The U.S. government has designed mortgage assistance programs to help people who own the home in which they live. These programs help average Americans who are struggling to stay in their homes and avoid foreclosure. The federal government has several different mortgage help programs, each providing a unique solution for homeowners' problems, including help with underwater mortgages.
What Underwater Means
Prior to the housing collapse, many housing markets appreciated at a steady rate. Homeowners expected their homes would appreciate by 3 to 5 percent or more each year. However, as with other assets, homes do not always appreciate. Sometimes homes depreciate, or lose value. When a home’s value falls below the mortgage balance or the combined mortgage balances, it’s commonly referred to as being underwater.
When a home is underwater, it causes many issues with the mortgage. Homeowners often find they cannot refinance their mortgages because most mortgage lenders require a specific percentage of equity in the home when it closes. If the home is underwater, the borrower’s only option is paying down the principal of the loan, which may cost tens of thousands of dollars. Most homeowners cannot afford this. The federal government created the Making Home Affordable Refinance Program, which allows homeowners with mortgages owned by Fannie Mae and Freddie Mac to refinance even if their mortgage balances are up to 125 percent of the home’s value. This program requires the borrower to have perfect mortgage payment history in the last 12 months to qualify.
While the Making Home Affordable refinance program is only available to borrowers who pay loans owned by Fannie Mae or Freddie Mac, the Federal Housing Administration (FHA) provides help to the rest of America's homeowners. If another company owns the loan then the borrower may refinance with FHA, even if the home is underwater. Under this program, FHA requires the lender to forgive at least 10 percent of the loan's outstanding balance while allowing the borrower to finance a loan with a balance up to 115 percent of the home's current value.
Selling the Home
Borrowers with underwater mortgages often find selling the home difficult as well. Few homebuyers wish to pay more than a home’s market value simply because the seller's mortgage balance is higher than the home’s value. In response to this, the federal government directed Fannie Mae and Freddie Mac to authorize their servicers to allow homeowners to short sell their homes. Short selling a home requires gaining permission from the lender to sell the home for less than the balance due on the mortgage. The homeowner must receive permission before listing the home, and the lender must approve the sales agreement and any offers made on the home.