Home values have fallen so much in California that almost half the people with mortgages there owe more than their homes are worth. So when federal money became available to help stem the tide of foreclosures, the state flagged that group for help. If banks would forgive some of a homeowners’ mortgage debt, the state said it would pay half, up to $50,000 of a $100,000 loan reduction. Despite the generous terms, most banks balked.
Only three homeowners have been approved for debt reduction since the program began in September 2010. A major obstacle has been that the two largest mortgage guarantors, Fannie Mae and Freddie Mac, will not participate in California. No loans are eligible for the state’s program if they were bought and held or securitized by the two companies, which are now under government control and guarantee more than 70 percent of the country’s home loans.
About one in five homeowners with a mortgage is underwater, and the total amount of negative equity is estimated at $700 billion to $800 billion. While many of those borrowers are coping with self-inflicted wounds, the problem is not limited to subprime loans. Among mortgages backed by Fannie and Freddie, a vast majority of which are prime, the percentage of underwater homeowners is virtually the same as the percentage among all mortgages.
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