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Upside Down Homeowners-Should You Stay or Should You Go?

The debate is raging for homeowners who are upside down in their mortgages.  With 30% of the population owing more than their houses are worth, many homeowners are weighing the pros and cons of walking away from their homes.  Understanding all your options is one of the trickiest problems.  The following is an article that discusses a few of these options.  The government-backed programs that have been put in place up until now, Hope for Homeowners and HAMP, have proven to be ineffectual.  Will principal reductions be the panacea?  Will the banks budge and start doing principal reductions?  Just what will it take to make real and lasting changes for homeowners?

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By Dawn Kopecki and Theo Francis

Jan. 27 (Bloomberg) — The Obama administration’s $300 billion Hope for Homeowners program may be retooled to help the growing number of Americans who owe more than their properties are worth as current anti-foreclosure efforts fail to account for these “underwater” borrowers.

The changes would be at least the third lease on life for the program, which began in October 2008 during the Bush administration and has so far helped just 96 of the 400,000 homeowners originally targeted.

The U.S. Federal Housing Administration is considering ways to make the program more effective, Commissioner David Stevens said in an interview. While he wasn’t specific about any changes, he said Hope for Homeowners could be expanded to more directly help borrowers with negative equity.

“The Hope for Homeowners program is unique in that it involves equity writedowns, principal balance reductions to help the underwater borrower,” Stevens said. “We’re going to look at that program very closely to make sure it can be as effective as possible, because that’s another segment of the population that needs to be addressed.”

With home prices down as much as 30 percent from their peak in April 2006, more borrowers are walking away from their homes even if they can afford the payments, administration officials and analysts have said. The Treasury Department is looking for a solution for the more than 10 million underwater homeowners that analysts estimate may willingly let their mortgages slip into default, which would push home prices even lower and hamper the economic recovery.

Walking Away

“When negative equity gets very, very high, when people are very underwater, that starts to have a much larger impact on people leaving their homes,” Michael Barr, the assistant Treasury Department secretary for financial institutions, said in a Jan. 15 conference call with reporters. “And the question then is which of those people is it fair and appropriate to help.”

Hope for Homeowners was intended to help borrowers with loans of less than $550,440, according to the original terms of the program listed on FHA’s Web site.

The decline in home prices has left 15 million borrowers owing more than their homes were worth in the third quarter, according to Loan Value Group, an advisory firm in Rumson, New Jersey. It says 10 million of those loans are at risk of so- called strategic default, citing data on mortgages that have loan-to-value ratios higher than 115 percent and where the borrower can afford the payment.

Rational Decision

“Strategic default is a rational decision,” Frank Pallotta, a managing partner of Loan Value Group, said in an interview. “Are you going to pay a $500,000 mortgage when the house is worth $250,000?”

“Walking away is money in your own pocket,” he said. “If you’re not getting money from the government, it’s your own self-stimulus for borrowers.”

President Barack Obama’s primary anti-foreclosure plan, the Home Affordable Modification Program, or HAMP, has helped fewer than 10,000 underwater borrowers cut their outstanding principal. HAMP is separate from FHA’s Hope for Homeowners program,

HAMP has been a “failure” so far at converting temporary repayment plans into permanent loan reductions, said Bose George, an equity analyst at Keefe Bruyette & Woods in New York. Of the 787,231 trial modification plans, 66,465 have been approved for permanent repayment through December, according to Treasury data.

Lowering Payments

HAMP is designed to lower monthly mortgage payments by reducing interest, lengthening repayment terms and deferring principal repayments for up to five years. Less than 10 percent of the trial modifications through December actually cut outstanding principal as opposed to deferring interest charges on it, according to Treasury officials.

“It looks like that’s not enough for many of these borrowers, especially the ones with significant negative equity,” George said in an interview.

FHA’s Hope for Homeowners program was designed to reduce outstanding principal primarily by extinguishing home equity debt, or second liens, in exchange for a cash payment from FHA. Participation is voluntary and pays second-lien investors 3 cents to 50 cents on the dollar.

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