Whitehead was approved through the federal Home Affordable Modification Program, or HAMP. Under the terms of the modification, her monthly mortgage payment was reduced from approximately $1,000 to $700, and her adjustable rate mortgage of 7% was converted to a 30-year fixed rate at 3.8%. In addition, her servicer, Wells Fargo, reduced the principal by $31,000, which included $14,000 in arrears, bringing her mortgage to $125,000. Although she paid $154,000 for her condo in 2005, it’s now worth only about $60,000.

Whitehead fell behind on her mortgage when her dream to become a doctor was delayed after a series of events including a breast cancer diagnosis. “I was in medical school when I bought my house,” she says. “I was approved for a no-doc mortgage by the loan officer with the understanding that once I became a doctor I would be able to afford the mortgage.” Whitehead graduated from medical school in 2006, but without a medical license her various part-time jobs generate $30,000 a year.

Like Whitehead, roughly 58% of homeowners facing foreclosure and seeking counseling services from the National Foreclosure Mitigation Counseling Program report that the primary reason is unemployment or underemployment. Many are also trapped with homes that are underwater, properties that have dropped in value leaving them with negative equity. Various options are available to struggling homeowners, such as forbearance, refinancing, and loan modification, says Mechel Glass, director of education at CredAbility.

The Atlanta-based nonprofit credit and debt counseling agency also participates with the congressionally funded NFMC (http://findaforeclosurecounselor.org). More than 1.2 million homeowners have received counseling through NFMC counselors, with many clients receiving modified loan payments that were reduced by as much as $500 a month.

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“A loan modification is a restructuring of a loan. It can include changes such as a reduction in the interest rate and/or principal amount,” Glass explains. “Other changes that may be made in a modification include extending the period of the loan (from 30 years to 40 years), moving any delinquency to the back end of the loan, or converting it from an exotic type loan (interest-only) to a conservative one (30-year fixed).”

There are caveats: If you are put on a trial payment plan, whereby you make a reduced mortgage payment, it will adversely affect your credit until the modification is officially approved. Also, if the modification isn’t approved, all arrears on the mortgage will be due immediately and the foreclosure process will proceed. Your eligibility for a home loan modification depends on your specific circumstance, says Glass.

Applying for a loan modification or restructuring can be extremely stressful, says Stephfan Nurse, CEO of Tampa, Florida-based Consumer Education (www.consumereducationonline.com).  “This process can be rife with mistakes and bureaucratic snafus. But if you take steps to reduce the opportunities for errors, you’ll have a much better chance of being approved,” says Nurse.

Millions of homes across the nation are worth less than their mortgages.

The nation may be in recovery mode but millions are still stuck in a financial quagmire. Over the past few years, far too many were careless in managing one of their most precious assets: their home.

Let’s step back a few years to when this nation was in the middle of the biggest housing boom in more than a half century. Just six years ago, the Federal Deposit Insurance Corp. reported that 15% of the nation’s metro areas experienced real estate price hikes of a staggering 72%. During that period, hundreds of thousands bought their slice of the American Dream as financial institutions made them affordable and accessible, offering subprime loans, zero-interest loans, zero-down payment arrangements, and low-interest adjustable rate mortgages, to get virtually anyone into a home. For legions of newly minted homeowners, gaining shelter wasn’t enough; with skyrocketing home values, many got caught up in irrational exuberance and converted their homes into ATMs, using home equity lines of credit to borrow a lifestyle. Instead of making repairs and enhancements to boost the value of their properties, they purchased expensive cars, took exotic vacations, and bought other luxury items they simply could not afford.

When the bubble finally burst, the caviar lifestyle disappeared for some and the faux safety net evaporated for others. The collapse of the housing market wiped out roughly $7 trillion in housing value from the third quarter of 2006 to the end of 2009, according to the Federal Reserve. This past March, USA Today reported that more than 11 million homes across the nation are worth less than their mortgages, while some borrowers with negative home equity may not realize any positive gains until as late as 2020. (According to a Pew Research Center survey in February 2009, 12% of African Americans said their mortgages were “underwater.”)

My advice to those waiting for the market to rebound to pre-2008 levels is quite simple: Wake up! We must realize that although property can and should serve as a valuable wealth-building tool, it also serves a practical purpose—your house is a home.

Black Enterprise has reported on scores of individuals who have opted not to take serious action to correct their finances or sell their homes due to an emotional attachment to their property or a false idea of what it’s worth. As a result, their families suffer through staggering costs as they remain caught in a debt trap. Shortcuts or quick fixes are as effective as repairing a leaky roof with duct tape. I urge you, with the help of a financial adviser, to make a clear-eyed evaluation of your finances and recalibrate your life.

For one, adjust your expectations: It’s highly unlikely that your home will ever again increase in value 5% to 10% every couple of years as it did during the past decade. (In February, home prices fell 0.9% on a seasonally adjusted basis, according to the Standard & Poor’s/Case-Shiller index. This was the fifth-straight monthly decline.) If you manage your affairs so you can make monthly mortgage payments with no more than 30% of after-tax income and you’re not drowning in debt, hold on to your property for the long haul and anticipate an increase in wealth as the home makes slow but steady gains in value.

If you face the possibility of default, seek a loan modification through such programs as Making Home Affordable. You may find, however, that selling your home is the only option to remain whole. There’s not a bit of shame in rightsizing—eliminating unmanageable debt, scaling back on nonessentials, boosting your savings, and preserving your credit. Done right, you’ll position yourself to purchase an affordable home, sock away emergency funds, and develop a comprehensive retirement plan. Lastly, don’t ever treat your property like a piggy bank again.

My parents’ generation believed when you bought a home, you didn’t try to time the real estate market. You scrimped and saved until eventually you owned the property outright. It may seem old school, but we all need to embrace the basics of homeownership.

Earl “Butch” Graves Jr. is the president and CEO of Black Enterprise.

George and Mae Hicks

Until recently, owning a home was the wealth-building move. These days, many homeowners are contending with more mortgage than the home is worth, joblessness, and other financial challenges and deciding to simply walk away from a dream home turned nightmare.

“We were hanging on, but for what?” asks Clovis, California, homeowner George W. Hicks, 64, echoing the thought process he and his wife, Mae, 62, went through in 2009. Three years earlier, the Hickses paid $555,000 (borrowing $380,000) for their home, chosen because it would be big enough to accommodate their daughter and grandson.

But 2009 turned into a calamitous year for the Hickses. Their home dropped in value from its peak of $638,000 to around $320,000. It wasn’t simply that they were “under water” in their mortgage. The Hicks’s investment portfolio had plummeted the year before and was generating only a tepid recovery. Making matters worse, both George and Mae were diagnosed with cancer. At the time, a “walk away” seemed like a good option. A strategic default, or “walk away” as its known colloquially, is different from the average foreclosure. It involves a homeowner who can afford to continue paying his mortgage but consciously chooses not to.

“We were getting by, paying everything on time. But the house was huge and so were our utility bills. At the end of the month, there was nothing left.” George explains. “We realized that, eventually, everything would come crashing down. We had to decide whether to walk away or find some other way to get out from under this.”

Walking away from the home would be difficult for George. He prided himself on “a lifetime of doing things exactly the correct way.” Though the stigma to walking away may be diminishing as foreclosures increase, many homeowners still attach guilt or shame to the idea. Like the Hickses, they may feel duty-bound to honor their obligations. “Even though there was no monetary upside in it for us, we gave our word, and our word meant something,” says George.

In that sense, he is like more than 80% of U.S. homeowners who believe “it is morally wrong to walk away from a house when one can afford to pay the monthly mortgage,” according to Moral and Social Constraints to Strategic Defaults on Mortgages, a University of Chicago and Kellogg School of Management, Northwestern University study. But studies also show that many homeowners have a breaking point at which “strategically defaulting” on their mortgage becomes a serious option.

Who Walks, and Why?
The Hickses are not alone. About a quarter of U.S. mortgage holders (11.3 million homes) are currently in a similar situation. According to mortgage data firm First American CoreLogic, when homeowners reach the point where they owe at least 25% more than the home’s value (for example, owing $375,000 on a home now worth only $300,000) they become just as willing to walk from their own homes as an investor. For some, the final straw is a serious illness or job loss. For others, there’s a critical point at which dwindling or negative equity turns walking away into a worthy consideration.

In the states hardest hit by the mortgage crisis (Arizona, California, Florida, Nevada, and Michigan) mortgage holders have an average of 40% negative equity—and no clue if their homes’ values will ever fully recover. It’s no wonder that 26% of U.S. foreclosures are estimated to be strategic defaults.

The national stalemate between banks and borrowers over loan modifications and principal balance reductions also influences homeowners considering a default. David Daniel, a certified mortgage planner specialist in Oakland, California, finds that the average potential “walker” is exasperated after waiting six months or longer for their lender to respond to a loan modification request. “Then they contact me and want to talk about refinancing or, as a last resort, walking away.” Antioch, California, real estate agent Tique Lee Caul sees the same thing in the underwater homeowners she counsels: “Some people feel screwed that they paid double, sometimes triple, what their neighbors are paying now. Some feel that the banks were rescued but are unwilling to work with borrowers” to reduce their payments or principal loan balances.

Consider the Consequences.
Walking away can create a whole host of problems for borrowers. George Hicks researched his options and discovered that the credit consequences are severe. The “walk away” would ruin his valued 840 credit score, prohibiting him from buying another home for roughly five years. “I wanted to be able to have the credit to do whatever we needed to do in our final days,” notes Hicks.

Nate Anderson, a licensed real estate agent with offices in Chicago and Philadelphia, also warns clients to be aware of the looming possibility of a “deficiency judgment.” That’s when the lending bank seeks to recover the difference between the balance left on the mortgage and the fair market value of the home.

Anderson says that in many states, “A lender can and will sue a homeowner for a deficiency judgment.” Those who walk away may be exposed to a deficiency lawsuit for as long as six years following the foreclosure in some states. Accordingly, Anderson advises homeowners in mortgage distress to instead work through their mortgage troubles with a real estate attorney “so that you are completely off the hook with the lender.”

The legal ramifications of a walk away vary from state to state. Even in the few states where borrowers can’t be sued by mortgage lenders, walking away can expose a homeowner to significant state income taxes if the state’s tax laws count debt forgiveness monies as income. So says California tax and real estate attorney and CPA Scott Haislet, who has counseled more than 200 homeowners on their personal mortgage crises since about 2007. Haislet also points out another big misconception homeowners have regarding a walk away: that both first and second mortgages will be extinguished if they default on the home. Rather, Haislet explains, the standard scenario is that the second mortgage simply becomes an unsecured loan, the balance of which the lender can sue the homeowner to collect up to four years following the foreclosure, under California law.

Available Alternatives
Many homeowners who consider walking away eventually decide to take another route. Those include negotiating a loan modification, a short sale, or a deed-in-lieu of foreclosure—where the borrower hands over the deed in exchange for the bank extinguishing the debt.

A member of George Hicks’s church purposely defaulted on his home and regretted the devastating credit consequences. The man cautioned the Hickses not to do the same. So instead, George and Mae opted for a short sale. The process turned into a drawn-out battle with their lender, but in the end, the home sold (for $315,000). George Hicks was able to move his family. The short sale left both George and Mae with credit scores just above 700, lower than they’d like, but still well above the national average of 671.

Caul finds that very few clients elect to walk away after she lays out their options. “Folks usually are willing to fight rather than to just give up when they know someone cares enough to work with them,”  says Caul. Likewise, the Hickses credit their real estate agents for helping them through the nearly eight-month short sale process. They were able to move their family, and they’re glad they didn’t completely wreck their credit  by walking away. After enduring their own personal mortgage crisis, the Hickses have also completed a round of cancer treatments. Says, George: “We’re going to be just fine.”

Tara-Nicholle Nelson is a real estate broker, attorney and author of two real estate guides. Tara is the Founder and Chief Visionary of REThinkRealEstate.com.

Under the principal forgiveness plan, Bank of America will provide earned principal forgiveness of up to 30% to homeowners who owe more than 120% of their home’s value and are 60 or more days behind on payments. Borrowers who meet the eligibility requirements of their National Homeownership Retention Program as well as the Making Home Affordable loan modification program will be able to take advantage of this plan. The bank says it is offering the principal forgiveness as a way to encourage burdened borrowers to participate in loan modification programs.

Initiative may help some homeowners stay above water.

Bank of America’s plan will begin this May. However, those with 30-year fixed loans are not eligible. Bank of America says it aims to assist those borrowers with loans that often exhibit a high rate of missed payments such as the payment-option Adjustable Rate Mortgage. This is an ARM that lets you choose among different payment options each month. For example, one month, you can elect to choose interest-only payments, and another month you can choose limited or minimum payments, which allows you to pay less than the minimum. Consequently, borrowers with these types of loans often end up owing more money.

If you don’t qualify for a loan modification but you’re having difficulty paying your mortgage, you still have some options.

Rent out part of your home. If you have the appropriate space (for example, you have a house with a mother-daughter apartment), take on a tenant and use the rent to help pay your mortgage. Laws vary by state as far as what is an acceptable living space for tenants, so make sure you review the requirements for your state.

Profit from your talents. You might be talented at cooking or fixing computers. Whatever your gift is, turn it into a profit. Start your own side business and make some extra cash.

Get help. If all else fails, seek professional help. The National Foundation for Credit Counseling offers help with basic budgeting and developing a financial plan. Some community colleges also offer free budgeting workshops and seminars.

Sheiresa Ngo is the consumer affairs editor at Black Enterprise.

—C. Jones
Via E-mail

First off: You’re not alone. Right now, according   to Zillow.com, nearly a quarter of U.S. mortgage-holders are “underwater,” meaning their homes are worth less than they borrowed from the bank. Many of those homeowners, like you, purchased at (or near) the height of the housing bubble in 2006.

If you like where you live, and can still afford your payments, your best option is to continue paying your mortgage and ignore the current market trends. Tara-Nicholle Nelson, real estate broker and author of The Savvy Woman’s Homebuying Handbook (Prosperity Way Press; $24.95), agrees. “Reset your mindset,” says Nelson. “Forget the idea that you have to do anything. Depending on where you live, if you plan to be in your home for five years or longer, you could see your value rebound.” The reason most real estate experts offer this advice? There are few palatable alternatives.

You might ask your bank to modify your loan by reducing the principle, but banks don’t often agree to these kinds of modifications. “That works in about 1% of cases,” says Nelson. Another option: you might ask the bank if they’ll consider allowing you to put the house on the market as a short sale property. The problem: your credit score will take a hit, and the bank may come after you later to pay the portion of the sale that fell “short” of what you owe them. The other option, if you can call it that, is to let the house slip into foreclosure. No one wants that, for obvious reasons.

This article originally appeared in the January 2010 issue of Black Enterprise magazine.

But when Arthur contacted her lender she says because she was current on her payments, she was told she did not qualify for loan modification.

“They said call us back at the end of the summer,” Arthur said.

Arthur was one of many to attend a predatory lending session at the NAACP 100th Annual Convention in New York City Tuesday afternoon.  She was also one of several people who said they were told to fall behind on their mortgage payments to qualify for loan modification.

“If anybody receives information from a lender, loan consultant, realtor, or any sources telling them they need to miss a mortgage payment in order to qualify for modification, it’s false,” says Janis Bowdler, deputy director of the Wealth-Building Policy Project at the National Council of La Raza.

Bowdler says the complexity of foreclosure prevention programs combined with inadequate training of staffers may account for the misinformation.

“In other more nefarious cases, it’s because [companies] are trying to triage the work, and they’re not going to help you unless you’re worse case scenario,” Bowdler says.

She reminded attendees that  financial institutions participating in the Making Home Affordable program are not allowed to tell borrowers they need to fall behind.

“If they’re not signed up for that program, they’re kind of allowed to do whatever they want. But they should still be reported because it is unfair treatment,” Bowlder says.

Click here to find out if your lending institution has signed up for the Making Home Affordable program.

Bowdler urged Arthur to report her lender to the Treasury Department and have a housing counselor call back the financial institution on her behalf.

If you are told you need to miss payments in order to modify your loans you should:

Seek out a loan counselor. Visit the Department of Housing and Urban Development for more information finding a housing counselor.

Report the lender to the Treasury Department. You can call their hotline (1-800-359-3898), mail or fax your complaint, or file anonymously or confidentially.

Renita Burns is the editorial assistant for BlackEnterprise.com.