Help! My home value has fallen and it can't get up!

Falling home prices and the terrible employment market have combined to create one of the worst housing markets in recent history. People who need to sell their homes can't, and those whose income has dropped often find themselves in a now-unaffordable house with no way to get out.

What can you do?

You have several options:

1. You can simply walk away from the house. Sometimes, just handing over the keys works best. You do put yourself at risk of a deficiency on the mortgage, but often those are not pursued. The downside is, other than you lose your home, is the foreclosure on your credit history.
2. You can try working with your lender to modify the terms of the loan. Some lenders are willing and able to do this, and when available, it is often the quickest way to get your home affordable again. However, since so many mortgages are sold and packaged on the secondary sale market (the cause of all this mess), speaking to the actual loan holder is difficult if not impossible, and your loan servicer is very limited in what they have permission to offer.
3. You can get a short sale on the home. If you need to leave the house, or simply cannot sell it for its loan value, your lender may agree to a sale price that does not fully repay their loan. This avoids foreclosure and bankruptcy, but may either carry debt on you to the future, or have significant tax implications. Read the fine print carefully before agreeing to a short sale.
4. You can try the Obama Loan Modification Program. This program is designed to help both you and your lender get the monthly mortgage payment down to about 31% of your gross income. It does this by lowering interest rates, extending repayment periods, and can even reduce your principal in part. However, not all lenders are participating, and it is a government program, so naturally it entails lots of detailed paperwork.

There is one tool that has intentionally been excluded from this toolbox: Bankruptcy. Mortgages on primary residences are basically unchangeable in bankruptcy proceedings. There has been renewed discussion of "mortgage cramdown" in Congress, but since the mortgage industry has a powerful (rich) lobby, I wouldn't get my hopes up of having any help from the Bankruptcy Courts.

That is a shame, for bankruptcy courts are just the place for such a tool. When a person files bankruptcy, they are attempting to get their fiscal lives back on track, but they cannot as of now help their mortgage. It does nothing to stem the tide of foreclosures, which is the primary step needed to begin the climb out of our current recession. Indeed, I have seen many people forced to lose their homes due to rising interest rates on adjustable mortgages, or falling home values due to the recession. With no help on the horizon, the situation may take even longer to reverse itself.

Feel free to contact your senators, and encourage them to allow for bankruptcy cramdown.