The New $100 Million Fund to Modify Loans and Prevent Foreclosures
Some Chicago-area homeowners at risk of foreclosure may get the lifeline they need from the new $100 million Mortgage Resolution Fund, announced by Governor Quinn this past Friday.
“We’re going upstream to stop further houses from becoming vacant,” says Bill Goldsmith, the president of the newly formed MRF as well as the president of Mercy Portfolio Services, an organization that works on foreclosure remediation. Mercy is one of four members of the MRF public-private partnership, which is using Chicago—scene of the nation’s largest unsold inventory of foreclosed properties, as the Chicago News Coop has reported—as a proving ground for what may become a national program.
The program buys up troubled mortgages and then modifies their terms (interest rate, term in years, or total principal owed) to make them more affordable to the homeowners. Goldsmith says loan modification has proved successful at keeping financially strapped people from defaulting, but banks have been slow to offer it. Reports indicate that one in nine homeowners may be at risk of falling into foreclosure. Keeping people in the black, Goldsmith says, “helps reduce the flow of real estate coming into the marketplace at [distressed] price levels, and that helps stabilize home values in the communities.”
While Goldsmith says the group still wants to line up another $300 million for use here and in other states in addition to the $100 million announced Friday, he says about 1,000 homeowners will be helped by the initial $100 million, which comes from Illinois’ $445.7 million Hardest Hit Fund. (The $100,000 of taxpayer dollars per mortgage includes all of the program’s operating costs.)
“Keeping more people in their homes is an important part of what we need to stabilize the housing market and work toward recovery,” says Tom Feltner, the vice president of the Woodstock Institute, which is not part of MRF. Woodstock has pushed the U.S. Treasury Department to make reducing the principal on loans standard practice for the Home Affordable Modification Program.
Feltner notes, as does Goldsmith, that the MRF program will be one among numerous tools and funding vehicles to address the foreclosure crisis. For example, other tools target people who are already in foreclosure, unlike MRF. Among them is the Neighborhood Stabilization Program, an initiative Mercy administers for the City of Chicago that buys already-foreclosed homes. “Those houses are usually in pretty bad shape because they’ve been vacant for a while,” Goldsmith says. “Getting them back in order is expensive. If we can keep a house from becoming vacant [using MRF funds], we can prevent a lot of problems,” including squatting, vandalism, and other abuses that contribute to a neighborhood’s decay.
Just now getting up and running, MRF should be buying bad loans by the fourth quarter of 2011, Goldsmith says. But he emphasizes that “this is not a retail program; it’s wholesale,” meaning that underwater homeowners can’t apply directly to MRF for help. MRF will buy troubled loans in bulk from lenders and then approach the homeowners to modify their loans. MRF will succeed, he says, if banks can get nonperforming assets off their books at a higher return than if they hold on until foreclosure. “Let’s say the loan is $100,000,” Goldsmith says. “It’s better for the bank to take $50,000 [from MRF] today and be done with it than to take you, the homeowner, through the entire foreclosure process, which is expensive, to get an asset that by that time might have pipes gone, windows busted, and a leaking roof, and end up selling for $20,000.”
Not to mention that it’s also better for the neighbors and the larger community to prevent the home from reaching that derelict condition.