On March 5, 2009 Jeff Brady and “Morning Edition” recorded a segment on the U. S. economy and the number of homes that are now “underwater.”  This is the euphemism that describes the mortgage that is more than the property is presently worth.

 First American CoreLogic estimates 20 percent of all mortgages in the U.S. are currently more than the value of the property. It is anticipated that about 8.3 million mortgages were in this negative position as of the end of 2008.  Leading states in the over-priced mortgage department are Nevada, Michigan, Arizona, Florida and California, in the order of percentage of mortgages in this condition.  Nevada has fully 55% of its mortgages under water!  On the “low” end are Florida and California with 30% of the mortgages in the negative position, although in the raw number of these mortgages, California takes the lead. 

 What’s worse, CoreLogic discovered that the problem is getting worse with over 18% of the mortgages nationwide underwater as of the end of 2008.

 This situation has enormous ramifications for homeowners, lenders, potential buyers, and the government in administrating its bailout program.  Mortgages become riskier for mortgage lenders to hold on to when they are underwater.  Homeowners have less incentive to continue paying on a mortgage that may not recover to a point of having equity for five to ten years.  What happens if the homeowner needs to sell because of a job transfer, retirement, a medical problem or job loss? What happens when the attractive beginning interest rate readjusts? Then the situation is ripe for foreclosure.

 With the recession deepening and with no end in sight, even people who saved for such rainy days may well not have sufficient savings to continue to meet all obligations until things turn around, or they find a means of bringing in more income.  Some of these people who take a “wait and see” approach are setting themselves up for bankruptcy.

 For those people who continue to have income, but are about to fall behind, the U.S. Treasury Department’s $75 billion foreclosure relief plan may be the key to stability.  The plan offers mortgage lenders incentives to modify mortgages on owner-occupied single-family homes of up to $729,750 in value. There is also the possibility that federal bankruptcy judges will be given the option to modify the mortgages and waive some of the debt for homeowners who reach the bankruptcy stage.

It remains to be seen whether these federal measures will, in fact help the 4-5 million American homeowners they are designed to save, or whether things will bog down in a flurry of red tape.  Voluntary compliance on the part of mortgage companies in the bailout round approved by the Bush administration, did not help many homeowners.

 In the meantime, there is a tried-and-true method of helping distressed homeowners and Investors who have underwater mortgage problems, and that is by helping these property owners to negotiate Short Sales with the mortgage companies. 

 Undoubtedly, in many cases, the mortgage lenders will try to work out a loan modification first.  But if the homeowner’s hardship letter and financial documentation does not support the possibility to carry even a modified mortgage, then the Short Sale becomes the next most logical step.  Investors, with the assistance of Real Estate Agent allies, should be prepared to carry on as usual.  The foreclosure problem is so wide-spread, there will continue to be lots of work in this arena for many years to come.

 There may be an additional delay until lenders figure out all the regulations and establish systems for dealing with greater numbers of loan modifications.  Make sure that the paperwork submitted by the homeowner is very clear on the homeowner’s intention to move forward with a Short Sale.  Make sure that the hardship data supports the need to get out of the home.  Provide documentation to support the upside down mortgage situation to support the Short Sale.  Then let our Short Sale Specialists do their work to keep the file ever-present in the mind of the assigned Loss Mitigator.  By working together on this as a team, we will continue to see a high record of success with Short Sale negotiations.