Loan Modification or Short Sale?

This article was taken from the Wall Street Journal...

Please give us your opinion on this at the end of the article



For many underwater borrowers, refinancing isn't always attractive because they could still owe more than the value of their home and face years of payments before they regain equity. Refinancing can be especially risky for those homeowners who might move within a few years or who are nervous about losing a job.



"If you're deeply underwater, it's going to be a long time before you regain equity, unless housing seriously rebounds. So investing more in the house is maybe not the best strategy," said Andrew F. Haughwout, a research economist at the Federal Reserve Bank of New York.



The Obama administration's refinancing program (HAMP) targets borrowers who are not in trouble on their mortgages now but, because they are underwater, are at risk of falling into trouble later. By suspending the traditional refinancing requirement that borrows have equity, officials hope to make them less vulnerable to foreclosure. Homeowners with loans backed by Fannie Mae or Freddie Mac are eligible.



Recent studies have shown that one-third of borrowers are underwater on their mortgage. The problem is most acute for borrowers who took out loans in 2006 and 2007--about 60 percent of them are underwater.



Many borrowers can't even afford the help because they must still pay traditional closing costs, which can run thousands of dollars. And those with little equity in their homes are charged higher fees under the program's rules because they are considered a higher risk. Moreover, many borrowers are so far in the hole they couldn't qualify for the federal program even if they wanted to.



In July, the Treasury Department raised the limit to include borrowers who owed up to 25% more than their home was worth. The higher limits went into effect for borrowers with Fannie Mae-backed loans in September and for Freddie Mac borrowers this month.



Though the housing market has stabilized in some parts of the country, home prices are expected to fall nationally through next year as foreclosed properties continue to pile onto the market, economists say. On average, home prices are likely to fall another 7 percent by early 2011, bringing them down 28% from their peak in 2007, according to IHS Global Insight.



Leaving Homes Behind

A growing number of underwater borrowers are walking away from their home even if they can afford the payments, according to recent studies. More than 25% of mortgage defaults during this housing crisis have been so-called strategic defaults, according to a study published in June by professors at Northwestern University, the University of Chicago and the European University Institute. Another study by credit bureau Experian and Oliver Wyman, a strategic consulting firm, estimated that nearly 600,000 borrowers "strategically defaulted" on their mortgages in 2008, more than double the number from 2007.



Housing experts are saying these borrowers are calculating that their homes are no longer a sound investment. For example, a homeowner who is 25 percent underwater would spend nearly 10 years making regular payments before regaining any equity in the home, according to mortgage research from HSH Associates.



"They are effectively renters with all of the costs of homeownership", said Jakabovics at the Center for American Progress.

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