Transcript here - DePaul University

Explaining
Multi-Family Property
Foreclosures
AREUEA 2010 Mid-Year Meetings
Susanne E. Cannon
and
Rebel A. Cole
Department of Real Estate
DePaul University
Summary

In this study, we use data from a new and
comprehensive database on properties in Cook
County, IL to provide new evidence on the
factors that explain foreclosures on multifamily
properties.
Cannon and Cole © 2010
Summary



We find that foreclosures are more likely where
buildings:
• have higher ratios of loan to value
• are older
And where buildings are located in Census Tracts
that are characterized by:
• lower median household incomes
• higher unemployment rates are higher.
We also find that loan vintage is a key
determinant of foreclosure.
Cannon and Cole © 2010
Introduction



There is a voluminous, and growing, literature on
the determinants of defaults and foreclosures on
single-family residential mortgages.
Largely ignored, with a few notable exceptions, is
the multifamily mortgage market.
The primary reason for this is the lack of data on
multifamily mortgages and their underlying
properties.
Cannon and Cole © 2010
Introduction


In this study, we take advantage of a new and
comprehensive database covering every
multifamily property located in Cook County, IL.
We focus on properties with seven or more units,
and use them to develop an empirical model that
explains the probability of foreclosure.
Cannon and Cole © 2010
Introduction


The ultimate purpose of this model is to develop
a neighborhood index of risk that can be used to
assess to risk of losing multifamily housing,
And to guide policies designed to mitigate future
foreclosures and the subsequent loss of
affordable housing.
Cannon and Cole © 2010
Literature


The study closest is spirit to ours is Foote,
Gerardi, Willen and Neg (JHE 2008), who
examine determinants of residential foreclosure
in Massachusetts.
The focus of their paper, however, is their
estimate of the homeowner’s equity, and the
impact of equity on the probability of default.
Cannon and Cole © 2010
Literature



Another closely related study is Archer, Elmer,
Harrison and Ling (REE 2002), who analyze the
determinants of default for a sample of (primarily
large) multifamily properties.
These authors question the applicability of
option-based models of mortgage default to
multifamily and commercial mortgages.
They also question the importance of the
competing risk of prepayment when analyzing
the risk of default because commercial mortgages
typically include prepayment penalties that make
prepayment unlikely.
Cannon and Cole © 2010
Literature

This leads them to estimate a simple model of
default probability where:
• the dependent variable is a binary variable
indicating whether a loan has ever been 90
days or more late and
• The explanatory variables are loan, lender and
property characteristics observable at
origination.
Cannon and Cole © 2010
Literature



They find that the Debt Coverage Ratio is
statistically significant in explaining default while
the Loan-to-Value Ratio is not.
They also find that Value per Square Foot and
Number of Units are not correlated with default
but Year Built is negative correlated, indicating
that newer properties are less likely to default.
None of their other control variables are
significant.
Cannon and Cole © 2010
The Judicial Foreclosure Process in IL



IL is a judicial, as opposed to statutory,
foreclosure state, so lenders must go to court to
enforce their rights.
The process begins when the lender files a Lis
Pendens on the collateral property with the
Recorder of Deeds to notify potential buyers that
a foreclosure lawsuit is pending against the
owner.
The lender also files a Complaint to Foreclose
Mortgage in the county Chancery Court, seeking
relief in the form of a judgment of foreclosure
and sale.
Cannon and Cole © 2010
The Judicial Foreclosure Process in IL


The complaint is served on the borrower using a
Mortgage Foreclosure Summons, which summons
the borrower to court to answer the complaint.
The borrower must file a a Verified Answer to
Complain to Foreclose Mortgage within 30 days of
receiving the Mortgage Foreclosure Summons, or
face a default judgment in favor of the lender, if
such a judgment is requested by the lender.
Cannon and Cole © 2010
The Judicial Foreclosure Process in IL

Following receipt of the summons, the borrower
may exercise a number of rights, including:
• the Right of Possession to live in the home until a judge
enters an order for possession;
• the Right of Reinstatement for 90 days to bring the
mortgage back to current status by making up late
payments; and
• the Right of Redemption for at least seven months to
sell, refinance or pay off the mortgage.

The court can shorten the redemption period to
30 days if the property is abandoned, and can
lengthen the redemption period if it so chooses.
Cannon and Cole © 2010
The Judicial Foreclosure Process in IL


If the borrower answers the summons as
required within 30 days, then a trial is scheduled
to be held in county court, during which the
judge hears from both the plaintiff and defendant
and makes a ruling as to whether or not the
mortgage debt is valid.
If the court rules in favor of the lender-plaintiff
that the mortgage debt is valid, then the
presiding judge will schedule the date, time and
location for a Sheriff’s Sale—a public auction at
which the property will be sold.
Cannon and Cole © 2010
The Judicial Foreclosure Process in IL



After the redemption period expires, the lender
must file a Notice of Sheriff’s Sale, which must be
published in a local newspaper one a week for
three weeks.
The Sheriff’s Sale cannot take place for at least
seven days following publication of the final
notice of sale or more than 45 days after
publication of the initial notice.
At the Sheriff’s Sale, a public auction is held with
the lender making the opening bid at the amount
owed by the borrower plus and fee
Cannon and Cole © 2010
The Judicial Foreclosure Process in IL



The highest bidder is awarded a receipt of sale,
describing the real estate purchased and showing
the amount bid, the amount paid the total
amount still to be paid, with the proceeds going
to the lender.
The bidder must put down 10% of the winning
bid in cash at the time of sale with the balance
paid within 24 hours.
Upon payment in full, the Sheriff issues a
Certificate of Sale to the purchaser.
Cannon and Cole © 2010
The Judicial Foreclosure Process in IL



Following the auction, the Sheriff must make a
Report of Sale to the Chancery Court that
includes copies of all receipts and the certificate
of sale.
The buyer must file a Motion to Confirm Sale with
the Chancery Court.
If confirmed, then the court directs that a
Sheriff’s Deed be issued to the buyer.
Cannon and Cole © 2010
The Judicial Foreclosure Process in IL


Finally, the court issues an order of possession,
which authorizes the Sheriff to evict the borrower
from the property.
Even after foreclosure, the lender may pursue a
Deficiency Judgment against the borrower if
proceeds from the Sheriff’s Sale are insufficient
to satisfy the lender’s outstanding claim against
the borrower.
Cannon and Cole © 2010
Data



The study utilizes information from a new
database developed by the Institute of Housing
Studies (“IHS”) at DePaul University, which
covers every parcel of property in Cook County,
IL.
As a base, the IHS database uses information
from the Cook County Assessor’s Office, which
assesses property taxes on every property in
Cook County.
There are more than 2 million records in the
database, which is more than 1 TB in size.
Cannon and Cole © 2010
Data



Upon this base, IHS has layered data from
numerous additional sources.
For our purposes, the most important additional
source is Chicago Title Company, which provides
title information on every property in Cook
county, enabling us to identify and track
properties through the foreclosure process.
Chicago Title also provides us with information on
each mortgage.
Cannon and Cole © 2010
Data


In addition, the database provides information
from the Chicago Multiple Listing Service on all
sales from 1997 – 2009, which we use to create
a repeat-sales index that enables us to estimate
the contemporaneous loan-to-value (LTV) ratio
for each property in each year.
The database also provides locational information
that enables us to match each property with
county court records on crime, divorce and public
health, as well more than 1,500 variables from
the U.S. Census.
Cannon and Cole © 2010
Data



The IHS database enables us to identify 9,715
multifamily properties with seven or more units.
Of these, 6,707 had a mortgage outstanding as
of year-end 2007.
Out of these 6,707, 450 entered the foreclosure
process during Jan. 2008 – Jun. 2009.
Cannon and Cole © 2010
Data




Upon further analysis, we determined that the
Assessor’s classification of 7+ properties included
a number of rental condos and even some
parking places (parking places go for $50K in
downtown Chicago with separate title).
We exclude a number of categories that appear
to primarily contain these types of properties.
Finally, we exclude properties that we cannot
match with census tract information.
These restrictions leave us with a final sample of
6,243 of which 378 entered foreclosure.
Cannon and Cole © 2010
Foreclosures
By Year of Mortgage Origination
Mortgage Year
1992-2000
2001
2002 2003
2004
1,145
6
0.5%
150
6
4.0%
255 462
12
12
4.7% 2.6%
465
19
4.1%
Mortgage Year
2005
2006
2007 2008
2009 Total
Non-Foreclosed
Foreclosed
Foreclosure %
564
641
776 834
200 5,865
49
80
98
69
27
378
8.7% 12.5% 12.6% 8.3% 13.5% 6.4%
Non-Foreclosed
Foreclosed
Foreclosure %
Cannon and Cole © 2010
Descriptive Statistics:
All Properties
Variable
Property:
Foreclosure
Building Age
Loan to Value
Mean
S.E.
Min
Max
0.064
78.1
0.662
0.003
0.30
0.01
0
1
0.001
1
143
2.000
Census Tract:
Median HH Income ($000) 36.9
Unemployment Rate
0.118
0.21
0.001
4.60
0
200.00
0.606
Cannon and Cole © 2010
Descriptive Statistics:
Non-Foreclosed vs. Foreclosed
Non-Foreclosed
Mean
Foreclosed
Mean
Property:
Building Age
Loan to Value
77.80
0.65
82.40
0.87
-4.60
-0.22
Census Tract:
Median HH Income
Unemployment Rate
37.40
0.11
29.89
0.17
7.52 13.37 ***
-0.06 -12.76 ***
Cannon and Cole © 2010
Diff
t-Stat
-4.92 ***
-6.93 ***
Logistic Regression Results
Variable
Intercept
Property:
Building Age
Loan to Value
Census Tract:
Median HH Income
Unemployment Rate
Coefficient S.E. t-statistic
-5.952 0.561
-10.60
0.006 0.003
0.264 0.095
1.92 *
2.78 ***
-0.016 0.006
4.365 0.778
-2.59 ***
5.61 ***
Cannon and Cole © 2010
Logistic Regression Results
Mortgage Vintage:
M2001
M2002
M2003
M2004
M2005
M2006
M2007
M2008
M2009
2.103
2.469
1.733
2.089
2.796
3.097
3.087
2.735
3.324
Cannon and Cole © 2010
0.615
0.507
0.513
0.477
0.438
0.430
0.427
0.432
0.463
3.42
4.87
3.38
4.38
6.38
7.21
7.23
6.33
7.19
***
***
***
***
***
***
***
***
***
Conclusions




Very preliminary findings, but very interesting.
Confirms some of the results from previous
research, contradicts others.
Clearly, loan vintage is very important for MF
foreclosures, just as previous research has shown
for SF foreclosures.
Neighborhood characteristics are very important.
Cannon and Cole © 2010
Conclusions



We find that MF foreclosures are more likely
where buildings:
• have higher ratios of loan to value
• are older
And where buildings are located in Census Tracts
that are characterized by:
• lower median household incomes
• higher unemployment rates are higher.
We also find that loan vintage is a key
determinant of foreclosure.
Cannon and Cole © 2010
Future Research

Extend through last half of 2009 (and 2010).

Refine analysis variables.

Analyze additional variables.

Develop an index of “At-Risk” neighborhoods.
Cannon and Cole © 2010