Under Water, Without a Paddle

Under Water, Without a Paddle

The  Chicago Tribune yesterday reported that data through June of this year shows that about 1 in every 4 Chicago homeowners is under water on a mortgage, or owes more on their loan than the value of the property. It's consistent with first-quarter figures, but it's still a remarkable ratio to see in print.

The Chicago area figures reflect slightly higher under-water marks than the national average, which is about 22.5 percent, according to research firm CoreLogic.

The same article pointed out that many of these homeowners are not candidates for re-financing.

So what's a homeowner to do? Short sales are a common resource for homeowners who are interested in selling their property, with a less impactful credit hit compared to foreclosure. In a short sale, the bank agrees to accept a buyer's offer that is lower than the seller's loan amount. Although the bank allows the transaction to take place, banks reserve the right to seek the deficiency amount. The seller is not required, then, to bring money to the closing, instead the seller walks away from the sale without any proceeds.

However, short sales in today's climate require a hardship. Although just about anybody can claim a hardship these days (lower profits at work, less income), it's not guaranteed that the bank will approve it.

So here's where legislative help is needed. The Home Affordable Foreclosure Alternatives (HAFA) Program is approaching its two-year anniversary this November (it was launched in Nov., but did not become law until April 5, 2010). It was designed to streamline the short sale process, but has its flaws as well. As a result, the number of homeowners qualifying for HAFA is minute, compared to the number of national short sales. Less than 4,500 homeowners qualified for a HAFA closing, which includes deeds in lieu of foreclosure.

As a first step, though, HAFA was the right idea: providing banks financial incentive to approve short sales more quickly. Today, more is required.

As these under-water figures climb, so too will personal debt and other financial burdens. I have not seen any attempts to update HAFA or further expand/reform short sale procedures since HAFA was introduced. Lenders need further incentives to improve on the short sale, deed-in-lieu and pre-foreclosure process. Without any upgrades to HAFA, and without any other progressive legislation, the foreclosure logjam will continue to grow.

Leave a comment