Negative Equity - the underwater mortgage

If you purchased a house between 2004 and 2008, chances are that you have negative equity. If you remember the simple formula for equity

equity = what a house is worth - what you owe on it,

Between these years, the cost of houses was rising rapidly in a market that was composed of unrealistic purchasers. Big lending organizations found ways to make money by lending money to home purchasers with few or poor qualifications. This put more buyers into the market and drove the prices of homes to higher levels than a normal market would have allowed them to reach. In short, if you bought a home during this time, you paid too much for it because of irresponsible banks. As this became known, people became less willing or able to purchase homes. "What a house is worth" began to drop about halfway through 2008. The result for homeowners was negative equity.

If you made a purchase at this time and now have negative equity, you are stuck with a huge payment that you can no longer pay. If you no longer have an income stream, a large regular monthly payment will suck up your saved money reserve pretty quickly.

Question: Have you told your loan servicer that you are having financial problems and cannot make the payments anymore? The reason I ask you this is that your inability to pay mortgage payments while living in the house isn't as big a problem for a lender as an empty property. The bank has an interest in keeping you there, even for free. Here's why:

Empty houses spread poverty in neighborhoods that banks own. 

Imagine that a bank is managing twenty properties on your block when you tell them that you can't pay. Their interests are served best by maintaining the value of the other nineteen. An empty house with boarded windows that you moved out of depresses the surrounding property values and lowers the bank's wealth. So they will deal with you. For instance, Bank of America has a homeowner relief program that can reduce (even to zero - but temporarily) your mortgage payment. (http://homeloans.bankofamerica.com/en/service-and-support/homeowner-relief/find-a-solution.html) You may not trust banks, but would it hurt to ask?

If you want to get out of your loan and are prepared to move away from the house, remember that your lender gambled on your ability to pay them back. You could hand them the deed and say "that's the collateral on the loan that I promised." This is called a "deed-in-lieu" of continuing payments. It isn't done very often because it's very inconvenient, and where are you going to put the stuff that had been occupying your 25000 cubic foot vessel.You won't get credit again for a while, but if you don't want credit anymore, but if you have a place to put your stuff, a deed-in-lieu may be your best bet.

There is always allowing your house to go to foreclosure. Banks don't like for you to do this because it costs them too much to take control of your former residence. And the legal proceedings can take up to 2 years to be completed. They would rather have you promise future payments and carry you over for a short term unemployed spell than have to foreclose on you. It's better for both you and them. Negotiate if you can.