December 9, 2007

By: Sally Duros

Some Chicagoans who took out exotic mortgages in 2005 at the peak of housing prices might want to step out of their mortgages now rather than wait through the five-year freeze on interest rates pushed by the Bush administration.

In announcing the plan Thursday, Bush said 1.2 million people could be eligible for help. But only a fraction will be subject to the rate freeze. Others would get assistance in refinancing with their lenders and moving into loans secured by the Federal Housing Administration, Bush said.

Bush and banking executives have agreed on a plan to freeze interest rates for certain troubled subprime mortgages for five years. The plan is aimed at absorbing the blow to holders of mortgages with adjustable interest rates — rates that soon will be re-set much higher than the original loan.

Those home buyers expected the equity in their homes would have soared during their short ownership, enabling them to cash out or refinance with a fixed-rate mortgage.

Data from the S&P/Case Shiller Index — a measure of prices used by investors in Chicago housing futures — indicates that since 2005, Chicago area home prices had tumbled by 15 percent, said professor James Shilling at DePaul University’s business school. As of Thursday Dec. 6, however, the current price on contracts going forward was $158, 000, only a 6% decline from the 2005 peak.

“I take that as a positive sign that having the freeze is going to have a positive impact on the housing market,” Shilling said. “Investors are raising their expectations.”

The Bush plan would ask mortgage servicers to voluntarily freeze rates on subprime loans made to borrowers with weak credit.

The freeze could stem a tide of foreclosures nationwide — estimated by knowledgeable sources to exceed 2 million.

Such a one-size-fits-all solution might not be the most effective strategy for many Chicagoans, said Shilling.

He said homeowners who already owe more on their mortgages than their homes are worth might find themselves deeper in debt if they wait and if home prices continue their downward tumble.

“If I got 100 percent financing in 2005, then I have lost probably 15 percent of the worth of the asset,” Shilling said. “Then the issue becomes would you rather be out the 15 percent today or be out 20 percent in two years or be out 30 percent in three years cumulatively as prices continue to drop.

“Obviously going further into debt doesn’t make a lot of sense for some people,” Shilling said.

Homeowners who put up some kind of down payment probably would benefit from the Bush plan.

“We are trying to have a blanket policy to affect everyone,” Shilling said.

“This is a case-by-case basis. For some people out there who only borrowed 80 percent in the subprime market in 2005, chances are they might benefit from having a freeze on the mortgage payments so they can keep their equity.”

He said the dollar figure of that savings could be as much as $8,400 per year over the period of the freeze.

Recent data from RealtyTrac placed the number of properties in foreclosure in the Chicago MSA at 17,424, or one foreclosure for every 190 households at the end of the third quarter of 2007. Foreclosures in Cook County alone totaled 11,032, or one foreclosure for every 194 households.

Shilling said that counselors at non-profits like NHS and NTIC will play a key role.

Geoff Smith, research director at the Woodstock Institute, said that “of all the proposals out there, this is one that we think has the ability to make the biggest impact.”

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