 2011 RealtyTrac data, in which the foreclosure inventory here drifted lower from prior months as sales picked up slightly, said the Los Angeles area ranks second, with 86,745 homes either owned by banks or in the process of foreclosure. New York City ranks third with 84,600; Miami is fourth, with 83,758, and Phoenix rounds out the top five with 72,225 homes in foreclosure.

The data, which dates back to January 2008–when the bursting of the years-long housing bubble first was getting national attention–show that the Chicago region has consistently ranked near the top in the listings.

The data suggest that banks and realtors in the area do not sell foreclosed properties as rapidly as they do in places such as Miami, where home prices soared but then fell quickly, volatility that drew national headlines.

Chicago sells fewer foreclosed home each month than any other major metropolitan area except New York, where state laws similar to Illinois’s offer protections that make it hard for banks to drive borrowers from their homes. During the first five months of the year, for instance, an average 4,004 foreclosed homes in Phoenix were sold each month. The monthly averages were only 1,697 foreclosed-home sales in Chicago, while 762 foreclosed properties sold in New York.

Curran at DePaul said that the housing boom in places like Miami was so hot that banks became more desperate when prices plummeted and were more willing to sell at lower prices than in the Midwest, where housing prices rose but at nowhere near the pace in places like Las Vegas, which was not included in the RealtyTrac data. Las Vegas, which has been hard hit by foreclosures, saw median home sales prices fall to a 15-year low in January this year as a result of the high number of foreclosed homes being sold, according to the real estate analytics firm DataQuick. The firm, which reviews property-sale records, also said 70% of Las Vegas homes sold in May were foreclosed properties.

“I think it’s the banks; they are not willing to lower prices,” said John Bouman, president of the Sargent Shriver National Center on Poverty Law, an advocacy organization for low-income people. “So these properties just sit there empty because they don’t want to sell it at a lower price and lose the money they have in it.”

Bouman, who lives in Maywood, said the situation has affected him personally.

The house across the street from him has been vacant for more than a year, he said, and he knows of two prospective buyers who inquired about the property but couldn’t get satisfactory answers from the bank.

Bouman said he and his wife had thought about selling their house and moving to a condominium in Chicago, but the glut of foreclosures had depressed prices so much that he couldn’t get enough money for his house to afford one.

“Sometimes I think that it’s hard to find anyone at the banks who can make a decision,” said Bouman, “so these properties just sit there.”

Geoff Smith, a senior vice president at the Woodstock Institute, a non-profit research organization that specializes in housing issues, said one factor contributing to Chicago’s slow sales rate is that Illinois is a judicial state that requires banks to go through a court system to foreclose on a property rather than simply file a notice to the borrower. Numerous consumer safeguards typically slow down the process and cause a backlog of cases in the courts.

“You’ve got a real bottleneck of cases,” Smith said.

Smith said the “robo-signing” scandal currently under investigation by Illinois Attorney General Lisa Madigan also contributes to the slower pace. “Robo-signing” refers to the robotic generation of erroneous or fraudulent loan documents by companies that service mortgage loans. Some foreclosures were based on fake documents, giving homeowners an opportunity to challenge the right of financial institutions to seize the property.

“Problems were generated by the servicers not processing these correctly,” Smith said. “This led to government intervention. The state had to make sure its citizens were protected.”

According to a study done by Nicholas Bianchi of National People’s Action, a national community rights organization, the nation’s five largest banks — Bank of America, Wells Fargo Bank, J.P. Morgan Chase Bank, Citibank and US Bank – are involved in three of every five foreclosures in Cook County. Bianchi’s study says most foreclosures also occurred in African-American and Latino neighborhoods.

Several banks declined to comment about the reasons for the slow pace of sales here.

Daren Blomquist, the marketing and communications director at RealtyTrac, said he thought there was a big difference between foreclosures in the Midwest and the West, where the real estate boom drove prices sharply higher.

Foreclosures of western properties tended to be in desirable suburbs, but in Chicago they came in older, economically weaker neighborhoods.

“In the West, there were a lot of foreclosures on newer properties in suburbs that might be more desirable to someone trying to get back into the market,” he said. In contrast, Blomquist said foreclosures in the Midwest tended to be in older neighborhoods where the property might not be as desirable or might have been more vulnerable to neglect on vandalism.

By The Numbers:

RealtyTrac lists the total inventory as the sum of homes that are owned by banks that took them over when borrowers fell too far behind on their mortgage payments and homes in which the foreclosure process is underway. The following chart compares the total inventory of the New York-Northern New Jersey-Long Island, Los Angeles-Long Beach-Santa Ana, and Chicago-Naperville-Joliet metro areas. The inventory in Chicago is the highest of the 20 metropolitan areas measured by RealtyTrac.

The monthly sales rate is the average number of foreclosed homes that banks and realtors sell each month. When banks and real estate sales staffs sell a higher number of homes, the inventory tends to fall, particularly if there is no sharp increase in the number of homes that fall into foreclosure. The monthly rate of sale of foreclosed homes in Chicago is lower that any other metropolitan region except New York.