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Are we in the Great Depression? Or will home prices rebound soon?

The straight scoop is this:  no one really knows.  It is clear that the “recession” we are in is the deepest “recession” since the Great Depression.  However, it is still not clear whether we will not experience any growth in our economy for 10 years which is an oversimplification of what happened in the Great Depression.

Bottom line:  the Great Depression had some odd characteristics that are important to remember:  The economy “freshened” and improved and then would decline.  It went up and down for a decade.  The most troubling issue of all is that most scholars believe that only the armament build up prior to World War II got us out of the Great Depression.  Not any of the fancy programs that were designed provide stimulus.

Why is this important?

If you are severely “underwater” on your home, it may be as long as 6 years before prices even register a real increase much less get you back to “even”.  If you are long-term unemployed – which affect construction workers disproportionately, you may need to switch industries.  An example of this is Marshall Field’s  LaSalle Bank Building, which was the last building built in the Chicago Loop in 1934 with no major construction until the late 1950’s.

Another haunting comparison is the  Auburn Automobile Company which produced Auburns, Cords and Duesenburg’s.  The company survived the crash of 1929 and made through the 1937 car year when it simply had no more cash to be run.  Even with incredible innovations such as front wheel drive, it wouldn’t be until 1940 that any new money entered the economy and would have kept a company like this going with armament orders, etc.

What about my home – bottom line if your home is reasonably priced in terms of your tax, loan service and other expenses compared to rent, then it is a good value and certainly better than renting.  However, if your home loan service and loan balance are simply far beyond the comparable cost of renting, then it unfortunately becomes a smart choice to surrender the home and rent superior rental properties at reduced rates.

Why won’t lenders just adjust my balance down to a “reasonable” level so that I can survive in my home?  It seems like the best choice for everyone.  Wrong!   Banks rely on the absolute firmness and collectibility of their loan and mortgage obligations.  If a precedent was set that these loan balances could be adjusted simply because they were unreasonable due to changes in the economy, then how would a bank ever predict what risk factors and other costs they would have to build into their loans.

It is my prediction that prior to 2014, nearly 25% of all homes purchased or refinanced between 1997 and 2007 will be sold at foreclosure and that this necessary transfer of wealth will end up adjusting these over leveraged properties while protecting the legal sanctity of a contract.  Is this a good result?  From a practical standpoint – no.  However, if our system of laws break down, we will not be able to structure and control the commerce of our country.

Lastly, I believe that instead we should give judges in a Chapter 13 bankruptcy some limited ability to adjust loan balances where justified and provide a 25 year recapture period where 50% of the appreciation is recaptured back to the lender.  This allows the borrower to keep their home, this allows the bank to “give up” an existing noncollectable balance while keeping a house occupied and sharing in 50% of the potential appreciation.

We’ve got a long ways to go in this current slowdown, we don’t need anymore dams and it will be difficult to get congress to allocate money for a much needed high speed rail network.  Therefore, it’s time to look for reasonable unglamorous solutions to our economic situation.

Illinois Foreclosure Laws Right of Redemption and Title Theory 9 Months Or Longer to be out of your house

Illinois foreclosure laws right of redemption and title theory 9 Months Or Longer to be out of your house

Real Estate Law is State law, not Federal law.  Therefore, every state has different foreclosure laws.  Here in Illinois, the land of Lincoln, we have one of the most liberal foreclosure laws in the country.  It takes at least 9 months to get an order of possession against a homeowner from the first missed home mortgage payments.  Oftentimes in practice, this time is 14 months or more.

Why is this – there are title states and lien states.  In title states, the lender has title to property until the loan is paid off and the mortgage is released.  States like this are California and Florida where it takes about 3 months to throw you out of your home.  Here in in Illinois, the lender has a lien against the property and based upon our foreclosure law has to go through an extensive series of steps to foreclose.

Why do we have such a liberal foreclosure law?  Because we are a farm state!  Yes it’s true, everybody thinks of Chicago and its big city glitz but the reality is that we are an agricultural powerhouse and our state does not like to see farmer’s lose their farms.  But the real impetus for our law is the Great Depression when things were so bad that they gave a tax holiday for one year which is why we pay our taxes one year in arrears.

So hears to Illinois – the state that is conservative in its politics and liberal in its homeowner rights.

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