House Trap

Upside-Down Owners Missed by Rescue Long to Exhale

When houses on our block sell for $50,000 less than we paid for ours -- if they even sell at all -- I get queasy. My wife, who can sleep through tornadoes, reports that such transactions keep her awake. We are upside down, in an interest-only loan that will reset next year, and we are petrified.

So when the Obama administration last week released plans to help the upside down, I moused over to a government Web site to check our eligibility. One government program helps people refinance if their loans are backed by Fannie Mae or Freddie Mac, representing about $4 trillion of the $10 trillion mortgage market. Another modifies loan terms for homeowners struggling to make payments, if the first loan is below $729,750.

We qualify for neither. We won't get a refinancing under the program because my loan was sold off to investors and is not backed by Fannie or Freddie. We're not eligible for a modification because we are still able to make payments, even though we fear the worst next year.

"There is nothing very good about this program for you," said Susan M. Wachter, a real estate professor at the Wharton School of Business. I am part of "a group for which there is a problem," she added.

And I am obviously not alone. Roxanne Gates owns a condo in Northern Virginia that is under water by more than $100,000. She rented it out so she could move to Europe for a job. Then she got laid off. Because she doesn't live in the home, she doesn't qualify. She has $2,000 left to her name. "It's rather annoying that I can't get help," she said. Foreclosure, and possibly bankruptcy, are looming.

Cherie Turner, a mortgage banker in St. Petersburg, qualifies for help, but her income has fallen so far and so fast that she thinks her loan would have to be reduced basically to zero for her to keep her house. "I'm supposed to be able to own my own home," she said. "I don't want to be owned by it." She is filing for bankruptcy.

The question now is this: Are there ways to survive and keep your home -- not to mention your sanity -- when the walls are closing in and you aren't eligible for help? Interviews with personal finance advisers and mortgage experts point to some ideas.

The first is not to make any rash decisions that would seem to improve your situation in the short term but damage it for the long haul.

Among those potential hasty pitfalls: taking the keys, putting them in an envelope and mailing them to the bank. My wife and I have had several disagreements about this strategy. I generally take the hard-line approach to any negotiation, for better or worse, and my argument about our plunging home value has always been, "Why should we stay in a house and keep making payments on a property that is well under water?" My wife's argument has always been, "Don't be crazy."

John Taylor, president of the National Community Reinvestment Coalition, a housing advocate, told me, "Your wife is right." Some implications of such a move are obvious: a significant hit to your credit record, which down the road, if you are even able to qualify for a new home, will cause you to pay higher interest rates. Less obvious (at least in this downward spiral): Such a tactic also ignores the fact that housing prices are not likely to go down forever. Or so the free world hopes.

"It's not a given that you will still be under water three or four or five years from now," said Rebecca Hall, a personal finance adviser in Reston for Ameriprise Financial. Or, as Wachter, the Wharton professor, put it, "You don't want to be a day trader with your house."

That's because while the Obama programs may not help you directly, there could be indirect help that would improve your situation, if you are able and willing to wait.