Upside Down on Their Homes but on Top of Their Debts

Think of them as the walking wounded. They are the homeowners who are upside down on their mortgages -- owing much more than their home is now worth. But they're still on their feet and still sending their payments each month.

In this credit crisis, all the attention has been directed toward the critically injured, namely those owners who cannot afford their mortgages and are slipping toward foreclosure. The walking wounded don't rate life-support measures such as interest-rate reductions or a write-off of part of their debt. And we don't hear much about them.

But we should all thank goodness that they continue to send in those mortgage checks. If people who could afford their payments were to abandon their depreciated homes, the current wave of foreclosures, bad as it is, would become a tsunami.

In many cases, declining values are getting in the way of important things homeowners had planned to do with their lives.

"We're feeling a little stuck," said Virginia Haizlip, who lives in Fairfax. She and her husband bought a three-bedroom townhouse in January with zero down payment. Haizlip estimates declining prices in their neighborhood have put them underwater by $10,000 to $20,000.

"We're still happy with our house, but we're a little worried," she said. They can afford their payments, but they had hoped to move up to a detached house after spending three to five years in the townhouse. That used to be a fairly reasonable plan, even before the boom. Not anymore. Now they're putting off decisions about moving and about starting a family. "We're trying to build equity," Haizlip said. They're pre-paying the mortgage by one month's payment each year. They're also considering remodeling as an attempt to boost their home's value.

There are reports of buyers simply walking away from homes that are worth less than the mortgage, but little evidence that it's a sizeable number. The threat of walk-aways prompted the Federal Housing Administration to tighten rules about loans to buyers who say that rent from their old home will help them buy a new one.

FHA officials were concerned that more people would try to fool them with a "buy and bail" deal. It's mortgage fraud, really, and it works this way: Fraudster wants out of his depreciated home with its unaffordable mortgage. He gets a buddy to sign a fake lease and uses that alleged income to qualify for a new home, bought at today's lower prices with an affordable FHA-insured mortgage. But fraudster really plans to let the old home go to foreclosure as soon as he has moved into the more affordable place. One more home is added the foreclosure rolls, dragging down neighborhood values.

The FHA now says it won't count rental income at all in qualifying for a new loan unless a borrower has a job relocation out of the area and cash in hand from a one-year lease. Or, the FHA will allow the deal if a borrower has a recent appraisal showing at least 25 percent equity in the old home.

Despite such frauds, many -- and we should all hope it's most -- of the walking wounded are hunkering down and paying their debts.

S. Fogg, who spoke on condition that her first name not be printed, is putting off plans to pursue a doctoral degree until housing values recover. She bought her first home, a condo apartment inside the Beltway in Northern Virginia, in 2005, "at the tail end of the market high." She estimates it's now worth about $50,000 less than she paid.

"I'm not angry," she said. And she doesn't regret buying. "I hated living in places where I couldn't paint the walls," Fogg said. Hers are now painted in shades of burnt orange and green.

But the $50,000 loss has her locked into that condo. If she were to sell now, she would have to tap the savings designated for grad school tuition.

It seems obvious enough, but a recent study documented the idea that having assets aside from home equity is the biggest difference between people who lose a home to foreclosure and those who hang on.

Borrowers who managed to keep their homes had an average net worth of $17,000, according to a study by Consumer Credit Counseling Service of Greater Atlanta. Those who lost homes were $27,000 in the hole.

The credit counselors checked on more than 3,500 people they had counseled nationally for foreclosure prevention from May to July 2007 and found that 69 percent had avoided foreclosure. Eleven percent have either filed for bankruptcy to avoid foreclosure or are in the foreclosure process but still live in the home. The rest lost their homes, despite counseling.

If you have money in the bank or other assets, lenders aren't going to forgive some of your debt in a short sale or through the new FHA Hope for Homeowners refinance program, which calls for lenders to voluntarily reduce the outstanding debt to 90 percent of today's home value. If you sell at a loss, and if you have some money, you're expected to pay the difference between what your home sells for and the outstanding mortgage.

Besides, some folks still think a deal is a deal.

"We chose the house and the price; the bank didn't do that," said Cassandra Bosley, who lives in Martinsburg, W. Va. She estimates the new house she and her husband bought three years ago has lost about $80,000 in value since then. They probably owe $40,000 more than it's worth.

"These are simply the facts of life," Bosley said. She said the market value of the home went up $60,000 during the seven months it took to build and continued to increase during the first year they lived there. "Would we expect the bank, or the builder for that matter, to come back and say we owe them for the increased value? Of course not. So why should we expect the bank to owe us for a decreased value now?"

Bosley said they would probably try to work something out with the bank if they were in danger of foreclosure, but that's not the case. "I suspect we would still owe the difference, right? So what's the point if we don't have to sell at this time?"

E-mail Elizabeth Razzi atrazzie@washpost.com.