THE JOURNAL & TOPICS NEWSPAPERS | FRIDAY, JUNE 1, 2007
Foreclosures A Hard Lesson For Some Here
By STEFAN SCHUMACHER
Journal Reporter
The number of foreclosures on homes in Des Plaines nearly doubled from 2005 to 2006, according to a study done by the National Training and Information Center (NTIC).
NTIC monitors lending practices and foreclosure rates in the Chicago area. According to their data, Des Plaines has seen an almost 300% increase in foreclosures since 1993, and from 2005 to 2006, the number of foreclosures went from 100 to 195, a 95% increase.
Des Plaines may be part of a growing trend, as NTIC's study found a 36% increase in Chicago foreclosures from 2005-2006, the largest increase in 15 years, as well as sizable increases in Arlington Heights (30%), Buffalo Grove (58%), Glenview (73%), Elk Grove Village (24%), Mt. Prospect (34%), Prospect Heights (23%) Niles (67%), Wheeling (86%) and Schaumburg (70%).
Park Ridge was a rare example of a town that had a decrease (-3%) in foreclosures from 2005 to 2006. Rolling Meadows' increase was only 7%.
"It's pretty clear that almost half of the foreclosures in 2006 were early defaults, meaning they were on loans that were less than 24 months old, and about 40% were ARMs (adjustable rate mortgages)," said NTIC Executive Director David Rose.
Adjustable rate mortgages are loans that guarantee a usually inexpensive fixed rate for a short time before increasing, often substantially.
"What we've seen across the city and in the suburbs," said Rose, "is a lot of foreclosures on loans with ARM characteristics. Our experience working with borrowers and looking at the foreclosure numbers is that NTIC just sees ARMs as very risky loans to get into."
Of the 195 foreclosures in Des Plaines in 2006, 48% were early defaults, and 38% were early defaults from ARMs, according to the NTIC data.
Rose said people often don't understand the risks when they apply for such a loan to buy a home, or to refinance. He said many of the brokers of these types of loans don't have the borrowers best interests in mind.
"The central problem here is that when you go to refinance, there's no one who has an incentive for you not to refinance," he said. "The moment you walk in the door and express an interest the only way the people you're talking to are going to make money is if they successfully get you to refinance.
"Brokers will tell you that they want to do the best thing for you and give you sound advice, but really what they want to do is get paid. There are good brokers out there, but it's really hard for a homeowner to know the difference."
Rose went on to say that brokers will often tell people they can simply refinance again when the rate of their ARM goes up, but that often involves an expensive pre-payment or refinancing penalty.
The result of these foreclosures, according to Rose, is often a decline in property values throughout the neighborhood.
"We're seeing boarded up homes in neighborhoods we would've never seen them before," he said. "We're talking about homeowners to begin with, so we're not talking about really, really poor people."
Why do lenders give out loans to people who may not be likely to pay them back?
"You have lenders out there who really never see buyers," said Rose. "The broker is the one who sits down with the homeowner, and the broker gets paid up front, he gets paid when the loan closes. So he has no real long term interest in the loan.
"The lenders that are supplying the money for the loan wind up owning the loan, but they then sell them in a loan pool up on Wall Street."
Rose said many lending institutions use words like "freedom" or "American" in their titles, but that doesn't necessarily mean they have the best practices.
"It's become a very complicated issue," said Rose. "When we started working on this, it was basically high cost loans that were getting people into trouble. Now it's these ARMs that aren't covered by the Illinois High Risk Home Loan Act."
The state law was intended to shield people from predatory lending, but according to NTIC data, 92% of the 2006 foreclosures had low interest rates that fall out of the scope of state protection.
Rose said although NTIC is trying to work with community, banking and government leaders to put some controls on the lending industry, "it seems like as soon as we shut down one kind of practice another one pops up."
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