Underwater California Home Loans

There was a time when California home loans ranked as top investments. During the heady days of the residential real estate boom, California housing values skyrocketed. Investors could buy a mansion in California for $1 million and then sell that same mansion, after updating it just a bit, for $3 million or more just two years later.

That has changed. The real estate slump has hit all major markets across the United States. However, no state has been slammed as seriously as has California. Housing prices here have plummeted. That million-dollar mansion in California might now be worth just $500,000.


This means that there are far too many underwater homeowners in the state. Homeowners are underwater when they owe more on their jumbo loans in California than what their homes are worth. As an example, the investor who owes $800,000 on a California home loan but owns a house that has a current market value of just $500,000 is $300,000 underwater.

Not surprisingly, many homeowners are lining up for a California home loan refinance. They want to lower their monthly mortgage payments by reducing the interest rates attached to their existing home loans.

The problem is that homeowners can’t refinance when they are underwater. Before approving California refinance loans, lenders typically require that homeowners have at least 20 percent equity in their homes. Those owners whose homes have fallen in value since they purchased them might not have this much equity available.

The government, in 2009, launched its Home Affordable Refinance Program, HARP, to help such homeowners. The program provides financial incentives to lenders who agree to refinance the home loans of homeowners who don’t have that magical equity level of 20 percent. In fact, homeowners who owe up to 125 percent of their home’s values can refinance under the program.

Unfortunately, the latest statistics show that far too few homeowners have managed to refinance their California home loans under this government program. It’s one of the many reasons why neither the residential housing market nor the economy in general has show much life in the last year or so.

Until mortgage lenders start cooperating more closely with government efforts to allow homeowners to more easily obtain refinancing, the country can expect to see an even higher number of housing foreclosures. Many homeowners could avoid foreclosure if they could just reduce their mortgage payments by gaining a lower interest rate. Unfortunately, too many of these struggling homeowners are also underwater on their mortgage loans.

Many critics blame the mortgage lending industry for fueling the economic crash. Lenders gave out too many home loans to borrowers with low credit scores and low monthly incomes. Not surprisingly, many of these loans went bad, taking a score of mortgage lenders with them.

Today, mortgage lenders, especially when it comes to refinancing the mortgage loans of their already existing customers, have gone too far in the opposite direction. And this might be preventing the national economy from experiencing the recovery so many are waiting for.

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