Underwater Loans: the Elephant in the Room

Real Estate Agent with Starlight Realty Certified REO & Short Sale Specialist

Four years into the mortgage crisis, lawmakers and consumers alike are demanding yet more government action to mollify its destructive impact on homeowners. With the recent announcement of changes in the Home Affordable Refinance Program (HARP), the Obama Administration hopes to quell those voices and move on to other issues. But the issue that won’t go away is the one that all government efforts so far have conspicuously avoided: the profusion of underwater loans.

The common element to most defaults today is loss of equity. In a normal market, borrowers who can’t make their mortgage payments can sell their homes and satisfy their debt obligations. Not so in today’s environment. At the other end of the spectrum are the strategic defaulters, who could afford their payments, but would rather face foreclosure than pour more money into a losing investment.

Only one thing will address both of these situations: substantial principal write-downs on underwater loans. But the Federal Housing Finance Agency (FHFA) which governs Fannie Mae and Freddie Mac has grown even more intransigent on this issue. As Kerri Panchuk points out in a recent Housingwire article, the FHFA has taken principal reductions off the table. In a C-SPAN interview, FHFA Director Edward DeMarco noted curtly that "principal forgiveness does not accomplish our conservator mandate.” End of discussion. The FHFA is now turning its attention to selling off its REO inventory.

But negative equity remains the elephant in the room. Some borrowers will simply swallow hard and accept their plight, but many more will conclude that even reduced payments don’t make sense if there’s no hope of breaking even. As a result, the losses the FHFA is trying to avoid will occur anyway—either through foreclosures or short sales. The only remaining questions: How much, and how soon?

Comments (1)

Curtis Van Carter
Better Homes & Gardens Wine Country Group - Yountville, CA
Your Napa Valley Broker Extraordinaire

Just my two cents. I believe every loan modification should have a review of the original loan application as a prerequisite for approval. If the person lied on their application, no loan modification. I know of too many people who were making $40,000/year and bought 7, 8, 9 homes.

Nov 14, 2011 07:51 AM

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