Despite some indications of economic recovery, steadily increasing rates of foreclosure continue to drag down the economy, but there are significant disparities in foreclosure rates - and a small glimmer of hope.
Foreclosures are heavily concentrated in some states and cities, and they continue to predominate on new mortgages in low-income areas. However, new data shows wealthier areas are catching up, particularly as job losses continue increasing.
RealtyTrac, a housing data firm, reports that nearly two-thirds of foreclosure filings in February were concentrated in six states: Nevada, Arizona, Florida, California, Michigan, and Utah. Nearly one percent of all Nevada homes received a foreclosure notice in February, a rate more than 400 percent greater than the national average.
Throughout the ongoing housing crisis, foreclosure rates have been highest in low-income minority communities like Indianapolis. By 2006, borrowers in low-income areas were 30 percent more likely than borrowers in upper-income areas to have a costly subprime loan. Along with adjustable-rate mortgages, these mortgages were typically among the first foreclosures once the housing crisis began the following year.
The foreclosures also have a deeper impact in these neighborhoods. According to Woodock Institute research, a foreclosure in low- and moderate-income urban areas pushes property values down 1.6 percent within the surrounding block - a drop of $1,600 to $2,000 in sale price. Across all income areas, a foreclosure only drives down surrounding property values by 1 percent.
Chicago has more homebuyers than any other city in the nation, and foreclosure rates mirror national averages, so it is often a focus of foreclosure research. Black and Latino Chicago neighborhoods had three times as many foreclosures as white areas. Likewise, families earning less than $60,000 per year saw twice as many home foreclosures in 2009 as wealthier families.
However, rates are increasing across all neighborhoods and income levels. Wealthier neighborhoods are beginning to catch up. In Chicago's upscale Lincoln Park neighborhood, foreclosures increased by 103.2 percent in the second half of 2009.
Across the spectrum, foreclosures are most likely on newer mortgages. In Chicago, 83 percent of 2009 home foreclosures were on loans initiated since 2005, with another 13 percent initiated since 2002.
There is reason for optimism, but it may be short-lived. RealtyTrac reports that the foreclosure rate dropped by 2 percent from January to February. It also showed the lowest rate of increase since 2006. Foreclosures increased 6 percent from February 2009 to February 2010, the smallest year-over-year rate of increase since 2006. The number includes homes slipped into default, were seized by banks, or were sold at foreclosure auctions.
It gives some economists hope of economic recovery, but others worry a new wave of foreclosures could dim their hopes. If the estimated 1.8 million homeowners who are several months late on their mortgage payments slip into foreclosure, it would lower overall home values and hinder the economic recovery.
Many of the homes that could slip into foreclosure are part of the federal Home Affordable Modification Program. Some could get a second chance to negotiate with their lenders. This week, Fannie Mae started requiring Alternative Modification options for homeowners who are eligible for the federal Home Affordable Modification Program but were not able to get a permanent modification under the program. The two parties could agree to a permanent modification of loan terms, and lower payments for up to five years.
Mortgage servicing companies must try to work with the homeowner for a specified period. Fannie Mae outlines strict guidelines for the number and type of contact with the homeowner before the company begins foreclosure proceedings. Meanwhile, homeowners must continue to make payments.
Next month, the US Treasury launches yet another program for struggling homeowners. The Home Affordable Foreclosure Alternatives program incentives will encourage lenders to allow short sales to avoid foreclosure. In a short sale, a homeowner can sell a home worth less than the balance due. The lender receives the money and forgives the outstanding balance. Lenders avoid selling the home at auction, and homeowners avoid going into foreclosure.
Posted by: Steve Graham