Loan mods: Take two. New program could keep more Chicagoans in their homes

Loan mods: Take two. New program could keep more Chicagoans in their homes

The new Mortgage Resolution Fund in Illinois will use what its backers call a "neighborhood stabilization approach" to try and staunch home foreclosures in communities in the Chicago region hit hard by the foreclosure crisis.

Such an approach, according to documents from Mercy Housing, the Denver-based affordable housing nonprofit that is designing and operating the new fund, focuses on areas with a high density of foreclosures, and will provide borrowers a permanent modification to unaffordable loans.

"What we really need to do is keep people in their homes," said Barbara Faulhaber, a Mercy Housing spokesperson. The new fund is "place based, really looking at geography. It's family focused. It's a long-term solution and it's scalable."

Faulhaber did not know which geographies in Illinois would be targeted, but a press release announcing the effort said the dollars would be aimed at the Chicago area.

Gov. Pat Quinn announced formation of the Mortgage Resolution Fund on July 15. A public-private partnership, the effort is seeded with $100 million out of the more than $445 million in federal dollars President Barack Obama's administration made available to state government through its Hardest Hit Fund (the U.S. Department of Treasury announced $7.6 billion for this fund in early 2010, with the dollars flowing to states hit especially hard by the recession).

The initial $100 million to Illinois will be used to purchase distressed loans in bulk from lenders at current market rates, and work with borrowers to achieve permanent modifications.

In a presentation about the Mortgage Resolution Fund, Mercy officials said a $200,000 loan on a home now might be worth just $160,000. The borrower is likely unable to refinance the loan because of the loss of equity and a damaged credit score. The property might be vacant and deteriorating due to vandals. In the end, the "net recovery" on the loan for investors could be about $5,000.

Under the new plan, the fund could buy the loan for $80,000, the document estimates, and lower the principal on it to $136,000, $75,000 could be returned to investors, with the property owner staying in the structure.

Faulhaber said the initial grant could help up to 1,000 distressed borrowers modify their loans; Mercy hopes additional public and private-sector investment would allow the fund to modify 10,000 loans.

Permanent modifications of home loans have been difficult to come by.

Nationwide, the Woodstock Institute reported in June that the Obama Administration's Home Affordable Modification Program had resulted in 608,615 permanent modification around the country--far fewer than the at least 3 million homeowners the administration wanted to reach. And Woodstock calls the loan modification rates in the Chicago region "underwhelming."

In 2010, the city of Chicago saw more than 23,000 new foreclosure filings.

Flickr photo courtesy of user niallkennedy.

© Community Renewal Society 2011

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