Note: The HARP deadline of December 31, 2018, will soon arrive, so take advantage of this program while you still can.
Finally Reaching the Surface
In the aftermath of the housing crisis and Great Recession, millions of homeowners were plunged "underwater" — owing more on their mortgage loan than their home was worth. By the second quarter of 2012, this had engulfed 15.3 million homeowners, or 31% of all U.S. homeowners.
Since then, the housing market has been in recovery, albeit a slow one. As of the third quarter of 2016, the number of underwater homeowners dropped to 2.2 million, the lowest number of homeowners in negative mortgage equity since early 2007. Thanks to rising home prices and an improving economy, one million more homeowners reached positive home equity during the first nine months of 2016.
Positive equity is an important milestone for struggling homeowners. Unfortunately, 2.2 million homeowners are still struggling — and in an even more ominous sign, the remaining underwater mortgages are concentrated more toward lower value homes and urban areas.
How's Your City's Housing?
Why are underwater mortgages concentrated in certain areas and not others? Two reasons: the rise in home values and the disparity across the U.S. in economic recovery.
Markets in the Southwest and Southeast, such as Miami and Las Vegas, were hardest hit by the collapse of housing prices and thus suffered high percentages of underwater homeowners. Those markets have also recovered faster, so in the broad picture the percentage of remaining underwater mortgages are concentrated in Midwestern urban areas, where the growth in home prices has not been as strong.
Markets that were hit extraordinarily hard, such as Las Vegas, still have above average rates of negative equity. In the latest Zillow negative equity report (Q3 2016), Las Vegas had the second-highest percentage of negative equity (16.8%), topped only by the 17% rate in Chicago. However, Midwestern cities like Chicago, Cleveland, Detroit, and St. Louis continue to suffer some of the highest overall negative equity rates.
When viewed at economic levels, the disparity is even more troubling. Zillow often found a huge discrepancy between the percentage of underwater mortgages in the bottom third of home values and those in the top third, but that level of discrepancy decreased significantly in fast-growing markets like Portland, OR, Austin, TX, and the San Francisco Bay area in California.
Detroit, MI, led the list with a whopping 39% of underwater mortgages in the bottom tier of home values, compared to only 4.4% in the upper tier. Cleveland, OH, had a similar ratio at 33.8% to 5.7%. This phenomenon highlights the uneven nature of the economic recovery (and may partially explain the phenomenon of President-Elect Trump).
In general, the wealthy were hit harder by the housing crisis but recovered faster. Lower-income Americans are recovering more slowly and may run out of time to do so without assistance.
There is Help Available
For homeowners who are still underwater, economic recovery that simultaneously raises wages and home values is still the best hope — but if you are currently in this situation assistance is available. For loans backed by the government-sponsored enterprises Fannie Mae and Freddie Mac (covering the majority of mortgages), the government offers multiple alternatives.
The most well-known program is probably the Home Affordable Refinance Program (HARP), which has been extended multiple times and now lasts through December 2018. HARP gives a refinancing path for homeowners who wouldn't normally qualify. In the past, the program was only available for those with loan-to-value limits of 125% (owing 25% more than the home was worth), but now there are no underwater limits. HARP is for those who are mostly current on their payments but can't qualify for better terms or interest rates.
HARP's companion program HAMP (Home Affordable Modification Program) was designed for homeowners in greater danger of foreclosure. This program expired at the end of 2016 and is being replaced by the Flexible Modification Program at both Fannie Mae and Freddie Mac. Flex Modification aims to reduce your mortgage payment by at least 20% to drop your cumulative monthly housing expenses to less than 40% of your gross income, and in some cases may allow principal reduction and other useful modifications.
Other last-resort alternatives are available, including resources to help you in the case of a "short sale" that allows you to sell your home for a lesser amount and still satisfy lender requirements. We suggest exhausting traditional options first — including reviewing your budget for lifestyle changes or income options that can help you devote more funds toward your housing expenses.
All these programs are executed through individual lenders, and that's the real key. For those whose loans are not backed by Fannie or Freddie, negotiating with the existing lender may be the only practical option.
Work with your current lender to see what options are available. Lenders would greatly prefer working with you in order to receive regular payments, even if payments terms are modified. Remember: lenders don't want your house; they want your money.
Prevention is the Key
Policymakers have struggled for decades with the balance in making housing affordable to more Americans in underserved markets without creating unsustainable risky loans. The underlying issue has more to do with psychology than policy: Americans are too willing to take on more mortgage debt than we can reasonably afford. In the words of Jordan Goodman, Personal Finance Expert for moneyanswers.com, "The biggest mistake people make when they are buying their first home is underestimating the expenses involved… you really have to be realistic."
People always assume the best is to stretch upward to reach their dream home. They often don't take into account running expenses such as maintenance or property taxes, and even if they do, they often forget how much those costs will rise over time. That doesn't take into account the occasional large economic hit on either the income or expense side of the family budget.
Goodman noted that real estate costs should be no more than 36% of your total income, but that many people go well over that. In those cases, Goodman adds, " ...then the house owns them. They don't own the house...You want to enjoy the house, not be a slave of that house."
Donald Trump and his proposed growth programs may help to save your home, but don't count on it. The main point is to take action. Nobody, including Donald Trump, will suddenly knock on your door and hand you a fully paid-off deed to your home.
Be proactive and investigate all of the options available to you, up to and including the possible realization that you simply bought a house that was too expensive for you. Remember that all options come at a price — typically a longer repayment term and greater cumulative interest payments for refinancing, or for sale/foreclosure, the acceptance that you will end up losing some money in order to move on and cut your losses.
If you are planning to get into the housing market, keep long-term affordability in mind and use realistic estimates for the future (including worst-case scenarios). It's too easy to be dazzled by a dream home that turns into an economic nightmare.
MoneyTips is happy to help you get free refinance quotes from top lenders.