The city of Springfield has accepted deeds in lieu of foreclosure on two homes on East Cecil Street that were remodeled and sold as part of the $8.5 million Neighborhood Stabilization Programs.
And one city commissioner wants to make sure the former owners see the effect on their credit reports.
However, the city cannot report borrowers to credit agencies — either positively or negatively — due to the size of its lending portfolio.
The city served as a lender for residents who couldn’t otherwise qualify for a home loan in both phases of the stabilization program, which the federal government created and paid for to fight the effects of foreclosures in neighborhoods at the height of the Great Recession.
By accepting the deeds in lieu of foreclosure, the city can quickly resell the homes, both in the 800 block of East Cecil Street, said Shannon Meadows, the city’s community development director.
City commissioners agreed to accept the deeds on Aug. 5, but Commissioner Kevin O’Neill believes the former homeowners should receive a hit on their credit scores.
A deed in lieu of foreclosure is a contract that says the borrower will give a home back to the lender for what it owes on the property.
“It’s a tool that banks and other financing entities use,” Meadows said. “It may seem unique because only in government do you legislate it.”
O’Neill voted in favor of accepting the deeds because it’s the simplest way to remedy a complex situation.
“It’s done every day in the private sector,” he said. “That’s not the problem. The problem I had with this is the reportability and how the people who made a commitment to the city of Springfield were being dealt with.”
The former owners have to be accountable for their commitment, O’Neill said, so he wants the action to go on their credit reports.
“If you’re not going to be accountable, there has to be consequences,” he said.
Traditional lenders can report both successful and unsuccessful payments to credit bureaus, which affects credit scores both positively and negatively.
However, the city of Springfield’s lending portfolio isn’t large enough to report to credit agencies, Meadows said.
“We’re not reporting either positive or negative payments, so there’s no effect on credit score at this point in time, either positive or negative,” she said.
The city is investigating ways to report to credit agencies, including partnering with other entities.
“Our focus is not on the punitive side, but the positive side,” Meadows said.
One of the homeowners was two months behind on payments, and then the family split up, Meadows said. The owners came to the city and told them they couldn’t maintain ownership of the home.
Another homeowner wasn’t behind on payments, but was moving out of state for a job.
In both circumstances, city staff members recommended to commissioners to take the homes back by the deed method rather than through a lengthy foreclosure process, Meadows said. There were no significant back payment issues, she said, and the city believed the homes could be sold back into the private market quickly.
The goal of the Neighborhood Stabilization Program is to return a home to the private market by allowing municipalities to offer loans when private lenders might not be willing to do so. However, without receiving credit for those successful payments, buyers might not be able to use a private lender in the future.
The city has sold 22 homes as part of both the phases of the NSP program. Of those homes, 13 have been purchased through the city’s homebuyer program, while nine homes were purchased with private loans or cash. The programs have generated about $90,000 from principal and interest.
The city did another deed in lieu of foreclosure in May, and the home was resold to Springfield Metropolitan Housing Authority for $71,000.
The community development department notified the credit agencies about the deed in lieu of foreclosure, Meadows said, but there’s no way to know if it actually reached the former owners’ credit reports.
City staff members has been working on a solution for credit reporting for many years, she said.
“If they’re going to be reported negative, they have to be reported positively,” said Rev. Linda Sue Stampley, who purchased an NSP home three years ago. “I’ve always paid on time.”
Staying with the story
The Springfield News-Sun has written extensively about the federal Neighborhood Stabilization Program since it was first announced in 2008.