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Refinancing lifeline fails to reach most 'underwater' homeowners

"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.

At the same time, government and industry officials say that many borrowers can't even afford the help. Under the program, borrowers 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.

"You have a borrower who says, 'I am so underwater and you want me to pay more to stay put -- maybe not,' " said Andrew Jakabovics, associate director for housing and economics and the Center for American Progress.

Moreover, many borrowers are so far in the hole they couldn't qualify for the federal program even if they wanted to.

Shelley Danzer hoped to refinance the mortgage for the home she purchased in 2005 outside Phoenix for $163,000. She had initially put down almost $35,000. But local real estate agents told her not to bother with the $400 appraisal fee. Homes in her neighborhood are now selling for about $60,000, putting her too far underwater to qualify for the program.

"I love my house. It's not that I want to give it up, but if I needed for some reason to leave I would be pretty [out of luck] right now," said Danzer, who estimates she could save $200 to $250 a month by refinancing. "I would have to just let it go."

Series of hurdles

The government refinancing program was initially hamstrung as banks and other lenders undertook the time-consuming process of updating their computer systems to process the loans, industry and government officials say. Many applicants had more than one mortgage or they had mortgage insurance, both of which made refinancing more complicated. There was also initial confusion as borrowers tried to determine whether their loans were backed by Fannie Mae or Freddie Mac and thus eligible for the program.

The deteriorating housing market also tripped up the program. It was initially limited to borrowers who owed no more than 5 percent more than their home was worth. But it quickly became apparent to administration officials that home prices had fallen so much that many borrowers fell outside those parameters.

In July, the Treasury Department raised the limit to include borrowers who owed up to 25 percent more than their home is worth. The higher limits went into effect for borrowers with Fannie Mae-backed loans in September and for Freddie Mac borrowers this month. Treasury officials expect the program to pick up momentum now that the higher limits have been put in place.

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 said. On average, home prices are likely to fall another 7 percent by early 2011, bringing them down 28 percent from their peak in 2007, according to IHS Global Insight. The numbers are even more dramatic in hard hit parts of the country, such as Arizona and Florida.

During previous housing downturns, negative equity was less of a concern. But this time, a greater proportion of borrowers bought at the peak of the market with little or no down payment, housing experts say.

With negative equity, these owners can't tap their house for cash if they face a personal crisis, such as a job loss or medical emergency, putting them at a higher risk of foreclosure. By contrast, borrowers with positive equity have more options, including selling their home to avoid foreclosure.

Leaving homes behind

A growing number of underwater borrowers are walking away from their homes even if they can afford the payments, according to recent studies. More than 25 percent 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 say these borrowers are calculating that their homes are no longer a sound investment. For example, a borrower who is 25 percent underwater would spend nearly 10 years making regular payments before regaining any equity in the home, according to mortgage research firm 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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