BY FRAN SPIELMAN
City Hall Reporter
Should Chicago use its sweeping condemnation powers to help stem the foreclosure epidemic?
The City Council’s most powerful aldermen believes it’s an idea worth considering, which is why the Finance Committee chaired by Ald. Edward M. Burke (14th) will hold a joint committee hearing on the controversial idea on Tuesday.
“Given the size of the foreclosure epidemic in Chicago, the city should explore every possible avenue to keep families in their homes and reduce the number of vacant properties that breed crime and erode the stability of our neighborhoods,” Burke, chief sponsor of the resolution, said in a new release distributed on the eve of the hearing.
The chairman noted that nearly 667,000 Chicago area homes were “underwater”–the term used to describe homes worth less than the amount still owed on the mortgage. An estimated 13 percent of those homeowners were three months or more behind on their mortgage payments, he said.
“Re-negotiation of underwater mortgages by the private sector has failed to keep pace with this epidemic,” Burke said.
“Even with record-low interest rates, many homeowners have found it difficult to re-finance, due to newly-tightened lending standards and depressed home values.”
Burke’s proposal is patterned after a concept under consideration in San Bernardino County, Ca.
Chicago would use its sweeping powers of eminent domain to seize underwater mortgages. The effort would involve creating “securitized packages of loans” that would be offered to private investors at a “steep discount.” Loans would then be “written down to a fair market value” to create a new mortgage with a reduced principal and lower monthly payments more affordable to struggling homeowners.
Tuesday’s hearing is expected to feature testimony from city department heads, legal experts, the Woodstock Institute and by a company involved in the San Bernardino County plan.
Last week, the Federal Housing Finance Agency voiced “significant concerns” about the eminent domain concept–so much so that the agency said it might need to step in to “avoid a risk to safe and sound operations and…taxpayer expense.”
Specifically, the agency warned that the cost of using eminent domain as a vehicle to write down mortgages “represents a cost ultimately borne by taxpayers” that could have a “chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors” who support the housing market.
Donal Quinlan, a spokesman for the Finance Committee, had an immediate response to the federal agency’s concerns.
He noted that Burke’s proposal “does not apply to mortgages owned or guaranteed by Fannie Mae and Freddie Mac.” Quinlan further argued that, “While the federal government is heavily-invested in private label securities, we would argue that it has no more rights than any other investor.”
Mayor Rahm Emanuel is still evaluating the controversial idea, according to his communications director Sarah Hamilton.
Burke’s resolution noted that Illinois has the nation’s fifth-highest foreclosure rate and that Chicago alone had 4,747 new foreclosure filings during the first quarter of this year.
Three months ago, the average home price in the Chicago area was reported to have dropped by nearly 40 percent since the real estate boom of 2006.