There is a timeworn joke about home ownership that has gained new relevance over the past few months. It’s one you’ve likely heard before, and maybe even made yourself. Making light of the fact that we claim to “own” our homes—when in fact, for many homeowners with mortgages, the bank technically owns the lion’s share—we say something along the lines of, “We own one bedroom and a piece of the kitchen, but the bank owns the rest.”

A March 6th announcement by the Federal Reserve revealed that the joke is now closer to truth than it had been in at least 60 years. For the last nine months of 2007, the Fed announced, American homeowners’ portion of the equity in their homes fell below 50 percent. (Homeowners’ equity is the value of a house minus the mortgage debt.) What’s more, the Federal Reserve reported that the national average for homeowner’s equity dropped to 47.9 percent in the fourth quarter of 2007—the lowest it’s been since 1945, when the Fed first began compiling that data.

The reasons for the decline include a decade in which easy lending let people buy a house with a small down payment or none at all; the widespread use of home equity loans to take cash out of the house; and now, slipping home values that diminish equity, giving a mortgagee a larger piece of the home.

Fannie Mae, the federally chartered mortgage investment firm, has put new rules in place that, while designed to reduce the risk of people walking away from their mortgages as values decline, may help push the homeowners’ equity figure back up.  In December 2007, Fannie Mae told mortgage lenders that loans made after January 15, 2008, would require higher down payments if given in regions that Fannie Mae has flagged as “declining markets.” Required down payments in those regions are now five percentage points higher than they had been; that means, where once you might have had to put down 5 percent, you will now have to put down 10 percent.

Chicago is not on Fannie Mae’s list of declining markets, which are defined as places where prices have dropped more than 1 percent in the last two reported quarters or have declined overall from the year before (unless they have rebounded in the past six months.) According to the price index Fannie Mae uses, home prices in the Chicago area fell only in the last recorded quarter (the third quarter of 2007), and by only 0.11 percent—not enough to qualify as a declining market. Keep in mind, though, that the cited price index ended five and a half months ago; the market has sagged further since then, and other, later reports have shown larger drops.

Furthermore, although Fannie Mae looks at big regions—called MSAs, or Metropolitan Statistical Areas—it told lenders and appraisers in a February 21st “guidance” memo that, if they have evidence that prices are declining within a smaller, more local area, the higher down payment rules apply. On top of that, Countrywide and GMAC-ResCap, two big lenders, have both reportedly installed their own tightened rules on down payments in areas where prices are declining, although their lists of risky areas have not been made public.   

In related news, there may be one more small drain on home equity in the city of Chicago—that is, if a proposal in front of the City Council Finance Committee passes today. Chicago’s share of the CTA bailout is supposed to come from an increase in the real-estate transfer tax (an increase of $3 per $1,000 of the sale price). Home buyers, who already pay the existing tax ($7.50 per $1,000), were expected to shoulder the increased rate. But on Monday, Alderman Patrick O’Connor (40th) introduced a plan to place the burden of the new tax on the seller. As O’Connor suggested to the Sun-Times, it makes sense to divide the burden of the tax between the buyer and the seller. But it does mean that homeowners could now face another (albeit small) reduction of their equity once it comes time to sell. If approved, the tax goes into effect April 1st.