What to do if your home is “Underwater”

According to the World Economic Forum, global sea levels are rising and some of the world’s greatest cities could be underwater by the end of the century. Well, there is also a rising breach in the real estate market that could cause serious flood damage in the United States.

It’s the rising tide of underwater mortgages.                                             

What Does Underwater Mean Exactly?

When your mortgage balance exceeds the value of your home, you have an underwater mortgage. An upside-down mortgage is another term or industry label for this type of situation.

According to newly released housing data by Black Knight IP Holding Company, LLC, home buyers who purchased a home in 2022 are now underwater in their property. The number of homeowners who have negative equity in their homes has reached alarming proportions. Based on that new analysis, more than 250,000 borrowers who purchased homes this year now owe more than their home is worth today.

The not so good news:

• Of the 450,000 mortgaged homes underwater at the end of Q3, nearly 60% are loans originated in 2022, with purchase loans representing 95%
• More than 250,000 borrowers who purchased in 2022 owe more than their home is now worth, while another ~1M have less than 10% equity

How about some good news:

• Fewer than 1% of homes mortgaged in 2021 are currently underwater with only 3% having limited equity
• Equity challenges are most prevalent among homes purchased at the peak of the market (May-July) – nearly 10% now marginally underwater and more than 30% having less than 10% equity
• Among originations in early 2021, hardly any are underwater, and fewer than 5% have less than 10% equity

Let’s Put These Numbers in Better Perspective

Those calling for the crash of crashes and amping up the drama may not be looking at ALL the data. If you look at the chart below, delinquent loans and foreclosure starts were well higher than they are today.

For example on January 31, 2007, there were 117,419 foreclosure starts. While on October 31, 2022, there were just 19,611, that a whopping 143% higher number of foreclosure starts at the beginning of the 2008 crisis.

Meanwhile the average long-term U.S. mortgage rate ticked down for the third week in a row and have fallen more than a half-point since hitting a 20-year high less than a month ago.

Mortgage buyer Freddie Mac reported on December 1, 2022 that the average on the benchmark 30-year rate fell to 6.49% from 6.58% last week. A year ago the average rate was 3.11%.

The rate for a 15-year mortgage, popular with those refinancing their homes, edged down to 5.76% from 5.90% last week. It was 2.39% one year ago.

What Are My Options If My Mortgage is Underwater?

If you’re keeping up with your mortgage payments and you don’t plan to move any time soon, you’re good. If not, here are four options you might want to consider.

#1 HARP Your underwater loan could be refinanced through the federal Home Affordable Refinance Program, or HARP. This program allows qualified borrowers to refinance a loan ranging from 105 percent to 125 percent of the value of their home. Not every underwater loan is eligible. Any delinquent payments, for example, in the previous 12 months will automatically disqualify you. However, if you are fortunate enough to qualify, it could mean the difference between keeping your home and getting your mortgage back on track.

#2 HAMP This program works by encouraging participating mortgage servicers to modify mortgages so that struggling homeowners can have lower monthly payments and avoid foreclosure. It has specific eligibility requirements for homeowners and strict guidelines for service providers. To encourage successful mortgage modifications, the program includes incentives for homeowners, servicers, and investors.

To qualify, you must demonstrate financial hardship that has put your mortgage at risk. HAMP is not a refinancing program, but it can temporarily modify – or lower – your payments for up to 60 months. Again, check with your financial lender to see if you qualify.

#3 Loan Modification If you don’t qualify for federal assistance and you know you’re in trouble with your mortgage, don’t hide under a rock and hope that the problem will go away. Try to negotiate a loan modification with your mortgage lender.

What is a Modification?

Under this option, you and your mortgage company agree to change the original terms of your mortgage, such as payment amount, loan length, interest rate, and so on. When your mortgage is modified, you can usually reduce your monthly payment to a more manageable amount.

A modification may be an option if:

• You are ineligible to refinance
• You are facing a long-term hardship
• You are several months behind on your mortgage payments or likely to fall behind soon

#4 Short Sale If all else fails and a foreclosure seems imminent, ask your lender or realtor about a short sale – which means selling your house at market value, with the remaining loan balance written off by the lender.

What is a short sale?

A short sale, also known as a pre-foreclosure sale, occurs when you sell your home for less than the mortgage balance. If your mortgage servicer agrees to a short sale, you can sell your home and use the proceeds to pay off a portion of your mortgage balance. You may be required to make a financial contribution toward the balance depending on your circumstances, but once the short sale is completed, you will be relieved of your obligation to pay any remaining balance—this is known as a deficiency waiver.

A short sale is an alternative to foreclosure and may be an option if you:

• Are ineligible to refinance or modify your mortgage
• Are facing a long-term hardship
• Are behind on your mortgage payments
• Owe more on your home than it’s worth
• Haven’t been able to sell your home at a price that covers what you still owe on your mortgage
• Can no longer afford your home and are ready or need to leave

If you need advice or would like to speak with an Embrace Home Loans® professional give us a call or send us an email. We’ll be glad to help you review all your options.