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Foregoing foreclosures

Maximo “Max” Pagan and his wife, Gladys, were OK with their $1,600-a-month mortgage from lender HSBC … until their low introductory rate adjusted up, and Gladys missed work due to spinal surgery.

“All of a sudden we’re looking at $2,500,” said Gladys of the adjusted monthly on their tidy brick ranch near Midway Airport. “That’s more than my husband’s retirement check. With food and utilities, and kids in school, we’re already living check-to-check.”

Photo: John McCarron

Max and Gladys Pagan hope to benefit from the proposed Mortgage Resolution Fund, due to ramp up this fall.

No wonder the Pagans are on an informal list of families, started by Neighborhood Housing Services of Chicago, who might benefit from a new program due this fall aimed at avoiding foreclosure and keeping working families in their homes.

It’s a simple concept—the proposed Mortgage Resolution Fund—though its implementation may prove anything but. The draft operating manual for this first-of-its-kind program is already 700 pages. But surely the need is there.

Balky lenders
Traditional lenders have been slow to modify mortgage terms and especially unwilling to reduce the principal owed, even in the face of broadly declining home values.  Instead they tend to foreclose and take back the house. But with times this hard and qualified buyers getting scarce, properties sit empty for months, even years, often degrading into blighted hulks that endanger neighborhoods.

The federally funded Neighborhood Stabilization Program, or NSP, managed here for the City of Chicago by Mercy Portfolio Services, has had considerable success buying some of these REOs (a banking term for “real estate owned”), rehabbing them using local contractors, and re-selling them at a discount to credit-worthy buyers.

But it’s slow going. With so many single-family dwellings so long vacant, vandalized and stripped of valuable piping and wire, the per-unit cost to acquire and rehab can get out of line with the local market. That’s one reason Mercy Portfolio has focused increasingly on apartment buildings, which can be refit at a lower per-unit cost and sold into the stronger rental market.

Drops in a bucket
By late summer, nearly three years into the program, Mercy reports it has rehabbed and either sold or put up for sale or rent more than 700 housing units in 100 buildings.

Photo: John McCarron

Domingo and Ana Medina are being threatened with foreclosure by Bank of America, which bought their mortgage from the infamous Countrywide Financial.

But these successes are drops in the foreclosure bucket. During the past two years Chicago borrowers have been hit with more than 20,000 foreclosure filings—more than triple the level before the crisis hit in 2007-08.  And there’s no let-up in sight. During the first six months of 2011, there were 26,681 initial foreclosure filings in Cook County, the great majority against Chicago borrowers. 

So big is the backlog of homes on both the court docket and the real estate market that some lenders are simply “taking the keys” and not bothering to foreclose, thereby saving court costs, masking a degraded asset on their books … and sticking the neighborhood with yet another untended hulk.

So it’s little wonder cities like Chicago, and housing-savvy non-profits like Mercy Housing, NHS and LISC/Chicago, are looking for ways to break the spiral of decline by avoiding the foreclosure process altogether.

The new Fund 
What may prove a national prototype is emerging here in Chicago: the Mortgage Resolution Fund.  The concept’s initiators include Mercy Portfolio’s parent, Mercy Housing, plus three national non-profits: the Enterprise Foundation, the Housing Partnership Network and the National Community Stabilization Trust.

 The effort got off to a fast start this summer when Gov. Pat Quinn and the Illinois Housing Development Authority (IHDA) chose to back the idea with $100 million obtained from a U.S. Treasury allotment to those states “hardest-hit” by the foreclosure epidemic.

“We began conversations about ways to avoid the foreclosure process shortly after NSP began operations,” said William Goldsmith, who directs Mercy Portfolio and will serve as president of the Mortgage Resolution Fund.

He predicts lenders and loan servicers will be eager to sell delinquent mortgages to the Fund, rather than foreclose, once they pencil out the numbers. Same goes for Fannie Mae and Freddie Mac, Goldsmith said, as those government-sponsored mortgage wholesalers look for ways to pare their swelling inventory of non-performing loans to reduce the ultimate cost to taxpayers.

Photo: John McCarron

The Medinas love their 51-year-old Cape Cod duplex, home to their two adult daughters--one a disabled military veteran--and their 9-year-old grandson.

Under one comparative model, a typical lender would recover $75,000 on an unpaid loan balance of $200,000. This compares to recovering zero from the loan and losing an additional $5,000 by pursuing foreclosure, paying lawyers and court costs, and ultimately watching an empty house descend to near-worthlessness … all the while exposed to the legal liability of owning an eyesore. 

The Fund would buy that mortgage for $80,000 and issue a new mortgage to be administered by a consumer-friendly servicing agent. The loan’s principal would be lowered to reflect the home’s true market value; the repayment schedule extended; and the interest rate lowered to reflect today’s record-low rates.

The new mortgage could then be sold to an investment house, such as Fannie Mae, restocking the Fund with capital to buy more troubled loans held by working families.

A “fresh start” 
“Working” is the operative word, Goldsmith explains, because for the Fund to succeed its borrowers must have incomes sufficient to make those reduced monthly payments.

That likely describes Max and Gladys Pagan, according to Sonia Delgado, who has counseled the family at the Chicago Lawn/Gage Park office of NHS. “I truly believe,” said Delgado, “that with a fresh start they can afford their mortgage.”

Same goes for Domingo and Ana Medina, another of Delgado’s clients at NHS. They are being threatened with foreclosure by Bank of America, which took over the loan when it bought the now-notorious Countrywide Financial.

The Medinas desperately want to keep their Cape Cod-style duplex on the 5100-block of South Lotus Avenue because their two adult daughters—one a disabled military veteran—and their 9-year-old-grandson all call it home.

Like a lot of stressed borrowers, they tried to modify their mortgage under the federal government’s Home Affordable Mortgage Program, or HAMP. But BofA would not let them advance beyond the “trial” phase and at one point, Ana claims, refused to accept their monthly payments.

Now the interest-only period of their mortgage has expired and the lender wants $2,562.82 per month toward their 7.64 percent, $313,441.44 mortgage.

“They don’t listen to you,” said Ana, who lost her job as a videotape duplicator four years ago. She lives now on a Social Security disability benefit plus Domingo’s meager pay working for a temp agency as a school janitor.

Getting a new, affordable mortgage through the Resolution Fund would be, she said, “the answer to our prayers.”

The new program will be welcomed, too, by those who’ve been in the trenches for years fighting the foreclosure menace.

“This is what we wished the banks to do all along,” said Jeff Bartow, executive director of the Southwest Organizing Project (SWOP), about the desperate need for principal write-downs and an escape from tricky, pop-up interest rates.

With the Greater Southwest Development Corp., SWOP has been a mainstay of NCP on the city’s Southwest Side. Their “Keep Our Homes” project and REACH counseling center have become national models for neighborhood-based foreclosure-fighting. 

Bartow is heartened, also, that Goldsmith and the Resolution Fund intend to accept nominations from neighborhood-based mortgage counselors such as Sonia Delgado and NHS … rather buy batches of failing mortgages that lenders are most eager to get off their books.

“We’re hoping they do it in a concentrated way,” Bartow said, explaining that the best part of the Mercy-run NSP program is that it targets neighborhoods that have clusters of foreclosures … yet still have potential to rebound if key buildings are saved.

“We’re excited about it,” he said of the new Fund, especially if it employs the same, targeted approach … and lets community-based groups like SWOP and NHS screen and nominate applicants.

Those having difficulty with mortgage payments and in danger of foreclosure are encouraged to contact Neighborhood Housing Services at (773) 329-4185, English, (773) 329-4181, Español, or e-mail foreclosureprevention@nhschicago.org

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