A major contributor to the crisis in subprime lending was the loss of home values in many markets. As home values soared, borrowers with bad credit became afraid of being priced out of the market before they could get their credit cleaned up. So they took out subprime mortgages that gave them a 2 or 3 year window to clean up their credit and refinance to a better loan — before the loan converted to an ARM and the rate spiked. The problem is that even those borrowers who did the right thing and got their credit up to snuff ended up being stuck with their bad credit loans because they didn’t have any equity. And now their rates and payments are being yanked up and if this keeps up they may end up with bad credit again — unable to pay their mortgage. Seems very unfair. So if this is you, what can you do about it?
First, have a talk with your lender. One nice thing about having no equity is that there is nothing to take from you, so the lender will probably not be falling over itself to take away your home. Document your income and your improved credit and prove that you can continue to make your old payment but not a higher one. Remind them that your better credit means that you are not the same grade that you were and ask for a better deal — either keeping the loan at its introductory rate or refinancing into a new one at a higher credit grade and presumably a better rate.
Second, look at the FHA Secure program. Take advantage of your improved credit performance and use it to get into a better loan. You need to meet these criteria for eligibility:
- A history of on-time mortgage payments before the initial rates expired and loans reset;
- Interest rates must have or will reset between June 2005 and December 2009;
- A small amount of cash or equity in the home (depending on the loan amount and property location)
- A sustained history of employment; and
- Sufficient income to make the mortgage payment.
If you don’t have the equity try to come up with cash by borrowing against a 401(k) account, cashing out some investments, or borrowing from family members.
If you owe more than the home is worth you may still be able to get an FHA Secure loan if your current lender is willing to take a second mortgage for the excess or write the loan down to a manageable amount — many lenders will see this as preferable to starting foreclosure proceedings. Your first step in any event is to call your lender’s workout or resolution department and begin a dialog.
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Can you give me a quick explanation on what the term negative equity means? Is it simply when the value of your home is less than the loan amount? If this is the case, then most of us who plan on living in our houses for awhile should be ok when the market goes up right?
I keep hearing people say that the banks don’t really want to foreclose on homes, that they loose a lot of money that way. Is this the case?
George, you are right. Negative equity is in fact the loss of equity in your home until it is worth less than your mortgage balance. Like any investment, a home’s value fluctuates over time — and you are correct, a drop in value doesn’t necessarily mean that you are in trouble. It can happen a couple of ways. First, if the value of your home decreases then your equity does too — perhaps to the point of owing more than your home is worth. But our cars do this all the time, yet few decide that’s grounds for blowing off their car payments and leaving the car in an alley somewhere. No reason to be alarmed unless you have to sell at an inopportune time.
The other reason for negative equity is having a loan that allows you to make payments that don’t even cover the interest due on the mortgage balance. That amount is added to the balance each month(called negative amortization), causing a reduction in equity- and you can end up owing less than the worth of the property, especially if you are in a soft real estate market.
What can trip you up with a negatively amortizing mortgage is the fact that the lender does eventually expect to be paid (I know, some nerve, huh!?). So after a certain period these loans are re-amortized or recast. What you have at that point is a higher balance and less time to pay it off — and payments can be yanked up substantially. That is what has gotten homeowners into trouble recently.
Janice, you are right to a certain extent. Lenders don’t want to take your house if they can avoid it. Foreclosures cost lenders an average of $30,000 plus the lender has to deal with disposing of the property. That said, if you have a hundred thousand dollars of equity in your home and get behind a few thousand on your payments the lender will probably jump on it. I often say that equity is your lender’s protection, not yours. The ideal situation for getting your lender to agree to work out your loan with you is this:
1. You have little or no equity. If you have equity they might just take your property. And charge you attorney fees, penalties, interest, etc.
2. You have sufficient income to make a mortgage payment if the lender is willing to modify the terms of your loan slightly. OR,
3. You can demonstrate that whatever financial problems that caused you to get behind have been resolved. The lender may then be willing to add arrearages to your balance and bring your account current as long as you make your payments in the future.
If you are hopelessly behind and can’t possibly make a paynment even with modified terms the lender will want to foreclose quickly in order to minimize its closts. They will not be open to putting off what they see as an inevitible foreclosure.
Negative equity should mean negative amortization. you are going in the wrong direction and own a negative asset (currently)..there will be one day or year when the market comes back.
As far as $30,000 yes and it could as high as 50,000. I read some local sheriff reports in AZ and they had numerous thefts in abandoned new homes..it’s like a ghost town in some US new home developments. They take the new appliances and anything else..