Continued trouble in the housing market in the form of falling home prices has the federal government considering expanding its mortgage aid programs to include homeowners that are further underwater than is currently acceptable under federal guidelines. Currently, its Making Home Affordable Program serves people who have a loan-to-value ratio of up to 105 percent. However, falling home prices are pushing more people further underwater in their loans, so the federal government is considering implementing a maximum loan-to-value ratio of 125 percent in hopes of increasing the number of struggling homeowners able to stay in their houses.

As reported by Bloomberg.com on June 19, 2009, “President Barack Obama’s Home Affordable program announced Feb. 18, sought to help as many as 5 million Americans who may owe more on their mortgages than their homes are worth. Fannie Mae and Freddie Mac have refinanced 80,000 loans under that program.” However, as pointed out by a June 27, 2009, CNNMoney.com article, with the degree to which home prices have fallen, particularly in the regions of the nation affected worst by the bursting of the housing bubble, it will be difficult for the current administration to come anywhere near that goal of 5 million people without adjusting the program limits “to allow mortgages with 25% negative equity to refi.”

Negative equity is becoming a serious problem throughout the nation, with some areas seeing home values dropping by 30 percent and even by 50 percent and more, creating a significant gap between what is owed on the home and what it is worth. According to an article published on HispanicBusiness.com on June 15, 2009, “the average person in foreclosure in California is 43 percent underwater.” Citing data from Moody’s Economy.com, the article also noted that “Roughly one-fourth of homeowners with a mortgage owe more than the home is worth, making them much more likely to default. Among those who purchased in the past five years, 30 percent are underwater. The figures are worse in bubble markets such as Las Vegas, where 61.4 percent of buyers in the last five years are underwater.”

Because of this trend towards lower home values and increasing degrees of negative equity, the federal government is taking a serious look at expanding their assistance programs to include homeowners with 25 percent negative equity. However, there are many who do not see such a move as a positive, pointing to the number of people who still end up defaulting after loan modification or refinancing assistance programs, in part due to other economic stresses occurring simultaneously, like increasing unemployment.

Those who view such an expansion with a critical eye, suggest that we are far from the bottom of the housing market, and values will probably continue to drop, pushing more homeowners underwater and increasing the equity gap for those already dealing with a negative equity problem. Expanding such programs could end up trapping people in homes and loans that they simply can no longer afford, wasting resources they could use to help them back to financial stability.

If the Obama administration does expand its assistance programs to include those that are dealing with a higher degree of negative equity, that doesn’t automatically make that the right financial choice for you. When making individual decisions concerning what path to take in a negative equity situation, it is essential to take a serious and honest look at all facts and potentials, making the choices that make the best fiscal sense to you, even if it does mean letting a beloved, but too costly, home go. In these tough economic times, playing too close to the margin just doesn’t make sense and being in a financial situation in which everything must go perfectly or all is lost is far too risky.

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