Where Did the Equity Go?
If you're an Illinois homeowner chances are any equity you had in your home disappeared between 2008 and 2011; and hasn't been seen since. If you're lucky that equity may start crawling back to "normal" levels in 2013; but if you haven't seen it happen you're not alone. Despite recent reports in the news about recoveries in California, Arizona, and Las Vegas, Illinois property values continue to languish. Of course it's not all bad news. For instance, as of January the overall price of housing in the Chicago area was up 3.3% from a year ago, with condo prices up a robust 5.8%. Then again, the Illinois foreclosure rate has merely leveled off rathern than falling as it has in other States. And as the "jobless recovery" grinds on, a few basic truths are coming to light:
The value of real estate is still well below pre-crash levels and many people borrowed against those inflated values. These people owe well more than their homes are worth.
Result: These borrowers can afford to keep paying, but they know that doing so is tantamount to throwing good money after bad. They don't really want to keep making monthly payments on loans valued at 2 or 3 times they market price of their homes.
Moreover, many who who managed not to over-borrow still find themselves in trouble because they have suffered irreversible job loss or were forced to take a lower-paying position. Often these jobs come without benefits like insurance.
Result: This leaves many with no option but to make payments on excessive loans with high interest rates until something unexpected happens and their system crashes.
Are Write-Downs The Solution?
Members of Congress, Administration officials, analysts, and pundits, have all speculated that if mortgagees adjusted homeowner indebtedness down to the value of their homes, the result would be a tide of debt forgiveness that would lift all boats. In other words, they advocate a write down of mortgages by banks to match the value of the underlying real estate. The result would be the one-time elimination of billions in phantom real estate value. Of course banks would be left holding the bag... but the last time that happened the government came to the rescue. Could it work again?
Is DeMarco the Bad Guy?
The consensus on the feasibility of write downs has been growing for some time. Now even quasi-government enterprises like Fannie Mae and Freddie Mac support these kinds of mortgage loans now. So why aren't write-downs being used more? Illinois Attorney General Lisa Madigan puts the blame on one man: Edward DeMarco, the head of the agency that regulates Fannie and Freddie. DeMarco has stated on the record that he does not believe write-downs would resolve the nation's foreclosure problems, and that on the contrary, their use would force banks to write down billions in non-performing loans then turn around and seek another bailout at taxpayer expense.
The Controversy Over Write-Downs
In March 2013 Attorney General Madigan and 8 other State Attorneys General called for DeMarco to resign because he had impeded the best chance that most homeowners would ever have to get on track. Whether or not that allegation is true, the controversy raises troubling questions. No place is this more apparent than Illinois, where home values remain low.
According to the Illinois Assistant Attorney General for Consumer Fraud, borrowers will be forced to struggle with their mortgages for years because of DeMarco's refusal to permit Freddie and Fannie to accept write-downs. Attorney General Madigan echoed those sentiments in her own statement on the subject.
Arguing With The Administration
The position espoused by the AG's has garnered support from Washington heavyweights like Tim Geithner, former Treasury Secretary, who wrote to DeMarco in July 2012 to say suppressing write-downs was not in the best interests of the nation. Secretary Geithner also noted that strategic principal reductions, as they are known in Washington, are effectively the only way for homeowners to escape crushing subprime mortgages, and that the economic rebound resulting from widespread write-downs would benefit taxpayers far more than it would cost them..
DeMarco Remains Intransigent
In October 2012 Bank of America analysts predicted that DeMarco would resign his position or be forced out. Some analysts even thought that if President Obama were reelected he would fire DeMarco by December of that year. When that didn't happen, 45 members of the House of Representatives called for DeMarco's removal. Attorney General Madigan made her demand a few months later. Despite everything however, DeMarco has retained his position and continues to stand fast in his refusal to allow mortgage write-downs as a legitimate means of extinguishing mortgages owned by, or backed by, Freddie Mac or Fannie Mae.
What will happen in 2013? If write-downs are not an option, many will find themselves looking at programs like HAMP and HARP to manage payments while others will find that Chapter 13 is the most expedient way to deal with their situation.
To find out which route might work for you, feel free to call for an appointment or contact us directly using the form on this page. We look forward to speaking with you in confidence.
About the Author
Robin Lewis is a business development professional with a real estate background. She is currently a senior writer at Mortgageloan.com, which covers trends in real estate, financial stability, and economics.