Federal Underwater Refinancing Programs–How Are Homeowners With Negative Equity Benefiting?

Negative equity remains a major problem for many homeowners as reports show home prices continue to drop and have many in the position where they feel there will not likely be a recovery at the beginning of 2011. It’s expected that homes will be worth about $1.7 trillion less in 2010 than they were only one year ago, which obviously leads to a great deal of mortgage trouble that could arise in the lives of individual homeowners.

Yet, there are underwater assistance programs which are available for individuals facing a negative equity situation, but the effectiveness of these plans has been questioned. While there are programs like the Home Affordable Refinance Program, which may allow homeowners with Fannie Mae and Freddie Mac to refinance their underwater mortgage, there are also programs like the FHA’s short refinance program available to homeowners who are current on their underwater mortgage payments, and incentives for homeowners who successfully meet payments within a federal modification plan may offer some underwater mortgage relief down the road.

However, more calls for action, like principal reductions, have been on the table over the past months as many homeowners want a reduction in the value of their home in cases where they are severely underwater. There have been homeowners in the past who have simply walked away from an underwater mortgage because they felt they were sold a home with an inflated property value, and as a result, there is little chance at them recouping these losses in the near future.

Homeowners who see their property as an investment are particularly troubled by negative equity as, even in cases where a mortgage payment can be met, options like traditional refinancing or selling a home for a profit are not currently an option for many. While, again, there are some options which may offer principal reductions, there is concern that financial institutions are hesitant to offer principal forgiveness options in many cases.

As an example, the FHA’s short refinance program can offer homeowners a more affordable underwater home loan payment, if their mortgage servicer will reduce their mortgage principal as part of the qualifications for this program. Also, there are some federal programs like the Principal Production Alternative, which gives servicers the option to lower principal amounts in certain cases where negative equity is a problem.

Yet, mortgage servicers have been unwilling to offer homeowners these principal reductions in many cases, especially when a payment plan could be reached where a homeowner in an underwater situation could afford their monthly payment. Also, in cases where a homeowner is able to meet their mortgage payment, offering a principal reduction has not been a top priority for servicers in these situations. While it’s understandable that homeowners are frustrated as a result, servicers feel that finding affordability options concerning payments leads to more sustainability than simply forgiving a portion of a homeowners principle.

However, there are options for principal forgiveness in some cases, yet with continued decreasing property values, many feel that underwater refinancing for affordability or principal reductions may be more necessary in the coming months, especially if the housing market and foreclosures continue to be problematic.