May 17, 2007 11:31 pm US/Central
Forced Out: Foreclosures Hitting More Homeowners
by Diann Burns
CHICAGO (CBS) ―
The chairman of the Federal Reserve is in Chicago, promising a crackdown on mortgage lenders who abuse the system, giving loans to people who can't afford them.
A record number of homeowners are now defaulting on their loans and risk losing their homes – 7,000 in the Chicago area in April alone.
As CBS 2's Diann Burns reports, this is not just your neighbor's problem. When they are forced out by foreclosure, everyone pays a high price.
Owning a home is an integral part of the American dream. But this year alone millions across the country could face foreclosures.
Debbie Clark owns a home in Marquette and recently got the shock of her life. Her adjustable rate mortgage, or ARM, will jump from 7 to 13 percent in a year.
"Financially it hurts, it leaves you up at night crying, worried," Clark said.
"When a broker or realtor or some other person talks somebody into taking a loan that they really can't afford, that's no different then robbery," said researcher David Rose.
The National Training and Information Center studied foreclosures in Chicago between 1993 and 2005.
"It's all over the city," Rose said. "Even neighborhoods like this one in Jefferson Park saw an 89 percent increase in foreclosures."
Hot neighborhoods like the West Loop saw foreclosures soar 440 percent; the South Loop by 600 percent; and Washington Park, a potential site for the 2016 Olympic Games, by 786 percent.
And this is not just a city problem.
T.J. McKinney is an investor with the Illinois Foreclosure Listing Service, a company that tracks foreclosures for investors. He says that there are plenty of foreclosures in suburbs, like Glenview, Naperville, Plainfield, Forest Park and Oak Park.
Here's what they have in common: most were ARMs.
"The adjustable rate mortgages gave people a false sense of what was affordable," McKinney said.
The interest in an adjustable rate mortgage goes up or down based on a specific financial index. That's the kind of loan that got Clark in trouble.
For the last two years, she's paid about $1,000 a month. In August, it jumps to $1,300, in February $1,410, finally capping at $1,635.
The Chicago foreclosure report blames "abusive origination practices and/or disregard for the ability of borrowers to pay."
"They would say do not worry, when you have to worry, because if you don't worry, they will come two years later, hike your mortgage up so high that you cannot even eat," she said.
When asked what potential buyers should be aware of, Rose said, "The broker, the realtor is not your friend. These are business people who only make money when you close on a loan."
ARMs were intended for a narrow group of borrowers. They exploded a few years ago when they were also pushed to people with bad credit and low incomes.
Neighborhood Housing Services counselors now spend almost half their time on foreclosures. Mortgage planners say the people who borrow have to take responsibility.
"The homeowner is the one who's making the decision to say 'Can I afford this?'" said Dan Green, a mortgage planner. "Disclosures are very clear."
But for many people, the paperwork is overwhelming and confusing. And if just one home on a block goes into foreclosure, it affects all of us.
"They can lead to abandoned buildings," Rose said. "Some neighborhoods could become a haven for crime activity."
A study of a block in the Auburn/Gresham neighborhood determined that foreclosures come with a stiff price tag. Every foreclosure costs local government more than $34,000, and property owners collectively lost $220,000 in reduced property values and home equity.
"That's why it's very important that we work with people and help them stay in their homes," Rose said.
But experts say this is just the tip of the foreclosure iceberg.
"The actual crisis hasn't started yet," said John Groene of Neighborhood Housing Services. "We'll see that in a couple years."
That's because millions more of these mortgages will adjust to a higher rate over the next couple of years. The sooner you get help, the better.
The city is a safe route, offering counselors to help you make your case to the lender. Call 3-1-1 for information.
The Neighborhood Housing Services is helping Clark restructure her loan.
And here's a simple way to know if you can afford a home – the payment, including the principal, interest, taxes and insurance, should be no more than 33 percent of your income.
(© MMVII, CBS Broadcasting Inc. All Rights Reserved.)
