Homeowners with at least 3 percent equity may qualify for refinancing through the Federal Housing Administration. On March 6, it began making loans up to $729,750, a new higher limit that expires Dec. 31 unless Congress extends it. Limits are 125 percent of median home prices, by county.
Loan modifications entail freezing or reducing interest rates and may also include balance reductions.
“But if your payments are still going to be more than half your gross income, the lenders won’t do it because they figure you’re going to default later,” Mr. Geller said. “It’s not rational to dedicate your life to making the next $5,000 monthly payment on an asset declining in value.”
Negotiating a loan modification means understanding that in most cases “the lenders really don’t want to force people into foreclosure because that virtually guarantees large losses in the market,” said Dean Baker, an economist with the Center for Economic and Policy Research in Washington.
“It’s a game of chicken,” Mr. Baker said. “And you can’t play it effectively unless you know what your risks are, including whether lenders can come after your other assets if you walk away.”
Borrowers should determine if they live in a state with nonrecourse laws. In general, lenders in those states cannot pursue borrowers for money owed. But these laws are complex and change often, so consulting with a lawyer may be necessary, Mr. Geller said.
Every affluent borrower who took an ARM has a different story.
In Oceanside, Calif., north of San Diego, people paid $650,000 to $750,000 in 2003 and 2004 for row houses on Cleveland Street, said Chris McBrearty, certified mortgage planning specialist, in Carlsbad, Calif., who wrote many mortgages there. When prices for the houses rose as high as $1.5 million in 2005, many of those people refinanced with ARMs to take out cash, he said.
But while the borrowers had the best intentions, life — job losses, divorces, deaths — changed their financial circumstances, Mr. McBrearty said. Now, with a most recent listing at $920,000, “nothing is selling on the street, and even for those with some equity, the products needed to refinance such large loans are not out there.”
One of those homeowners, a lawyer who spoke only on condition of anonymity for professional reasons, said he refinanced his mortgage with an ARM in January 2006 to take $510,000 out to invest in a hotel. “I planned to run the hotel with my lovely wife,” he said.