Good Credit Doesn’t Help Those with Negative Equity

Policy still exists today that requires mortgage delinquency first before any help on lower payments for underwater homeowners is considered. There are still 6.7 million underwater homeowners “staying put” awaiting equity to return and who are paying their mortgage on time. A great majority of them have no refinance option except a modification…. which requires mortgage delinquency and a hardship first.

Homeowners who have negative equity, who are staying put, and who are current on their mortgage… need to be given a refinance option just like those with equity available to them… a refinance that does not require mortgage delinquency first and allows continued, on time mortgage payments.

Many have asked why I am obsessed with keeping problems that surround underwater homeowners at the forefront. It is because of continued policy applied to those who have negative equity that requires mortgage delinquency first just to be considered for a better finance option when no refinance is available, or when an underwater homeowner must short sale their home.

For those with a non-Fannie Mae, non-Freddie Mac conventional first mortgage, a second mortgage or a home equity line of credit that has negative equity, mortgage delinquency is still required first just to be considered for a modification, their only option.

This delinquent mortgage requirement results in a denial of a new secondary market mortgage and a prolonged period of time to get a new mortgage. This directly affects mortgage and real estate industries and the U.S. economy.

Resetting [1]Interest Only First Mortgages, Second Mortgages and Home Equity Line of Credit (HELOC)

A large number of loans originated as interest only first, second mortgages and HELOCs are now resetting to fully amortized payments. Interest only loans have a set period of time when interest is paid only. It is common to see a three, five, seven or ten year reset time frame where full principal and interest payments on the outstanding balance including principal that is unpaid start to be paid back. In areas across the nation where home values have not come back yet, homeowners are stuck with initial higher interest rates simply because they have negative equity. Fully amortized payment increases have been seen as high as 400%. The only option available for negative equity non-Fannie Mae, non-Freddie Mac conventional first mortgages, second mortgage or home equity line of credit (HELOC) is a modification that.… you guessed it… requires mortgage delinquency and a hardship first in order to get help.

An alarming number of elderly homeowners who have refused to go delinquent on their mortgage but have negative equity interest only loans are now coming forward. It is especially heartbreaking to see homeowners in their 70s and 80s demoralized by the fact that they have to destroy their credit just to be qualified for a lower interest rate.

And, if these underwater homeowners ultimately short sale, the negative credit from the required mortgage delinquency results in a higher rent payment.

A great deal of early press educated our nation about “strategic defaulters”, claiming that many who walked away voluntarily were able to make payments but chose not to. However, a 2015 study entitled [2]“Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default” cites that though unemployment was the single biggest financial shock, most financially distressed households didn’t default and underwater homeowners tapped into retirement resources and friends or relatives to stay afloat. Even among unemployed households lacking enough savings to make even one monthly mortgage payment, more than 80% stayed current.

Another issue centered around families who could afford to keep paying their mortgage but chose not to do so. Despite media attention to strategic defaulters, the study shows that these were rare. Fewer than 1% of households with the financial means to pay instead chose to walk away.

The study largely confirmed that personal economic events led to mortgage defaults without citing negative housing equity as the overriding factor. It also showed that many underwater homeowners struggle to hang on to their homes perhaps longer than they should, wiping out retirement assets awaiting positive equity to return.

Many who are in the mortgage business in areas still affected by negative equity are acutely aware of how the required mortgage delinquency results in a downward spiral of credit that prompts other negative consequences for underwater home owners just trying to stay put.

This country can’t afford to turn a blind eye to what we all saw coming in 2007-08. Good credit is still the benchmark of the mortgage and real estate industries and the driver of a good economy. Solutions are available right now.

[1] The I-O payment period is typically between 3 and 10 years. https://www.fdic.gov/consumers/consumer/interest-only/

[2] Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default

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