Homeowners in the Chicago region are struggling with mortgage debt. Data released today shows that about one-third of mortgages on area single-family homes are worth more than the property itself. What can be done to improve the situation?
When President Barack Obama talks about the struggling housing market as a "headwind", one assumes he's thinking of issues like this: nearly one-third of single-family homes in the Chicagoland area are underwater -- meaning their mortgages are worth more than the present value of their homes -- according to an analysis released this morning by the real estate firm Zillow. That's about 10 points higher than the national average and a leap of approximately six percent from the same time last year. Zillow's information, by the way, doesn't include condominiums, which have their own knotty set of problems.
That Chicagoans are drowning in mortgage debt generates a ripple affect that saps the region's housing market and economy. One of the biggest reasons why is because mortgage holders who have lost so much of their equity are at risk of falling into foreclosure. Geoff Smith, vice president of research at the Woodstock Institute, said underwater mortgagors don't have many good choices at their disposal right now to improve their situation. They can attempt to refinance their loan with their lender, seek help through the federal government's Home Affordable Modification Program (HAMP), or try to sell the property, taking a loss on it. But none of the options are commensurate with the problem, according to Smith, even if some individual homeowners find a way out of the mess. "There's just a lack of options for underwater homeowners," he said.
If foreclosure rates remain high, city and suburban neighborhoods can expect to continue struggling with decreased property values and blight as foreclosures grind through the court system and properties sit vacant. Cities and public agencies that depend on real estate-derived taxes will go wanting. And the usual assumptions about home ownership -- a purchase allows one to build value, which in turn can help pay for education and other expenses -- frays.
It's a disturbing situation for mortgagees and communities. Not helping matters is the ineffectiveness of HAMP. The program is designed to get distressed, but employed, homeowners bargaining with their lenders and striking new terms for existing loans they agreed to during an utterly different economic moment.
But the program, simply put, has not kept pace with the housing crisis. Too few lenders have agreed to too few permanent modifications of loans that mortgagors -- be they underwater, suffering from the loss of income or another economic calamity -- now simply cannot afford. Too many trial modifications that temporarily lowered monthly payments were pulled off the table, whipsawing borrowers acting in good faith.
"A combined total of close to 700,000 of the almost 1.4 million total trial modifications were canceled after failing to be converted to permanent; more than 28,000 permanent modifications have been canceled due to missed payments, and more than 173,000 trial modifications remain in limbo," the inspector general monitoring HAMP wrote of the national trends in an October report (PDF) critical of the program.
For a more local examination of modification activity, the Woodstock Institute recently posted this chart of modification rates in the Chicagoland area:
As the chart shows, the number of active modifications is slipping in Chicagoland. Lenders canceled more than 18,000 modifications since February and September. Nixing modifications exacerbates a bad situation. The HAMP inspector general wrote that mortgage-holders who tried a trial modification that wasn't made permanent are left "with more principal outstanding on their loans, less home equity (or a position further 'underwater'), and worse credit scores."
Helping underwater homeowners means helping the broader economy. So what can be done? Woodstock's Smith is thinking big -- a "TARP-like effort on the part of the federal government" that forces the banks to participate. "In reality," he said,"that kind of discussion needs to take place."
The Washington Post's Ezra Klein, meanwhile, recently outlined four options that would help homeowners, including those underwater. One of the options was simply reforming HAMP to empower housing counselors rather than the banks; right now, the banks get to make the call on modifications. Another idea Klein noted was passing U.S. Sen. Dick Durbin's "cram down" bill, which would allow judges to write down the principal on loans during the bankruptcy process.
Something needs to be done. Right now, the very basic structure of the loan servicing process steers lenders "away from win-win modifications and toward lose-lose-lose foreclosures." Think about the topline statistic from Zillow: one-third of those holding mortgages for single-family homes in Chicagoland are underwater. They're at major risk of sliding into foreclosure. The potential for continued economic distress is immense.