Raise your hand if you bought a house in the mid-2000s.

Wow! That’s a lot of people.

Now, raise your hand if your house is worth as much (or more) than you paid for it.

It’s OK. I’ll wait.

Anyone?

Right. That’s what I thought.

Don’t feel bad. Anyone who bought a house in the past three or four or even five years is in the same boat. And it’s sinking. Fast. I hate to be the bearer of bad tidings, but even though the mainstream media is trying to say that we’ve hit bottom and that (HOORAY!) all is on its way back to recovery (I keep expecting to see rainbows and unicorns thrown in with those stories), that situation isn’t likely to change anytime soon.

Case in point, a recent study by First American CoreLogic (a group who spends all its time studying such things), which indicates that home values likely won’t start to break even — meaning that they’ll actually be worth the amount for which you’re mortgaged — until at least 2015. In some areas, like Detroit and Las Vegas, which have been particularly hard-hit by this economic freefall, that point mightn’t be reached til closer to 2020. That’s another ten years, folks.

The days of using your home’s equity for those unexpected expenses, like, say, college tuition, medical expenses, a special vacation, or (GASP!) even a few home improvements are gone.

So, what to do?

An excellent question. One option is to just lie in the bed that was made for you. When you bought your home, you agreed to make the payments. That, as they say, is what it is.

Lots of people are opting to, simply, get the heck outta Dodge by performing a “strategic default.” What this means is that they’re simply handing over the keys to their home and returning it to the bank — even if they’re not having trouble making their mortgage payments. Many people feel that they’re simply throwing good money after bad, so they’re getting out.

This may or may not be a good idea.

With a strategic default, there are many things to consider. How will it affect your credit score is something to think about. Though the mar upon your credit will, eventually, heal itself, it’s something that you’ll carry with you for years. Years. During that time, you likely won’t be able to finance a car, get a credit card, or do anything that requires a credit check. Further, depending on which state you live in (and I’m not talking about “denial” here), your lender may be able to pursue you for the unpaid balance on your loan. Be sure to check with an attorney prior to taking any action.

Another option is to look into a loan modification. While the process is a bit cumbersome, OK … very cumbersome, it’s worth the call to your bank. It’s possible that you won’t qualify, but if you do, you could stand to have your interest rate lowered, your monthly payment lowered, or even the principal on your mortgage lowered (or all three!) I won’t get into any arguments about what is or isn’t fair, but taking advantage of the HAMP (Home Affordable Modification Program) or HAFA (Home Affordable Foreclosure Alternatives) programs is a great idea if you’re approved.

Yes. Being underwater stinks. On ice. It’s up to you to decide whether you’re gonna sink, or whether you’re gonna swim. As for me, I’m heading out to get a snorkel.

An interesting idea – if you lose your job and are collecting unemployment, you don’t have to make a house payment for up to 9 months.

That is a proposed plan by Bank of America as one possible solution to the problem of high unemployment and struggling homeowners.

The catch under this plan is that if you don’t get a job within 9 months and start making your house payment again, you agree to sign your house over to the bank in exchange for up to $2,000 to move out of the home.

This plan isn’t official yet — it still needs regulatory approval and there is no telling whether that will happen or when it will happen.

Would the plan be popular with homeowners if approved?

Possibly.

According to the Charlotte Observer:

“It’s something I would have done,” said Bill Sagy, a Bank of America mortgage customer laid off last June from his management consultant position. “That would definitely have worked.”

Instead, he spent months working with the bank for reduced payments that he thought would become a long-term modification. But that didn’t happen, making him one of a growing group of homeowners who spent scarce resources that didn’t ultimately save their homes.

Sagy’s Huntersville home, which he bought for $253,000 in 2006, has shed value and is unlikely to sell for what he owes. Without a modification, he’s behind on payments and says the bank wants to foreclose.

“It’s so frustrating,” said Sagy, who with his wife is considering relocating.

Will the plan work? I don’t know for sure, but I have to give Bank of America credit – at least they are trying to come up with something that will work.

The more a homeowner is underwater on their mortgage, the more likely it is they’re going to walk way from their loan despite their credit score, as Justin McHood recently wrote here at Mortgage Loan Place. 

Now, a University of Arizona law professor has a controversial take on strategic defaults, going so far as to suggest that homeowners should default on their mortgages and not feel bad about it.

“Millions of U.S. homeowners could save hundreds of thousands of dollars by strategically defaulting on their mortgages,” writes Brent T. White in his paper, Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis. “Homeowners should be walking away in droves. But they aren’t.”

White says many people continues to pay on their mortgage loans because they are concerned about the shame and embarrassment that comes with defaulting and going into foreclosure. He also says that a person’s credit will take a big hit after going through a foreclosure, but that shouldn’t keep him or her from strategically defaulting. 

“But assuming one had otherwise good credit, and continues to meet other credit obligations, one can have a good credit rating again – meaning above 660 – within two years after a foreclosure,” he writes.

He even advises people to make large purchases, such as a car, another home, or other items they need to set up a new residence. ”Most individuals should be able to plan in advance for a few years of limited credit.”

Of course mortgage lenders and many others disagree with White’s advice. ”Borrowers who walk away from their mortgage obligations face serious consequences,” Fannie Mae spokesman Brian Faith told the Washington Post.  “There’s a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community.”

What do you think? Is White’s advice urging homeowners to strategically default irresponsible?