Negative equity mortgage situation is one of the most complicated financial situations to solve. Negative equity mortgage is also known as underwater mortgage or upside down mortgage, which means a person, owes more money to the lender than the current house is worth.

For example if a homeowner bought a home for $300,000 and placed the 20% down payments of $60,000, he got $240,000.

When the real estate markets crashed at 2009 and properties lost their value, in our example the homeowner is left with nearly $240,000 mortgage but if the home value decreased by 30% to $200,000 the lender owns a home worth less than the borrower had borrowed.

If the borrowers fail to pay, they will lose the house and the lender lose a lot of money.

Unfortunately at the financial crisis of 2009 millions of Americans fell into such awkward situations, when the value of their homes dropped steeply, while their mortgage loan stayed as it was. It is estimated that there are 3-4 Million homeowners nationwide with underwater mortgages.

Together with the crisis the national interest rates decreased too, this was a life saver for those who could refinance their mortgage and lower their monthly payments or shorten the mortgage term by a few years.

While Millions of homeowners took advantage from the crisis outcomes and refinanced, homeowners with negative equity mortgage not only lost their home value, but they were not able to refinance, since the home value is less than their loan.

The federal administration tried to launch some programs to help those with underwater mortgages. This effort is part of the 14 Billion dollars the Treasury Department funds for the Troubled Asset Relief Program. It was released as ‘FHA short refinance’ program.

Until lately saving underwater mortgages with the FHA short refinance’ program was not very successful, because not many lenders joined the plan. This may be changing soon, as Wells Fargo and Ally Financial have both stated they will join a pilot program.

The basic guidelines for Negative Equity Mortgage Refinancing are:

• That the borrower must be living in the property;
• The borrower must be current on their mortgage payments;
• The mortgage processed should not be an FHA backed mortgage;
• Borrower with credit score above 500
• Loan to Value should not be over 97.75%

There are many reasons why the FHA short refinance program did not succeed until now, the main one is that it is up to the lenders to decide to join. Many lenders did not join this program even though there where some federal incentives invested by the government.

Lenders were reluctant to join because they need to write off at least 10% of the current borrower’s principle on the underwater mortgage.

Since FHA requirement is that the homeowners will be the ‘perfect borrowers’ which are never late on their payments, lenders didn’t want to lose principle on those who were paying on time.

In case there are two mortgages on the same property, both of the lenders need to agree to the FHA short refinance guidelines.

As you can see, the FHA strict borrower’s terms and the lenders requirement made the underwater mortgage refinancing program, too specific to really solve the negative equity to the Millions of homeowners who need it. The entrance of two major mortgage players Wells Fargo and Ally Financial may bring new hope to more homeowners.