Underwater mortgages, loans where the debt exceeds the market price of the homes, are in for some difficult times according to First American CoreLogic, a real estate consulting firm. According to their forecasts underwater mortgages will not regain equity until at least 2017. Unlike Pharaoh’s dream the seven bad years are to come before the good ones. Or did we already get those during the housing market boom years. This forecast was design for the New York City area, but its results could reflect the trend of other regions.

This is not good news for mortgage holders who were already planning a strategic default on their loans. Strategic defaulters are borrowers that can afford their mortgage, but decide to stop paying and let their home go because they feel it will be underwater for the foreseeable future and paying for it is throwing good money after bad.

Of course the forecast described above is just that an educated guest. The report based the forecast on historical data and the average rate of appreciation of the last 30 years. The problem with using historical  data, especially during crisis years, is that it is not always useful. The president of the New York Association of Mortgage Brokers, Robert Duquette, thinks that this forecast is pessimistic. He makes the point that the economy is already showing signs of recovery and that it is pessimistic to think it will take seven years. Although, he would say that wouldn’t he? It is like asking a Casino manager how likely it is for clients to hit the jackpot. You know he isn’t going to underestimate your chances.

What we do know for sure is that underwater homes are a problem in New York and the rest of the U.S. According to the same First American report, around 116,000 of the 1.1 million mortgage holders in the New York City region owe more than their homes are worth. This is below the national average. The percentage of underwater homes is estimated around 24% of the 11.3 million mortgages in the U.S.

Another factor that might hurt areas like New York, California and Florida, with high housing prices, is the mortgage rate for jumbo loans. Government mortgage programs help keep interest rates down for borrowers of loans under $729,750. In recent years jumbo loans, loans over $729,750, have still enjoyed low interest rates. If this changes, states with high house prices might suffer, and take longer to recover.

So what is the best advice for the owners of underwater homes? First do not make knee-jerk decisions. First think of the value of your home to you. Prices rise and drop but if you and your home enjoy living in your home and you can afford the payments then it has a value that debt-to-value rates cannot measure. However, in some extreme cases it is true there is little sense, at least from an investment perspective, to continue paying for a home. Banks know this which is why they are starting to offer incentives to certain homeowners which they consider are at risk of strategic default. These programs offer homeowners cash incentives if they pay their mortgage or find alternative financing without foreclosing.

These programs are still new and banks are keeping their cards close to their chest, which is understandable. They do not want a queue of homeowners at their doors asking for handouts. We will provide details of these programs as soon as we have more information. Whatever your situation it is worth contacting a reputable housing counselor and asking for advice before making any drastic decisions.

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