Picture a typical Tucson neighborhood. "For sale" signs go up and eventually disappear. The couple that went underwater in that cute house is long gone to foreclosure. Their home, which sat marooned and neglected for more than a year, sells at a price considerably below property valuations for the rest of the street. The new owner, however, has a market-value mortgage at a low interest rate.
What is the incentive for the neighbors whose Tucson homes have nearly halved in value to continue paying on properties that may not rise to the level of their investment for another five to 15 years? What options do they have?
Over the last five years—while housing was showing no appreciation in the Tucson market—banks made refinancing nearly impossible for the majority of homeowners who were underwater, by raising the loan-qualification bar to heights unheard of in the Ponzi-like feeding frenzy before the crash.
However, the Home Affordable Refinance Program (HARP), passed by Congress in 2009, offers possible relief to Tucson's underwater homeowners.
To qualify for HARP, a homeowner must have purchased prior to May 31, 2009, through a Fannie Mae or Freddie Mac conventional loan. The owner must be current with payments, have acceptable credit and prove sufficient income to qualify for a new mortgage.
Once qualified, a homeowner receives a loan on outstanding mortgage principal at current historically low interest rates. Loans are processed quickly, with no out-of-pocket cost requirements. There is no cap on the program, which runs through December 2013, so all who qualify get a loan.
Tucson homeowners Lorin Labardee and Eileen Shores expect to realize a 34 percent reduction on their mortgage payments, according to their lender's estimate. They describe qualifying for the mortgage as one of the easiest things they've done to improve their household bottom line. They say applying was quick, simple and mostly pain-free.
However, even after the new loan terms, HARP properties are often still underwater, resulting in a "sucks less" outcome for HARPees.
Homeowners in distress with a failure to pay on a mortgage, but who are not in foreclosure, may qualify for the Home Affordable Mortgage Program (HAMP), which resets principal as well as interest to affordable levels.
What does all of this mean for Tucson? At the moment, not enough. Response to the program is good, but many homeowners who need help have not yet heard of HARP, do not understand it, fear a government program, or do not have qualifying income. Mortgage lenders are not required to participate, much less notify clients. And HARP and HAMP, initially dysfunctional, have been upgraded only since March.
Some 16 million homes are estimated to be underwater across the nation, with tens of thousands in Tucson. These fleets of shadowy inventory help keep the economy depressed, because the market keeps expecting more cheap foreclosures.
Underwater properties are such a threat to economic recovery that California is considering a creative interpretation of eminent domain that would allow it to condemn mortgages as it would property, allowing them to reset both principal and interest rates to current market value.
Homedefendersleague.org is an organization made up of community groups and unions that has prevented home foreclosures in hard-luck cases through media attention. Anyone can sign the organization's online petition to President Obama demanding a reset of all underwater mortgages to market value. Proponents claim resetting these rates nationally puts the solution on the backs of bailed-out banks and would pump $700 billion directly into the economy.
Should you receive HARP or HAMP, your loan will likely be sold in the same derivatives marketplace that caused the problem in the first place. That has not changed, as Washington, D.C., does not prosecute the pirates or regulate the whales on Wall Street.
At the end of the story, a home is not just a house. If you are underwater, by all means, call a lender—call several—and ask about terms. Reducing your mortgage by any significant amount can make a huge difference for your economy and for Tucson's economy.