Foreclosure Prevention Law Goes into Effect on September 1
by Marilyn Kennedy Melia

(originally published by Chicago Tribune, Chicago, Illinois, August 20, 2006)

Sept. 1 marks the start of a controversial approach to thwarting foreclosures. Call it loan crisis intervention.

Illinois law HB 4050 aims to curtail risky loans before the loans are made by counseling borrowers as they apply for a mortgage.

Ten ZIP codes on Chicago's Southwest Side were identified as a pilot area for the law. They are 60620, 60621, 60623, 60628, 60629, 60632, 60636, 60638, 60643 and 60652.

These ZIP codes were chosen because research by the Chicago-based Woodstock Institute showed that these areas had a high rate of foreclosure and also a high number of loans with high rates and fees.

While HB 4050 is designed to prevent foreclosures, it's spawning a bigger problem, critics say, because its requirements will inhibit lending and home purchases.

There's no way of knowing how many loan applicants will be affected by HB-4050. Borrowers with credit scores less than 620, or between 621 and 650 if they're seeking "exotic" mortgages such as interest-only loans, are required to go through counseling.

In Cook County, the average credit score in 2004 was 639, according to studies by Matt Fellowes of the Brookings Institution. His studies indicate that the average credit score in the 10 ZIP codes, excluding 60638, is lower than the Chicago metro average, though he can't pinpoint a precise score.

The law became effective at the beginning of this year but has taken some time to implement. Hence the September start date.

- A fair number of mistakes are made by lending companies when they pay property tax bills out of customers' escrow accounts. This year, the second installment of Cook County tax bills are due Sept. 1. For about the last decade, the bills were due later. It's always a good idea for mortgage borrowers to log onto and to check whether their property taxes have been paid by their lender to ensure that payment is received by Sept. 1, says Bob Benjamin, spokesman for the Cook County Treasurer's office.

- The end of the month is the busiest time to close on a loan and move into a home. And August is the end of the most popular season for families who want to settle in before school starts, says Hank Shulruff, senior vice president of Attorney's Title Guaranty Fund in Chicago.

People think they're saving money by closing at month's end, but in many cases savings are illusory. There is greater potential for missing or mistake-riddled paperwork among the end-of flurry, says Shulruff.

If you're closing in the middle of the month, you'll be required to bring money to cover mortgage charges from, say, Aug. 15 until Aug. 31. That means if your monthly mortgage bill is $1,000, you'll need about $500 at closing, says Keith Gumbinger, of the mortgage data firm, HSH Associates.

Mortgages are paid in arrears, meaning that the bill due on the first day of the month reflects the charges for the month you lived in the home. So if you're closing in the middle of the month, your next mortgage bill isn't due until the beginning of October.

"A lot of first-time buyers don't like to bring a check to closing," says Gumbinger.

But the half-month that owners are no longer in their old home cuts the amount due on their remaining mortgage. They are then able to keep more of the proceeds from the sale of their home. The exception, Shulruff says, is certain FHA mortgages, whereby borrowers must pay off an entire month regardless of timing.

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Copyright © 2006, Chicago Tribune.

[Last update: 6-23-06]