The Deep End: Homeowners who owe more than their house is worth feel brunt of tough economy

Jeff Catlin is growing weary of treading water to keep his modest three-bedroom home in Pfafftown.

He owes more on the house than it's worth, and he's been waiting nearly 10 months for a life preserver -- final approval of a home-modification mortgage plan from Saxon Mortgage Co.

The plan went into effect temporarily in May, lowering the interest rate on his home from a 9.5 percent adjustable-rate mortgage to a 6.375 percent fixed-rate 30-year mortgage.

But before the plan could become permanent, Catlin's job in the parts department at Pace Airlines Inc. was eliminated as part of the company's collapse in September. Saxon decided soon after it needed more time to evaluate Catlin's financial status, but kept the interest rate drop in place.

The difference for Catlin seems modest -- about $160 a month. But for Catlin and his mother, Jeanette, it could be the difference between staying in the home he bought in 2003 and scrambling for shelter.

"We've always lived paycheck to paycheck," Catlin said.

"With the economy being the way it's been, with having to take pay cuts and my former employer going under, it's been really rough, emotionally and financially."

The Catlins are not alone in being "underwater," or owing more on their mortgage than the house is worth. In their instance, they owe a combined $112,000 for a first and second mortgage on the house, which is valued at $82,000.

According to a study by First American CoreLogic, a real-estate research company in Santa Ana, Calif., 10.7 percent of residential properties in the Winston-Salem metropolitan statistical area, or 10,828, are underwater or "upside down" with their mortgage.

Nearly an additional 5 percent, or 4,895, are teetering on the brink. The data for the MSA, which consists of Davie, Forsyth, Stokes and Yadkin counties, was as of Dec. 31.

"Negative equity is a significant drag on both the housing market and on economic growth," said Mark Fleming, the chief economist with First American. "It is driving foreclosures and decreasing mobility for millions of homeowners."

According to First American, 11.3 million households nationwide are underwater, with another 2.3 million also on the brink.

"Since we expect home prices to slightly increase during 2010, negative equity will remain the dominant issue in the housing and mortgage markets for some time to come," Fleming said.

Catlin said that part of the insult regarding his family's mortgage situation is that Pace owes him $6,050 in back pay. Although employees were not paid for up to their final six weeks of work, they were worried that Pace management would fight their unemployment claims if they quit.

Local U.S. bankruptcy officials have encouraged former Pace employees to file wage claims as part of the involuntary Chapter 7 case involving the company, which went out of business because of mismanagement, costing about 300 local jobs.

After drawing about $300 in weekly unemployment benefits in recent months, Catlin has landed a job that pays less than his Pace salary, but comes with insurance benefits.

"All it would take is one more mishap, one more piece of bad luck, to put us out," Catlin said. "We're just holding our breath that the mortgage company doesn't come back to us and say, ‘We're sorry, but we can't work with you anymore.'

"In that case, the home goes back to the adjustable rate interest that we can't afford."

In some instances, a home becoming underwater is the last step before foreclosure begins.

In January, there were 4,561 homes in the foreclosure pipeline in the Triad and Northwest North Carolina, including 1,162 in Forsyth County, according to RealtyTrac.com. Banks and lenders own 83 percent of those properties in the 14-county area.

Last week, the federal government extended the Home Affordable Refinance Program through June 30, 2011. The program, which is not mandated to lenders and mortgage servicers, allows borrowers who owe up to 25 percent more than their homes are worth to refinance to lower interest rates.

The initial projection was that the program would help up to 5 million homeowners who had loans owned or guaranteed by Fannie Mae and Freddie Mac. However, the U.S. Treasury Department said it has helped only about 220,000 homeowners.

Among the obstacles are borrowers being too deep in debt to qualify, lenders needing to update their computer software to process claims, and holders of second mortgages and private mortgage insurance slowing down the refinancing process. The N.C. Banking Commission said in January that foreclosures could rise as much as 20 percent in the state this year.

Many foreclosures from 2005 to 2008 came from subprime mortgage loans and homeowners who couldn't adapt when their adjustable-rate mortgage increased. Subprime loans are directed at people who do not qualify for lower interest rates through traditional banks or mortgage groups.

"You would find higher levels of underwater homes in places where there was a lot of high loan-to-home-value and low down payment lending, as small changes in home prices tip a loan over 100 percent in loan to home value," said Mark Pearce, the state deputy banking commissioner.

Dan Kornelis, the director of Forsyth County's housing department, said he has not observed many local homeowners walking away from their homes -- in effect turning the residence back to the lender -- because they believe they are too underwater financially to recover.

That strategy has become increasingly popular in states with very sour housing markets, such as Arizona, California, Florida and Nevada.

Kornelis said he believes most local residents, particularly first-time homeowners, will continue to battle if they are slightly underwater. "If they are 25 percent or more underwater, that's another thing," he said.

Carol Newman, the wife of former Pace employee Art Newman, said they struggled to qualify for a loan-modification program that is providing a $60 monthly reduction in their mortgage. They began pursuing the program in February 2009.

"It only took a complaint to the N.C. Commissioner of Banks and numerous letters and phone calls, not only from us but also our counselor at Consumer Credit Counseling of Forsyth County, to get Bank of America to agree," Carol Newman said.

In the past week, however, the Newmans received notice from the bank that it is raising their payment by $20 a month to build up their escrow account for taxes.

"Our house is not worth what we owe on it due to the housing market," Newman said. "Our credit counselor has advised us to try again for another modification. We do have that on the back burner at this time. We're looking at all our options."

rcraver@wsjournal.com | 727-7376

Struggling households

The Winston-Salem metropolitan statistical area of Davie, Forsyth, Stokes and Yadkin countries has the second highest percentage of homes considered as "underwater" among the state's largest metros. Being underwater means the homeowner owes more on the mortgage than the home is currently worth.

Metro area - Underwater - Nearly underwater

Charlotte-Gastonia-Rock Hill - 13 percent (47.560 households) - 9 percent (33,100)

Durham - 7.2 percent (6,474) - 4.9 percent (4,400)

Greensboro-High Point - 10.1 percent (14,445) - 6 percent (8,482)

Raleigh-Cary - 7.2 percent (17,892) - 6.6 percent (16,540)

Winston-Salem - 10.7 percent (10,828) - 4.9 percent (4,895)

Note: Data as of Dec. 31, 2009

Source: First American Core Logic