By Ashley Gross
February 4, 2010

We’ve been hearing a lot about home foreclosures the past couple of years. But a new report shows the crisis in Chicago is playing out in a new way. Now, more and more homeowners – especially condo owners – in wealthier communities are falling behind.

The condo building Catalpa Gardens looks more like something from Miami than the traditional North Side neighborhood of Edgewater. It’s painted red, yellow and blue and towers over everything nearby. But the cheerful colors outside mask financial pain inside. The developer slashed prices last year on the unsold units. That left the people who bought a few years ago owing way more than their new neighbors paid. Sue Fox is a realtor with a Chicago firm called At Properties.

FOX: There’s units in here that sold for $350,000, $400,000 a couple of years ago, two bedroom, two baths. These days those are selling in the low $200,000s. So that’s an amazing destruction of equity in a short period of time.

And that means people who paid the higher prices in 2007 and 2008 have few options.

FOX: Those people are in trouble because now if they need to sell, it’s almost guaranteed that they’re looking at a short sale. So that means they’re stuck in the position of going to their lender and asking, can I short you on this? Can I sell it for much less than I owe?

Fox says banks are reluctant to let people sell for less than they owe and often that begins a long slide toward foreclosure. Six units here are in the foreclosure process. It’s not limited to this building; foreclosure filings jumped almost fifty percent last year in Edgewater. In Lincoln Park, they doubled. But in a lower-income community like Englewood further south in the city, filings actually dropped. Geoff Smith of the housing research group Woodstock Institute wrote the new report.

SMITH: Two years ago when the foreclosure crisis started, it really started to hit these lower-income communities where there wasn’t so much of a safety net there with equity or savings, and now as this thing continues to persist and go on, you see it affecting folks with higher incomes as well.

Condos in particular are taking a beating. Foreclosure filings on condos in Chicago more than tripled from 2007 to 2009. Compare that to filings on single-family homes, which also rose, but by 50 percent. Smith says speculation was part of the problem. And now as developers cut prices, many people owe more than their homes are worth. That is pretty much the definition of being underwater.

SMITH: I have people I know who seriously have thought about – they’ve gone and done the math and said, gee, I could stop paying my mortgage and live there a year, I could save you know, $12,000, is this a good idea? And my recommendation would be no.

Because, Smith says, a foreclosure leaves a severe and long-lasting mark on your credit. But he says more and more people may choose just to walk away. That’s something Eric Posner wants to stop. He’s a law professor at the University of Chicago who, along with a colleague, last year proposed a solution to underwater mortgages. Posner says the government should pass a law to force banks to reduce mortgages for people who owe more than their homes are worth in areas where prices have dropped a lot. Here’s how he would see it working:

POSNER: If you live in a zip code where housing prices have declined by 20 percent, you have this legal right, which you can simply exercise unilaterally without involving the bank, of course the bank would be informed that they’d be getting less money, but it would be a much more streamlined process.

Posner says banks would share in the profit if the house later sells for more than the reduced mortgage. But he says banks may not support the plan because they’re worried everyone would want to pay less. In the meantime, in Chicago, there are lots of cheap condos to be had. But realtor Sue Fox says be careful and consider what other people in the building paid even a few years ago.

FOX: Buyers today who look at this and think, oh what a great deal, these are all on sale, look at these dramatic price reductions, okay, but what’s going to happen next year or the year after when people start having to sell?

And prices may have further to fall. Geoff Smith of the Woodstock Institute says even more foreclosed properties are expected to come on the market this year.

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