Home prices have dropped, and dropped big. According to The S&P/Case-Shiller National Home Price index, home prices are almost 20% lower than one year ago. This represents the largest price decline ever recorded by the Case-Shiller Index. According to the Index, prices have basically been in a freefall since reaching their peak in early 2006. In some locations, such as Phoenix and Las Vegas, homes are now worth less than half what they were just a few short years ago.
Unfortunately, total mortgage debt remains almost as high as it ever was. At its worse, in 2006, total mortgage debt equaled approximately 75% of the Gross Domestic Product. In the last couple years, the amount has decreased slightly. Currently the amount is roughly 73% of the GDP. This high debt level creates numerous economic problems. With high debt, society, individually and collectively, will spend less. Consumers are strapped with debt and unable to shift money from assets to offset the debt. Less spending inevitably results in poor performance from the business community, causing loss of jobs and fewer opportunities for new workers. Consumers are forced to default on debt at a higher rate, further depressing business performance. GDP can then become affected as output regresses, thus causing mortgage debt to become an even higher percentage of the total. This cycle becomes very dangerous and the longer it continues, it becomes more difficult to reverse.
Given the importance of reducing the total mortgage debt, it is perplexing as to why banks remain unyielding in their opposition to reducing principle balances for homeowners. Over the past couple years, banks have come to grips with the fact that the mortgages are not worth what they thought they were. As a result, they have been willing to write-down the value of these mortgages on their own books. They have also of course been willing to accept federal tax dollars as a result of these poor performing assets. Yet even as homeowners increasingly are forced to, or voluntarily, walk away from their homes, banks are holding the line on principle balances.
Consider that by reducing mortgage balances to the value of the underlying collateral, that is the home, consumers would be able to play their proper role in the economy and the cycle described above would be broken. If this proposition is true, then the banks could have saved 20% of the total value of real estate, simply by taking this step one year ago. Regrettably, I fear that this article will be ready to republish one year from now, with only slightly updated figures…
If you are a California homeowner and need professional legal assistance in dealing with your mortgage servicer or you are considering a lawsuit against your lender, then please feel free to call me for a free consultation.
My law firm, the Law Offices of Fransen and Molinaro is located in Southern California, but we are able to assist most homeowners throughout the state. Toll free (888) 756-2652 or locally at (951) 520-9684. You can also use the 24/7 contact form on the right side of the blog to reach me via email.
Keep up the fight!
Sincerely,
Nathan Fransen – California Attorney & Real Estate Broker
{ 1 comment… read it below or add one }
Has your office been able to reduce loan balances with lenders such as Chase, WAMU and BofA? We have a mod but unless we can get a principle reduction it makes no sense go accept it.
We must give our answer and payment Oct 1st.
Thank you for any input.