Too Little Equity Traps Homeowners

Many would love to sell their houses but are trapped due to relatively low prices and high debt.  Our real estate market won’t truly normalize until this changes and trapped home owners can easily sell.  Why are they trapped?  Lack of equity prevents selling as a non-short sale, and refinances can be difficult, due to low or absent equity and/or poor credit, leaving many to scratch their heads for a good solution.  Eventually the situation will resolve, but it will take awhile.

In round numbers, we’ve lost about 1/4 of our value in the real estate market in Eugene Springfield, since peak values in summer of 2007.  If real estate appreciates at a typical value of 3-4% per year, it will be years, not months until we’re back at previous values.  So, prices will eventually rebound, but over time.  Reduction of mortgage debt is also part of the solution.  With every payment, the amount of the home mortgage decreases, which also helps.  Rebounding home prices and a reduction in the mortgage amount are one cure for the problem.  How long until these trapped sellers are set free?  I’d guess perhaps 5 years.

Just how big is the problem?  Nationwide about 1 in 4 mortgages are underwater, which is to say that more is owed than the house is worth.  In Portland, it’s thought to be about 1 in 5.  Statistics aren’t available for Eugene Springfield, but it’s reasonable to assume we’re somewhere between the national average and Portland.

So, what can the trapped homeowner do?  Refinancing is great if you can do it.  We’re at very low mortgage interest rates, and if you can refinance it may well indeed lower your monthly mortgage payments.  Refinancing can involve a myriad of rules and requirements and lenders are the best ones to answer questions.  Some general information on different types of refinancing is below:

FHA Streamline refinancing

  • Your current loan has to be insured by FHA.
  • Often, no appraisal is required.  This means house value, in particular if you are underwater, isn’t considered.
  • Your mortgage payment history is key.  Paying over a month late hurts.
  • A good credit score may not be necessary.
  • Income verification is not necessary.

VA Streamline refinance

  • The VA program is called IRRRL (pronounced “earl” by lenders) which stands for:  Interest Rate Reduction Refinance Loan.
  • You need to have an existing VA loan.
  • No appraisal is required.
  • No income verification is required.
  • You don’t need to occupy the home currently, but do need to have occupied it in the past.


  • The mortgage must be owned by Freddie Mac or Fannie Mae. The mortgage must have been acquired by Freddie Mac or Fannie Mae on or before May 31, 2009.
  • You may avoid an appraisal (it’s case by case, determined by Fannie or Freddie), but they will refinance your loan even if you’re way underwater.

HAMP refinance

  • Your loan must have been originated before or on January 1, 2009.
  • You must have sufficient documented income to support the payment.
  • You must have a documented hardship.
  • Designed to help people in danger of foreclosure.

The above loan programs actually have more specific rules and guidelines, and I just mentioned a few of the highlights.  A good lender will know more and be able to answer your questions.

I have worked with clients who want to convert their current residence with a mortgage to a rental then purchase another house to live in.  It’s not that it’s impossible to do this, but it is much more difficult than it was in the past.  Each situation is unique, but some of the problems that derail this plan are:  too much debt to income, inability to count rental income if there is insufficient equity in the rental house, and needing in some cases 6 months PITI for the rental and new purchase.  Mitigating factors such as a job transfer helps in this plan.  It’s worth investigating turning your house into a rental, but it’s a more arduous task these days.

When home owners need or want to sell when they’re underwater, some will turn to a short sale.  In some ways, short sales are similar to a regular sale:  the house is listed with a Realtor and offer(s) are accepted by the seller.  In other ways, they are much different:  sales proceeds are short of what is owed (short sale; clever, huh?) and the sale is contingent on the lender’s approval of the short sale.  The lender will want documentation to prove that the seller can’t afford to write a check for the deficiency (difference in sales proceeds and mortgage debt.)  The timing is also much different.  Non-short sales typically close in about 5 weeks from the accepted offer.  Short sales are typically 3 to 6 months.  As I understand it, in Oregon, lenders aren’t allowed to seek deficiency judgments on the first mortgage of a primary residence; this is not the case for second mortgages, though.  Sometimes, but not always, lenders will do “cash for keys,” which is when they give you a small amount of money to assist in moving out.  I always try for this on my short sales, but honestly don’t often get it.  Surprisingly, your credit seems to recover pretty rapidly after a short sale.  I have a client right now that is purchasing a new home after I short-sold her last house 24 months ago.

Foreclosures or a deed transfer in lieu of foreclosure are the last resort, at least in my opinion.  They are said to do the most harm to your credit rating and the effects persist the longest on your credit report.  If all other options are exhausted, though, this may be your last out.  It will certainly get you out of an unwanted house, but is a rather blunt instrument to solve an otherwise delicate problem.

Sometimes it can help to brainstorm with a good lender and/or Realtor when you find yourself trapped in a house with little equity.

My clients are purchasing this home 24 months after a previous short sale.

My clients are purchasing this home 24 months after a previous short sale.