explaining multi-family property foreclosures areuea 2010 mid-year meetings susanne e. cannon and...

Explaining Explaining Multi-Family Property Multi-Family Property

ForeclosuresForeclosures

AREUEA 2010 Mid-Year MeetingsAREUEA 2010 Mid-Year Meetings

Susanne E. CannonSusanne E. Cannonandand

Rebel A. ColeRebel A. ColeDepartment of Real EstateDepartment of Real Estate

DePaul UniversityDePaul University

Cannon and Cole © 2010Cannon and Cole © 2010

SummarySummary

In this study, we use data from a new and In this study, we use data from a new and comprehensive database on properties in Cook comprehensive database on properties in Cook County, IL to provide new evidence on the factors County, IL to provide new evidence on the factors that explain foreclosures on multifamily that explain foreclosures on multifamily properties.properties.


SummarySummary

We find that foreclosures are more likely where We find that foreclosures are more likely where buildings:buildings:• have higher ratios of loan to valuehave higher ratios of loan to value• are older are older

And where buildings are located in Census Tracts And where buildings are located in Census Tracts that are characterized by:that are characterized by:• lower median household incomes lower median household incomes • higher unemployment rates are higher. higher unemployment rates are higher.

We also find that loan vintage is a key We also find that loan vintage is a key determinant of foreclosure.determinant of foreclosure.


IntroductionIntroduction

There is a voluminous, and growing, literature on There is a voluminous, and growing, literature on the determinants of defaults and foreclosures on the determinants of defaults and foreclosures on single-family residential mortgages.single-family residential mortgages.

Largely ignored, with a few notable exceptions, is Largely ignored, with a few notable exceptions, is the multifamily mortgage market.the multifamily mortgage market.

The primary reason for this is the lack of data on The primary reason for this is the lack of data on multifamily mortgages and their underlying multifamily mortgages and their underlying properties.properties.



In this study, we take advantage of a new and In this study, we take advantage of a new and comprehensive database covering every comprehensive database covering every multifamily property located in Cook County, IL.multifamily property located in Cook County, IL.

We focus on properties with seven or more units, We focus on properties with seven or more units, and use them to develop an empirical model that and use them to develop an empirical model that explains the probability of foreclosure.explains the probability of foreclosure.



The ultimate purpose of this model is to develop The ultimate purpose of this model is to develop a neighborhood index of risk that can be used to a neighborhood index of risk that can be used to assess to risk of losing multifamily housing,assess to risk of losing multifamily housing,

And to guide policies designed to mitigate future And to guide policies designed to mitigate future foreclosures and the subsequent loss of foreclosures and the subsequent loss of affordable housing.affordable housing.


LiteratureLiterature

The study closest is spirit to ours is Foote, The study closest is spirit to ours is Foote, Gerardi, Willen and Neg (JHE 2008), who examine Gerardi, Willen and Neg (JHE 2008), who examine determinants of residential foreclosure in determinants of residential foreclosure in Massachusetts.Massachusetts.

The focus of their paper, however, is their The focus of their paper, however, is their estimate of the homeowner’s equity, and the estimate of the homeowner’s equity, and the impact of equity on the probability of default. impact of equity on the probability of default.



Another closely related study is Archer, Elmer, Another closely related study is Archer, Elmer, Harrison and Ling (REE 2002), who analyze the Harrison and Ling (REE 2002), who analyze the determinants of default for a sample of (primarily determinants of default for a sample of (primarily large) multifamily properties. large) multifamily properties.

These authors question the applicability of option-These authors question the applicability of option-based models of mortgage default to multifamily based models of mortgage default to multifamily and commercial mortgages.and commercial mortgages.

They also question the importance of the They also question the importance of the competing risk of prepayment when analyzing the competing risk of prepayment when analyzing the risk of default because commercial mortgages risk of default because commercial mortgages typically include prepayment penalties that make typically include prepayment penalties that make prepayment unlikely. prepayment unlikely.



This leads them to estimate a simple model of This leads them to estimate a simple model of default probability where:default probability where:

• the dependent variable is a binary variable the dependent variable is a binary variable indicating whether a loan has ever been 90 indicating whether a loan has ever been 90 days or more late and days or more late and

• The explanatory variables are loan, lender and The explanatory variables are loan, lender and property characteristics observable at property characteristics observable at origination. origination.



They find that the They find that the Debt Coverage RatioDebt Coverage Ratio is is statistically significant in explaining default while statistically significant in explaining default while the the Loan-to-Value RatioLoan-to-Value Ratio is not. is not.

They also find that They also find that Value per Square FootValue per Square Foot and and Number of UnitsNumber of Units are not correlated with default are not correlated with default but but Year BuiltYear Built is negative correlated, indicating is negative correlated, indicating that newer properties are less likely to default. that newer properties are less likely to default.

None of their other control variables are None of their other control variables are significant.significant.


The Judicial Foreclosure Process in ILThe Judicial Foreclosure Process in IL

IL is a judicial, as opposed to statutory, IL is a judicial, as opposed to statutory, foreclosure state, so lenders must go to court to foreclosure state, so lenders must go to court to enforce their rights.enforce their rights.

The process begins when the lender files a The process begins when the lender files a Lis Lis PendensPendens on the collateral property with the on the collateral property with the Recorder of DeedsRecorder of Deeds to notify potential buyers that to notify potential buyers that a foreclosure lawsuit is pending against the a foreclosure lawsuit is pending against the owner.owner.

The lender also files a The lender also files a Complaint to Foreclose Complaint to Foreclose MortgageMortgage in the county Chancery Court, seeking in the county Chancery Court, seeking relief in the form of a judgment of foreclosure and relief in the form of a judgment of foreclosure and sale.sale.



The complaint is served on the borrower using a The complaint is served on the borrower using a Mortgage Foreclosure Summons, which summons Mortgage Foreclosure Summons, which summons the borrower to court to answer the complaint.the borrower to court to answer the complaint.

The borrower must file a a The borrower must file a a Verified Answer to Verified Answer to Complain to Foreclose MortgageComplain to Foreclose Mortgage within 30 days of within 30 days of receiving the receiving the Mortgage Foreclosure SummonsMortgage Foreclosure Summons, or , or face a default judgment in favor of the lender, if face a default judgment in favor of the lender, if such a judgment is requested by the lender. such a judgment is requested by the lender.



Following receipt of the summons, the borrower Following receipt of the summons, the borrower may exercise a number of rights, including:may exercise a number of rights, including:• the the Right of PossessionRight of Possession to live in the home until a judge to live in the home until a judge

enters an order for possession; enters an order for possession; • the the Right of ReinstatementRight of Reinstatement for 90 days to bring the for 90 days to bring the

mortgage back to current status by making up late mortgage back to current status by making up late payments; and payments; and

• the the Right of RedemptionRight of Redemption for at least seven months to for at least seven months to sell, refinance or pay off the mortgage. sell, refinance or pay off the mortgage.

The court can shorten the redemption period to The court can shorten the redemption period to 30 days if the property is abandoned, and can 30 days if the property is abandoned, and can lengthen the redemption period if it so chooses.lengthen the redemption period if it so chooses.



If the borrower answers the summons as required If the borrower answers the summons as required within 30 days, then a trial is scheduled to be within 30 days, then a trial is scheduled to be held in county court, during which the judge held in county court, during which the judge hears from both the plaintiff and defendant and hears from both the plaintiff and defendant and makes a ruling as to whether or not the mortgage makes a ruling as to whether or not the mortgage debt is valid. debt is valid.

If the court rules in favor of the lender-plaintiff If the court rules in favor of the lender-plaintiff that the mortgage debt is valid, then the that the mortgage debt is valid, then the presiding judge will schedule the date, time and presiding judge will schedule the date, time and location for a location for a Sheriff’s SaleSheriff’s Sale—a public auction at —a public auction at which the property will be sold. which the property will be sold.



After the redemption period expires, the lender After the redemption period expires, the lender must file a must file a Notice of Sheriff’s SaleNotice of Sheriff’s Sale, which must be , which must be published in a local newspaper one a week for published in a local newspaper one a week for three weeks. three weeks.

The The Sheriff’s SaleSheriff’s Sale cannot take place for at least cannot take place for at least seven days following publication of the final seven days following publication of the final notice of sale or more than 45 days after notice of sale or more than 45 days after publication of the initial notice. publication of the initial notice.

At the Sheriff’s Sale, a public auction is held with At the Sheriff’s Sale, a public auction is held with the lender making the opening bid at the amount the lender making the opening bid at the amount owed by the borrower plus and fee owed by the borrower plus and fee



The highest bidder is awarded a receipt of sale, The highest bidder is awarded a receipt of sale, describing the real estate purchased and showing describing the real estate purchased and showing the amount bid, the amount paid the total the amount bid, the amount paid the total amount still to be paid, with the proceeds going amount still to be paid, with the proceeds going to the lender. to the lender.

The bidder must put down 10% of the winning bid The bidder must put down 10% of the winning bid in cash at the time of sale with the balance paid in cash at the time of sale with the balance paid within 24 hours. within 24 hours.

Upon payment in full, the Sheriff issues a Upon payment in full, the Sheriff issues a Certificate of SaleCertificate of Sale to the purchaser. to the purchaser.



Following the auction, the Sheriff must make a Following the auction, the Sheriff must make a Report of SaleReport of Sale to the Chancery Court that to the Chancery Court that includes copies of all receipts and the certificate includes copies of all receipts and the certificate of sale. of sale.

The buyer must file a The buyer must file a Motion to Confirm SaleMotion to Confirm Sale with with the Chancery Court. the Chancery Court.

If confirmed, then the court directs that a If confirmed, then the court directs that a Sheriff’s DeedSheriff’s Deed be issued to the buyer. be issued to the buyer.



Finally, the court issues an order of possession, Finally, the court issues an order of possession, which authorizes the Sheriff to evict the borrower which authorizes the Sheriff to evict the borrower from the property. from the property.

Even after foreclosure, the lender may pursue a Even after foreclosure, the lender may pursue a Deficiency Judgment against the borrower if Deficiency Judgment against the borrower if proceeds from the Sheriff’s Sale are insufficient to proceeds from the Sheriff’s Sale are insufficient to satisfy the lender’s outstanding claim against the satisfy the lender’s outstanding claim against the borrower.borrower.


DataData

The study utilizes information from a new The study utilizes information from a new database developed by the database developed by the Institute of Housing Institute of Housing StudiesStudies (“IHS”) at DePaul University, which covers (“IHS”) at DePaul University, which covers every parcel of property in Cook County, IL. every parcel of property in Cook County, IL.

As a base, the IHS database uses information As a base, the IHS database uses information from the Cook County Assessor’s Office, which from the Cook County Assessor’s Office, which assesses property taxes on every property in assesses property taxes on every property in Cook County.Cook County.

There are more than 2 million records in the There are more than 2 million records in the database, which is more than 1 TB in size.database, which is more than 1 TB in size.


DataData

Upon this base, IHS has layered data from Upon this base, IHS has layered data from numerous additional sources.numerous additional sources.

For our purposes, the most important additional For our purposes, the most important additional source is Chicago Title Company, which provides source is Chicago Title Company, which provides title information on every property in Cook title information on every property in Cook county, enabling us to identify and track county, enabling us to identify and track properties through the foreclosure process. properties through the foreclosure process.

Chicago Title also provides us with information on Chicago Title also provides us with information on each mortgage.each mortgage.


DataData

In addition, the database provides information In addition, the database provides information from the Chicago Multiple Listing Service on all from the Chicago Multiple Listing Service on all sales from 1997 – 2009, which we use to create a sales from 1997 – 2009, which we use to create a repeat-sales index that enables us to estimate repeat-sales index that enables us to estimate the contemporaneous loan-to-value (LTV) ratio for the contemporaneous loan-to-value (LTV) ratio for each property in each year. each property in each year.

The database also provides locational information The database also provides locational information that enables us to match each property with that enables us to match each property with county court records on crime, divorce and public county court records on crime, divorce and public health, as well more than 1,500 variables from health, as well more than 1,500 variables from the U.S. Census. the U.S. Census.


DataData

The IHS database enables us to identify 9,715 The IHS database enables us to identify 9,715 multifamily properties with seven or more units.multifamily properties with seven or more units.

Of these, 6,707 had a mortgage outstanding as of Of these, 6,707 had a mortgage outstanding as of year-end 2007.year-end 2007.

Out of these 6,707, 450 entered the foreclosure Out of these 6,707, 450 entered the foreclosure process during Jan. 2008 – Jun. 2009.process during Jan. 2008 – Jun. 2009.


DataData

Upon further analysis, we determined that the Upon further analysis, we determined that the Assessor’s classification of 7+ properties included Assessor’s classification of 7+ properties included a number of rental condos and even some a number of rental condos and even some parking places (parking places go for $50K in parking places (parking places go for $50K in downtown Chicago with separate title).downtown Chicago with separate title).

We exclude a number of categories that appear We exclude a number of categories that appear to primarily contain these types of properties.to primarily contain these types of properties.

Finally, we exclude properties that we cannot Finally, we exclude properties that we cannot match with census tract information.match with census tract information.

These restrictions leave us with a final sample of These restrictions leave us with a final sample of 6,243 of which 378 entered foreclosure. 6,243 of which 378 entered foreclosure.


Foreclosures Foreclosures By Year of Mortgage OriginationBy Year of Mortgage Origination

Mortgage Year 1992-2000 2001 2002 2003 2004

Non-Foreclosed 1,145 150 255 462 465 Foreclosed 6 6 12 12 19 Foreclosure % 0.5% 4.0% 4.7% 2.6% 4.1%

Mortgage Year 2005 2006 2007 2008 2009 Total

Non-Foreclosed 564 641 776 834 200 5,865 Foreclosed 49 80 98 69 27 378 Foreclosure % 8.7% 12.5% 12.6% 8.3% 13.5% 6.4%


Descriptive Statistics: Descriptive Statistics: All PropertiesAll Properties

Variable Mean S.E. Min Max

Property:Foreclosure 0.064 0.003 0 1Building Age 78.1 0.30 1 143Loan to Value 0.662 0.01 0.001 2.000

Census Tract:Median HH Income ($000) 36.9 0.21 4.60 200.00Unemployment Rate 0.118 0.001 0 0.606


Descriptive Statistics:Descriptive Statistics:Non-Foreclosed vs. ForeclosedNon-Foreclosed vs. Foreclosed

Mean Mean Diff t-Stat

Property:Building Age 77.80 82.40 -4.60 -4.92 ***Loan to Value 0.65 0.87 -0.22 -6.93 ***

Census Tract:Median HH Income 37.40 29.89 7.52 13.37 ***Unemployment Rate 0.11 0.17 -0.06 -12.76 ***

Non-Foreclosed Foreclosed


Logistic Regression ResultsLogistic Regression Results

Variable Coefficient S.E. t-statistic

Intercept -5.952 0.561 -10.60

Property:Building Age 0.006 0.003 1.92 *Loan to Value 0.264 0.095 2.78 ***

Census Tract:Median HH Income -0.016 0.006 -2.59 ***Unemployment Rate 4.365 0.778 5.61 ***


Logistic Regression ResultsLogistic Regression Results

Mortgage Vintage:M2001 2.103 0.615 3.42 ***M2002 2.469 0.507 4.87 ***M2003 1.733 0.513 3.38 ***M2004 2.089 0.477 4.38 ***M2005 2.796 0.438 6.38 ***M2006 3.097 0.430 7.21 ***M2007 3.087 0.427 7.23 ***M2008 2.735 0.432 6.33 ***M2009 3.324 0.463 7.19 ***


ConclusionsConclusions

Very preliminary findings, but very interesting.Very preliminary findings, but very interesting.

Confirms some of the results from previous Confirms some of the results from previous research, contradicts others.research, contradicts others.

Clearly, loan vintage is very important for MF Clearly, loan vintage is very important for MF foreclosures, just as previous research has shown foreclosures, just as previous research has shown for SF foreclosures.for SF foreclosures.

Neighborhood characteristics are very important.Neighborhood characteristics are very important.


ConclusionsConclusions

We find that MF foreclosures are more likely We find that MF foreclosures are more likely where buildings:where buildings:• have higher ratios of loan to valuehave higher ratios of loan to value• are older are older

And where buildings are located in Census Tracts And where buildings are located in Census Tracts that are characterized by:that are characterized by:• lower median household incomes lower median household incomes • higher unemployment rates are higher. higher unemployment rates are higher.

We also find that loan vintage is a key We also find that loan vintage is a key determinant of foreclosure.determinant of foreclosure.


Future ResearchFuture Research

Extend through last half of 2009 (and 2010).Extend through last half of 2009 (and 2010).

Refine analysis variables.Refine analysis variables.

Analyze additional variables.Analyze additional variables.

Develop an index of “At-Risk” neighborhoods.Develop an index of “At-Risk” neighborhoods.