Foreclosure laws could be holding Illinois’ housing market back

CHICAGO — While high property taxes and tepid of wage growth get most of the blame, experts say Illinois’ sluggish housing market is partly due to its foreclosure laws.

There were 267,000 foreclosures in Illinois between 2007 and 2016. Experts say foreclosure laws in the state likely put a damper on the housing recovery that may still be lingering today.

Home foreclosures are a process that starts with delinquent payments and ends with the lender taking possession of a home for resale. The timeline of that process can vary wildly depending on what laws are in place dictating it.

The key is in how the foreclosure is settled. States that allow for foreclosures to be settled via a power of sale clause in the contract have a much faster turnaround of a property once the borrower has stopped making payments. These are referred to as nonjudicial foreclosure states.

Illinois, however, requires a judicial process to happen before the lender can take control of the property, adding months – or years – to the process.

“The purpose is to give an opportunity for the homeowner to make the case why they should be permitted additional time to rectify the foreclosure,” said Frank Nothaft, chief economist for CoreLogic, a property data analysis firm. “But it took, on average, about 50 percent longer.”

Nothaft said judicial foreclosure states took an average of 36 months to foreclose in 2012 and 2013, at the height of the recession.

Other states, like California and Nevada, passed stringent homeowner protections in the years after the housing crisis, many of which slowed the foreclosure process. The Nevada foreclosure mediation program imposed strict penalties on lenders foreclosing without the taking the proper steps.

“It is important for property owners to have the full weight of due process when it comes to foreclosure proceedings,” said Jon Broadbooks, spokesman for Illinois Realtors. “Illinois had significant exposure in the foreclosure crisis. But, the system did work through the surge in cases in a deliberate manner, which accorded all parties an opportunity to protect their rights.”

Today, guidelines from Freddie Mac and Fannie May say Illinois’ foreclosures should have a maximum time span of 630 days between owner default and bank foreclosure. As of August, 4.2 percent of mortgages in Illinois were at least 30 days delinquent according to CoreLogic’s third-quarter report, slightly higher than the national average.

Nothaft and other experts say the key to a housing recovery is to get foreclosed properties off the market as quickly as possible, allowing prices to rebound with less inventory.

Combined with higher property taxes and slow wage growth, the effect of the prolonged foreclosure timeline is that homeowners have yet to see their homes’ values exceed what they owe on them. In other words, they’re “underwater” on their properties at a higher rate. Homeowners underwater in their mortgages are less likely to improve their property and are more apt to default.

“Without equity, those homeowners are unable to sell their homes and are more likely to transition from delinquency to foreclosure if they face financial distress,” said Frank Martell, president and CEO of CoreLogic.

Many local housing markets have failed to appreciate back to their pre-recession values. In the third quarter, CoreLogic data had the Chicago metropolitan region’s percentage of mortgages with negative equity at 8.4 percent, one of the highest in the nation.

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