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Our View: Underwater mortgages weighing down Illinois

Published: Sunday, Jan. 12, 2014 5:30 a.m. CDT

Being underwater on the mortgage is a drag for homeowners and our state’s economy.

The outsized loans can have a number of negative effects on these unfortunate borrowers, all of it adding up to them having less money to spend and less opportunity to meet their goals than they otherwise might.

Market data show that Illinois has a higher percentage of underwater homeowners than most states.

According to a report released Thursday by RealtyTrac, a real-estate information company based in Irvine, Calif., Illinois has the third-highest percentage of homeowners whose properties are “deeply underwater,” behind only Nevada (38 percent) and Florida (34 percent).

RealtyTrac defines “deeply underwater” as those whose mortgages are at least 125 percent of the market value of their home. Statewide, about 32 percent of homeowners – about 775,000 households – are “deeply underwater,” while in the Chicago market, it’s 33 percent, the report showed.

A more conservative estimate by financial information provider CoreLogic (also based in Irvine) put the figure at 17.7 percent of Illinois homeowners who were underwater, with another 3.7 percent nearly so, in the third quarter of 2013. That’s still more than 400,000 underwater homeowners.

Having so many people saddled with outsized debts will continue to hold back our state’s economy until either enough time passes or more relief measures are undertaken. Illinois homeowners have received some relief, including more than $1.8 billion in principal reductions and refinancing for underwater loans under a national foreclosure settlement reached in 2012. But the problem remains.

Some might be tempted to blame these homeowners for making bad investments, and that is partly their responsibility. However, let us not forget the wisdom that once prevailed about the relative safety of investing in homeownership, how people were encouraged to buy homes by people everywhere, and how eager banks were to lend this money during the housing boom that ended in the middle of the last decade.

Today, those underwater homeowners who have chosen not to abandon their homes to foreclosure have less money to spend on other goods and services than they would if their mortgage were in line with their property’s value. Those who do not have the money to cover the shortfall in their loan-to-value ratio might have missed out on opportunities to take advantage of lower interest rates or to move in pursuit of new career prospects.

The number of homes that are deeply underwater nationwide shrunk to about 9.3 million nationally in December, down from a peak of 12.8 million in May 2012, according to RealtyTrac. It’s a sign that home prices are increasing around the country.

But there remain obstacles for homeowners and for the recovery of the housing market. Until property values begin to appreciate at a faster pace, or more is done to relieve underwater homeowners of some of their burden, Illinois economic recovery will continue to face a headwind.

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