How Some Homeowners Are Dealing with Underwater Mortgage Loans

Posted by  on May 17, 2010

One in four Americans with mortgage loans now owe more on those loans than their homes are worth, according to real estate analysts at FirstAmerican Core Logic. If that unprecedented number isn't scary enough, digging deeper into the statistics reveals the effect of scarce refinance deals. Out of eleven million homeowners with "underwater" mortgages, roughly half make payments on loans that have grown to more than 125% of their homes' appraised values.

It wasn't that long ago that I remember talking to colleagues at mortgage lenders about the popularity of 125% loans designed for major renovations or debt consolidation. Rising home rates quickly brought those homes within more traditional lending guidelines, making it easy for mortgage lenders to propose fantastic deals. Today, homeowners bear 125% mortgages as a burden during a market correction that has punished residents of formerly fast-growing communities.

Walking Away from Mortgage Loans: The New Normal?

Few of us ever thought we'd see the day when a Wall Street Journal column advocated "strategic default," the process of giving properties back to mortgage lenders in exchange for zeroing out failed loans. Some states guarantee homeowners' ability to walk away from their mortgages without pressure to cover shortfalls. In states where homeowners enjoy no such protection, banks and credit unions have used bailout funds to backstop consumers' losses.

Data from credit scoring company FICO shows that a many Americans with high credit scores now prioritize paying unsecured credit cards over making regular mortgage payments. This counterintuitive move makes sense when considering that high-scoring consumers may feel comfortable falling behind on payments for investment properties. But it also takes into consideration the idea that some consumers want to preserve their credit scores by making smaller credit card payments on time, while allowing mortgage loans to languish under a slow foreclosure market.

The best mortgage lenders work hard to keep customers and their families in their homes. No mortgage lender I know enjoys the process of foreclosing on a borrower, or taking the subsequent losses at short sale. Even if our society accepts the idea of giving up a property, it's worth contacting mortgage brokers and shopping for rates online. That last ditch effort to refinance could be the one that saves your home, your credit score, and your dignity.


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