One week ago, if you owed more than your house was worth, you couldn't refinance your mortgage (unless you had a bucket of cash to bring to the table). You also would have to be very lucky to convince your lender to reduce your debt, if you needed a loan modification.
Now, both things are possible. The rules of mortgage lending changed dramatically last week.
Obama Administration and major banks suddenly decided to take an axe to mortgage debt – an idea they wouldn't have considered a couple of years ago. And I know why.
It's an extraordinary move taken in the face of an extraordinary reality. Nationwide 13 million homes could be headed into foreclosure through the end of 2014, according to a Center for Responsible Lending estimate. Millions of homes are already in foreclosure and millions more are close to it. The mortgage default rate is at the highest ever recorded. All this has rubbed off on all the rest of the market, bringing down the value of everyone's home.
At the center of it all, Florida has the worst problem in the nation, with more than one in four mortgages one or more payments past due.
Who would want this situation to continue? And will this week's changes turn the tide? That's what this is about. This is about trying to chip away at the foreclosure crisis and begin to bring about its end. It's not about you paying your mortgage and your neighbor getting out of it.
There's a solid reason for cutting people's debt. Because, when the debt is more than the home is worth, defaults are more common. That makes more foreclosures likely.
Bank of America last week said it would begin offering principal reductions to its borrowers who are the most deeply in trouble. Bank of America's plan won't help many people. Just 45,000 could qualify, when Bank of America alone has 1.5 million borrowers who are 60 days late in their payments.
Then the Obama administration on Friday announced a re-write to the rules for its Making Home Affordable program. This could help many people, but probably not all the 3 to 4 million borrowers that the program was supposed to help.
Now lenders in that program – and this is most of the lenders – will have to "consider" writing down the principal balance of the loan. They'll get an incentive payment from the government if they do so.
Treasury officials also said the lenders would be able to refinance underwater loans – that's the term for owing more than a house is worth - through the Federal Housing Administration. They'll have to cut down principal, too, by at least 10 percent.
Economist Mark Zandi of Moody's Analytics told the Associated Press that these moves would likely help 1 million and 1.5 million homeowners avoid foreclosure.
Almost half of Florida homes are underwater and the proportions are higher in South Florida. If you are underwater, FirstAmerican Core Logic predicts that it'll take until the end of 2015 before housing values will rise enough to get you back to even. In the worst markets, make that 2020.
If borrowers have to go another 10 years paying on a home that's worth less than the mortgage, how many do you think will stick it out?
Ronald Faris, president of Ocwen Financial, a West Palm Beach-based loan servicer told of his firm's experience in testimony before a House subcommittee at the start of March. Ocwen has found that the chances of a loan slipping into default after a modification are 1.5 to two times greater if that loan is underwater.
That comes from the numbers in his firm's portfolio of 300,000 loans, about 100,000 of them recently modified. Ocwen has put principal reduction into 15 percent of its modifications. While other lenders are seeing almost 15 percent to 35 percent of loans go into default shortly after the modification, Ocwen has about a 5 percent re-default rate.
One additional factor lenders may be considering: The prospect that home values will drop even farther would make their outstanding loans even riskier, said Diane Thompson, an attorney at the National Consumer Law Center. A group of mortgage investors who have $100 billion on the line has been hitting Capitol Hill hard lately, too, demanding that principal reductions be taken seriously.
Those bond holders and hedge funds – who no doubt will profit when the loans are kept current or refinanced -- are now on the same side as consumer advocates. "We've been pushing for this idea of principal reductions for quite some time," said Julia Gordon, senior policy counsel at the Center for Responsible Lending.
The banks "will see it can be done and the world does not end," Thompson said
"The question is how do you make it happen."
How? The answer is clear now for the banks and loan servicers. It is voluntary, however. They'll have to choose.
How for the borrowers? Make the loan affordable, make the amount owed make sense, and then maybe the borrowers will keep paying.
"If a loan goes into foreclosure, we've lost our income stream," Faris said.
And if millions more go into foreclosure, the recovery we all are waiting for doesn't stand a chance.
Harriet Johnson Brackey can be reached at firstname.lastname@example.org or 954-356-4614.
For more on personal finance, read Brackey's blog at sunsentinel.com/itsyourmoney