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Sheila makes all her mortgage payments, but nobody will allow her to refinance her underwater mortgage. How come there's no help for people who do the right thing?

Here’s a recent reader question – maybe you’ve wondered about it as well:

I would like to know if there are any programs to help homeowners who are current but owe more than their house or property is worth. I would like to refinance, but no one will lend me money when I have negative equity. Others tell me to quit paying my house payments and then I can get help. I can’t believe I am being told that from lenders. How is that going to help the economy? The government is helping people who are going into foreclosure so they won’t lose their house, but what about the people who have been lucky enough to stay current but can’t refinance to get lower interest rates? I don’t think that is fair. I hope you know of some program or type of help that is out there. – Sheila

Good question and even better commentary, Sheila. Let me start in the middle: DON’T quit making your payments, at least if you have a choice. Even if that really helped you refinance at a better rate – and trust me, it won’t – your  credit rating can take a serious dive. And that will cost you much more money in the long run.

You can refinance with negative equity (meaning you owe more on the house than it’s worth) but it’s not going to be easy, Sheila.

First of all, you need to be careful. Scams abound. When I wrote about 3 Mortgage Rescue Rip-off Tip-Offs, that was only the tip of the iceberg. More scams crop up every day.

There’s a legitimate way to go, but you need to make sure you qualify and that you follow all the rules. It’s called an FHA Short Refinance, and you can get all the details at this link: New Program May Reduce Mortgage Principal for Underwater Homeowners. If you qualify, this is your best bet. In fact, it’s probably your only bet.

This entire mortgage mess is deeper than you think, Sheila. In fact, next week, I’m spending the entire week explaining it. Check out Monday’s Money Talks News.

Finally, let’s address some of Sheila’s commentary, because I’ve received many, many similar comments from many other readers in various forms.

“Others tell me to quit paying my house payments and then I can get help. I can’t believe I am being told that from lenders. How is that going to help the economy?”

Lenders aren’t in business to help the economy – they’re in business to help themselves. When the bank helps the guy across the street who isn’t making his mortgage payments, it’s not being nice – it’s doing everything possible to get it’s money back. When the bank won’t help you when you’re current, it’s not being mean – it’s trying to earn as much as possible from people who have the ability to fulfill their contractual obligations.

There are only two things that will cause a bank – or any business – to stray from the path of maximum profitability: first, if it’s forced to, either by government regulation or media scrutiny. Second, if the human beings running it choose to forgo money to help people on moral grounds.

Now let’s look at this statement:

“The government is helping people who are going into foreclosure so they won’t lose their house, but what about the people who have been lucky enough to stay current but can’t refinance to get lower interest rates? I don’t think that is fair.”

You’re absolutely right – it’s not fair. But keep in mind that the government’s plan is to try to protect the overall economy by using taxpayer money to bail out some homeowners – and businesses – that it deems crucial.  That means people like you and me who can help ourselves are on our own, while other people and businesses who can’t make it are getting help with our taxpayer money – even some who may not deserve it.

Is it just to use government funds or create laws that benefit a minority at the expense of the majority? From civil rights to social security to health care reform, it’s an argument as old as the United States.

Stacy Johnson

It's not the usual blah, blah, blah

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