frustrated homeownerUntil recently, it took a rare combination of extreme bad luck and poor judgment for a homeowner to end up under water on his mortgage – that is, owing more than the house is worth. Today, nearly one out of four homeowners is facing exactly that situation. In response, banks and the government are rolling out new programs they say will help – that is, for homeowners who qualify.

After banks' initial resistance to loan modification programs and refinancing designed to help struggling borrowers, many are now embracing programs for homeowners in trouble. Both GMAC Mortgage and Wells Fargo have started either reducing some mortgage balances, deferring payments or offering subsidized refinancing. Chase says it will open another 30 dedicated "help centers" this year where homeowners can apply for loan modifications. This month, the government also stepped in, extending the period for underwater borrowers to refinance their mortgages at lower rates, which was not possible through standard refinance programs. "All of a sudden, everyone is aware of this growing problem," says Stu Feldstein, president at SMR Research, which tracks the mortgage market.

About a year ago, it seemed the number of underwater homeowners was declining as home prices were rising. But housing analysts say that trend is now reversing. Approximately 23% of homeowners with a mortgage are underwater -- near an all-time high -- according to fourth quarter 2010 data from CoreLogic, a mortgage-data firm. That figure rose for the first time in a year, and it's up from 22.5% in the previous quarter. Meanwhile, another 2.4 million homeowners are teetering on the brink, with less than 5% equity in their home. If home prices drop another 10% -- which is likely over the next year – many of those owners could end up with negative equity, says Cameron Findlay, chief economist at LendingTree.com.


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While this has been an obvious problem since 2008, "large banks have been extraordinarily slow to move to adopt these programs," says Paul Leonard, a director at the Center for Responsible Lending. But now lenders are increasingly stepping in, eager to avoid foreclosures, which can cost the bank far more than a reduced payment plan or loan modification ever would. Lenders are also hoping to keep discouraged homeowners from intentionally walking away from their home: Half of homeowners who owe 50% or more on their home than it's worth and who default do so strictly because of negative equity, according to a 2010 Federal Reserve Board study.

But the banks' programs aren't designed simply for people disappointed by falling prices. To qualify, in most cases, borrowers have to prove they're having trouble making their payments and for a good reason. They'll often have to provide documentation for a job loss, a pay cut, large medical expenses or other unanticipated losses. If approved, they could be offered a lower interest rate – by up to 2% when a bank is participating in the government's Home Affordable Modification Program. Or they may also receive a longer repayment period – extending a mortgage by up to 40 years from the date of origination -- which makes monthly payments smaller, says Leonard.

With some lenders, borrowers who are past due and whose home values have suffered large losses (and appear unlikely to recover in the near term) could qualify for a principal deferment, where a chunk of the mortgage is set aside to be paid later, or out-and-out forgiveness of part of the loan. In general, borrowers will have to meet some income limitations. Modifications typically occur when a borrower's monthly mortgage payment is more than 31% of their monthly household pre-tax income and when the principal balance is no more than $729,750 on a single-family home. The amount forgiven is often small in the grand scheme of things, and it varies depending on the lender and the borrower's circumstances. Wells Fargo, for example, says it eliminated $51,000 in principal, on average, for more than 73,000 borrowers from 2009 through 2010.

Some government programs offer help, through refinancing, to underwater borrowers who are capable of making payments. But applicants will need to meet a long list of qualifications. For underwater borrowers, these programs are among the very few options available for them to refinance. Homeowners who owe up 125% of their home's current market value should contact their lender or mortgage servicer to find out if they're participating in the government's Home Affordable Refinance Program (HARP), which was just extended through June 2012. Borrowers must have a mortgage that's guaranteed by Fannie Mae or Freddie Mac -- to find out, contact these agencies or your mortgage company -- be current on their payments, and not be more than a month late making a payment over the past year.

There's also an option for borrowers who are even further underwater where participating lenders must agree to write off at least 10% of their unpaid principal balance on their primary mortgage. Since September, the government's Federal Housing Administration has been offering some underwater borrowers in areas with large declines in home values -- like Miami and Las Vegas -- a chance to refinance. But that's assuming that their lender agrees to write off a portion of the unpaid principal and that the borrower doesn't have an FHA mortgage but can now qualify for one. So far, just 24 lenders are participating, and only 99 loans have been approved, according to an FHA spokesman. A GMAC spokeswoman says the company will open up this program to some of its borrowers in the next few weeks.

In spite of the recent flurry of activity, consumer advocates say homeowners shouldn't expect much – at least not yet. As it is, some government programs have already fallen short of expectations. HAMP, for example, has helped around 600,000 people permanently modify their mortgages since 2009 -- so far, a far cry from the up to four million it was projected to help. And banks have been slow to act as well, especially when it comes to borrowers who are currently making payments. Among lenders "there is some concern that by offering [principal reduction] qualified borrowers will storm the gate and demand a reduction," Leonard says. So far, that hasn't been the case. From 2009 through 2010, Chase says it helped around 500,000 borrowers avoid foreclosure. During that period, about two million foreclosures occurred, according to RealtyTrac.com. And critics say even the loan modifications that have been in place haven't helped that much: Many of those borrowers fell behind on payments again afterwards.

Of course, there are other options for desperate homeowners. They can try a short sale, assuming the bank allows them to sell the home for less than what's owed on the mortgage. More lenders are now open to this, says Stuart Gabriel, director at UCLA's Ziman Center for Real Estate, because they're likely to lose less money in a short sale than they would in a foreclosure. Or, if they can make the payments, they can decide to ride it out. Contrary to popular belief, homeowners who have seen their homes lose 25% or more in value but can afford to keep paying the mortgage might be better off staying there and waiting for prices to stabilize, says Findlay. But if a borrower is able to refinance into a lower rate through a government program, that might be the better move, he says.

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Connie

I am a 52 yr old disabled women. Unfortunately, my significant other left me and I am the one tryin to to keep my home I received my assessment for this year os 149,000 compared to 275,000. What's wrong with this picture. I have teverything possible to save my home, I've done everything but get down on my hands and knees and beg for help. I have sent in 3 mods. each time they will say something is wrong. Each time I prove them I have provided ALL THE NECESSARY PAPERWORK THEY ASK FOR. In the mean time, there is not a day that goes by that I will be get the knock on the door telling me to vacate the premises. My fears are literallly makimng me sick. I have know famil y to turn to. I don't know how many times Bank of American has told me to ask friends and family for help. They don't get it, I have know o ne to help me. My home is worthless to others but to me its everythin.g I don't know what else to do, if I lose my house they my as well be ready to pay for my funeral. I just can't imaging my life being homeless. With my health conditions I wouldn't have the strength to fight anymore cause I have used everything Ive got trying to save my home. Im not a crook, I have told them I will do whatever I have to (within reason)If you think about it all the paperwork that continues to go back and forth probably would have paid all mY LATE FEES. Ive cried so much and I don't have any more tears. This is my lI am really scared, OU TELL ME WHAT DO I DO NEXT. HOW WILL I GET ANOTHER PLACE, THIS HAS TOTALLY MESSED UP MY CREDIT TOO. PLEASE, SOMEBODY HELP ME, I JUST CAN'T LOSE WHAT LITTLE BIT I GOT LEFT. I JUST WANT TO LIVE AND BE HAPPY AGAIN. I DON'T WANT TO GIVE UP BUT IM RUNNING OUT OF TIME, IM NOT ONLY LOSING MY AMERICN DREAM IM LOSING WHAT LITTLE BIT OF PRIDE I HAVE LEFT. WHEN WE LOSE THAT WE DO WE HAVE LEFT. 000000000000000000000000000000000000000NOTHING. PLEASE HELP ME

March 30 2011 at 3:29 AM Report abuse +1 rate up rate down Reply
Bill

All these programs the government is talking about are nothing more than a farce on the public by them and big business banks working in cohoots. If our government wanted to help the working man all they have to do is tell the banks this is what you must do or else. They want us to think they have our interests at heart and that is not the case at all. Let them eat these mortgages and then they send them back to fannie or freddie and get there money back and we the taxpayers will be on the hook for these losses. We no longer have a government who looks out for it's people.

March 28 2011 at 5:20 PM Report abuse +1 rate up rate down Reply
rktan

The fact that your mortgage is "more than your home is worth" is IRRELEVANT. As long as you keep making your payments, you will have a place to live AND eventually when you pay the loan off in 15, 20, 30 years -- whatever it takes -- I can guarantee your home will be more than you owe, because you'll owe nothing at that point, and the home will always be worth SOMETHING. What is it about this concept that people don't seem to understand??

March 28 2011 at 11:50 AM Report abuse -1 rate up rate down Reply
1 reply to rktan's comment
mawikemima

It is true what you say, if your income has not been decreased. But, if you are having trouble making payments it will have another meaning to you. RKTAN, if you are fortunate then remember those less fortunate in your prayers. There are a lot of honest hard working American's who are hurting now and I'm afraid for some time yet to come. It doesn't matter to THEM I'm sure whether their homes are worth the weight or not, but to the LENDERS it is another matter in the process of helping these folks during these trying times.

April 04 2011 at 10:05 AM Report abuse rate up rate down Reply
AZ Stang

Right- lenders won't work with anyone who was stupid enough to pay their mortgage on time, in full, every month! I was that stupid. I should have stopped paying my mortgage payments a year ago like everybody else!

March 27 2011 at 6:18 PM Report abuse +1 rate up rate down Reply
WASHMUFF&BRAKE

Well god bless all of you in the good old USA, have retired and living on an Island in the South Pacific and life is good here, just walked away from my Ranch, paid $430,000 put $100,00 down now worth $130,000 I am 70 now won't live long enough to see it come back up to what I even owe let alone what I paid for, shame the banks did not want to work with me, now the Ranch will become a perfict place for homeless and drugies as it sets to far of the road and to many trees in the way to see it, I am sure it will be striped of all value pool pump filter and all, Jack

March 26 2011 at 10:13 PM Report abuse +4 rate up rate down Reply
defeatdemin2012

We always bought far below what they said we could afford because we had common sense.

March 26 2011 at 9:04 PM Report abuse +5 rate up rate down Reply
2 replies to defeatdemin2012's comment
Helen Saghy

Many other people did the same and the Great Recession wiped out their jobs or greatly reduced thier income. Does a societal plastic bubble go along with that proclamation of common sense?

March 27 2011 at 12:32 AM Report abuse -1 rate up rate down Reply
MortgageMisery

That's great, you must truly be blessed with a high income. Unfortunatly some of us do not make as much and certainly do not have the option of buying "far below" the affordable price. Common Sense really only applies if you have that financial luxury.

Most folks that buy homes are looking for someplace to live, not invest in for a few years and sell off. The problem is that most homes are "affordable" to start off with a loan is taken out and then the value of the home plummets, a loss of income or catastrophic event coupled with the fact that loans are based on Gross income and not Net income, result in the bind that many of the home owners are facing. To add insult to injury when modifications are granted as in my case, the lender piles on any outstanding interest only payments to the principal further putting the home underwater and adding fees and charges that they can't legally add to the principal just for good measure.

So I totally understand why one would walk away from a home that is underwater with no real hope of recovery, on top of that the lender does everything in their power to destroy your credit. Making refinance impossible. The sad thing is that the home that the lender sees as an investment is the same home that a family sees as their place to live. Once the lender destroys the home owners credit they are stuck between a rock and a hard place because it makes it almost impossible to find an apartment to move into in the event of forclosure, eviction, or even walking away from the home.

June 20 2011 at 4:02 PM Report abuse rate up rate down Reply
dancerprnc

I would like to know how many people have seen the commercial where a meeting is being held amongst the Chinese. The speaker tells the audience that Americans are taking loans from them, and cannot pay them back. The comment made that stuck in my mind most was the Americans will soon be working for them. Of course the audience had a hardy laugh. But that commercial really hit home hard with me, because it is true. The large banks are selling our home mortgages to them in massive lots. They already own Main Street USA. That commercial is a true wake up call to America. We have been warned, please take notice. I'm just saying......

March 26 2011 at 8:26 PM Report abuse +5 rate up rate down Reply
Hello Lenny

As a realtor,I tried to tell the State Association about the fraud with home prices and appraisers, banks taking 2nds under the table to get people in, and the phony outrageous prices some large realestate companies were putting on the market, as long as the money was flowing, nobody cared. Now everyone is unemployed because of government not keeping industy such as Chrysler open here in US. It is not the homeowners fault they were mislead by the greed, and unemployment is getting worse, most of us have been looking hard for jobs to cover our house payment, there are none! Now that there is no real estate market, I will continue to work in low wage position, and continue to lose weight as I starve to pay for the gas, just so some jerky bank can't kick me out of my house, but blaming everyone doesn't help. Hold your head up and keep trying!

March 26 2011 at 8:19 PM Report abuse -2 rate up rate down Reply
1 reply to Hello Lenny's comment
Helen Saghy

Um, (1) the market as in home owners set the market, (2) the home buyers support it by the prices they are willing to pay, (3) I haven't been to a settlement yet where a bank took '2nds under the table'. Home owners often did not question whether the market would change and whether that 1% loan for 14 months was sustainable over time. There is plenty of blame to go around, but until we figure out a solution, this rhetoric will continue.

March 27 2011 at 12:35 AM Report abuse rate up rate down Reply
chrsahrns

God bless those rednecks. They always remind me how there are people dumber than I am.

March 26 2011 at 8:04 PM Report abuse -4 rate up rate down Reply
1 reply to chrsahrns's comment
defeatdemin2012

I doubt anyone is dumber than you.

March 26 2011 at 9:32 PM Report abuse +7 rate up rate down Reply
yourcountry2

Stop buying houses you can't afford and expect to be bailed out.

March 26 2011 at 7:43 PM Report abuse +1 rate up rate down Reply
5 replies to yourcountry2's comment