Negative equity is a significant drain on the housing market, making it harder to sell homes and driving new foreclosures. Our research has shown that negative equity is a big problem in the Chicago area, particularly in communities of color. Nearly half of homeowners with mortgages in communities of color have little to no equity in their homes, compared to less than one-in-five homeowners with mortgages in predominantly white communities. Due to declining home values, communities of color have lost substantial wealth and have limited access to refinances that could help make homeownership more affordable. President Obama’s proposals would help underwater homeowners refinance and, in some cases, help homeowners rebuild equity faster.


The refinance proposal has been broken into three separate pieces of legislation:

The Responsible Homeowner Refinancing Act of 2012 (S.3085, introduced by Sens. Menendez and Boxer): This bill would make it easier for underwater homeowners with mortgages backed by Fannie Mae and Freddie Mac to refinance. Homeowners must be current on their loans to qualify. Specifically, the bill would encourage competition among lenders so borrowers can get lower rates, streamline the application and qualification process, prohibit upfront fees, and fine junior lienholders and mortgage insurers who try to block a refinance.

The Rebuilding Equity Act of 2012 (S.2909, introduced by Sen. Jeff Merkley): This bill encourages homeowners to refinance into a shorter-term loan (up to 20 years), which would allow them to pay down equity faster. The Obama administration estimates that homeowners choosing this option could bring their homes above water within five years. Fannie Mae and Freddie Mac would be required to pay the closing costs of participating homeowners.

Expanding Refinancing Opportunities Act of 2012 (S.3047, introduced by Sen. Feinstein): This bill would create a $6 billion fund within the Federal Housing Authority (FHA) through which current, underwater homeowners with non-GSE-backed mortgages could refinance their loans. The program would be funded by existing fees lenders pay to Fannie Mae, Freddie Mac, and FHA.


For more details on what’s in the proposal, you can read our summary from the State of the Union address or watch the White House video below explaining its key components.

We encourage you to contact your Senators and let them know that homeowners need more affordable mortgages. Ask them to support S.3085, S.2909, and S.3047. In Illinois, Senator Durbin is already a co-sponsor of S.3085.


While these proposals will put sorely-needed money in homeowners’ pockets, there is still a missing piece of the puzzle for addressing negative equity. We need the Federal Housing Finance Agency to allow principal reductions on loans backed by Fannie Mae and Freddie Mac. Mortgages that are deeply underwater are more likely to go into foreclosure, and writing down principal as part of a loan modification results in fewer defaults.  Data show that banks have found principal reduction to be a useful tool—they have used it on one-quarter of their loan modifications on mortgages held in portfolio. Fannie Mae and Freddie Mac should have that same option to use principal writedown prudently.