Foreclosures on traditional mortgages are on the rise

By Ashley Griffin 

As the housing crisis continues to ravage many neighborhoods in the state, a study released today has identified a new breed of foreclosure that is on the rise.

The report found that conventional mortgages given by banks represent a growing percentage of new foreclosures in the Chicago and Cook County area. It also reported that nearly a quarter of new foreclosure filings in 2011 were on loans that originated before 2005. That indicates the foreclosure crisis has now hit homeowners who had been able to afford their monthly payments for six years or more.

In the past when borrowers lost their homes, experts pointed to subprime mortgages, which were marked by fluctuating interest rates and balloon payments. But the Chicago-based Woodstock Institute's report found that residents in the Chicago area are defaulting on more traditional loans, as well. “These new data show that even those buyers who took the less risky route of buying a home with a conventional mortgage are not immune from the impacts of the foreclosure crisis,” Spencer Cowan, vice president of the institute, said on the organization’s website. Cowan said the trend may have been brought on by the high employment rate. “People’s incomes have dropped; that’s why they cannot afford a mortgage anymore,” he said on a conference call today.

The report states: “The type of mortgages entering foreclosure has changed since 2008. At the beginning of the current downturn, mortgages of single-family homes entering foreclosure were almost equally divided between conventional fixed-rate, Federal Housing Administration (FHA) and Veteran’ Administration (VA) loans, at 50.1 percent of filings; and riskier mortgages, including Adjustable Rate Mortgages (ARMs) and balloon payment mortgages, at 49.2 percent of filings. By 2011, 68.2 percent of single-family home mortgages entering foreclosure were conventional, FHA, or VA loans, and only 29.4 percent were ARMs or balloon mortgages.”

The report also found the number of foreclosures in the Chicago region has declined, reaching about the same level as in the second half of 2008. There were 30,943 foreclosure filings in the six-county Chicago region during the second half of 2011, compared with 40,775 for the second half of 2010, a decrease of 24.1 percent. For the full year, foreclosure filings decreased by 18.9 percent, from 76,986 in 2010 to 64,877 in 2011.

Although the number of foreclosures has dropped, Cowan believes the reductions may be a product of recent delays in the clogged foreclosure system. (For more on the overburdened foreclosure system, see Illinois Issues March 2011.) In 2011, there were almost 31,000 foreclosure filings but only 11,766 auctions in the six-county region, which suggests that the backlog in the courts may have increased. “Without concerted effort to address the forces that drive foreclosure activity, such as negative equity and unemployment, foreclosures will continue to drain wealth from all corners of our society,” Cowan said.