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.

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.

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?

And the #1 reason they walk away is because they owe more than the home is worth.

And according to the latest research, the larger the negative equity, the higher the chance of someone defaulting on their mortgage no matter what their credit score is.

According to a story in the LATimes regarding the Strategic Default problem:

But research by three academics suggests that the willingness of people to default depends largely on just how far underwater they are. Or, as the study’s authors put it, “People default because of the size of their negative equity, not just because they cannot afford to pay.”

And when the shortfall is between 10% and 20% of their home’s value, Luigi Zingales of the University of Chicago, Paola Sapienza of Northwestern University and Luigi Guiso of the European University Institute found that just 5% of the owners they sampled would quit. Even when the difference reaches 50%, only 17% said they would throw in the towel.

And it appears that at least one factor when making the decision to default or not when you can afford your mortgage is how many of your neighbors are doing it.

Then there is something the study’s authors call a “multiplication effect,” meaning that the social pressure not to default is weakened when the borrower lives in an area with a large number of foreclosures. The predisposition to run away increases with the number of foreclosures in the same ZIP Code, the study found.

Lastly, many homeowners are finding that the banks are “just asking for more foreclosures” because they are not working with homeowners as much as they could.

Deede Wockenfuss of CybrSold Concepts in Chandler, Ariz., has had several clients who tried to no avail to work with lenders to get their loans modified. “The bank is asking the borrower to default,” she said.

When push comes to shoving your loved ones out the door, Bob Hunt of Keller Williams O.C. Coastal Realty in San Clemente says the moral duty to protect your family outweighs the moral duty to repay the loan.

Regardless of whether someone can afford to pay their monthly mortgage payment, one thing is clear: the more that their house is “under water” the greater the chance is of them defaulting.

No matter where they live.

Economists now say unemployment is contributing to more people becoming delinquent on mortgage loans than sub-prime mortgages. Unemployment in the U.S. is currently at 9.8%, and more people are expected to lose jobs. Just this week, Johnson & Johnson announced it would cut up to 7% of its workforce, or about 8,000 jobs.

Although mortgage loan modifications have helped some homeowners, a new study from the Federal Reserve Bank of Boston says many mortgage lenders believe that they will recover more from foreclosures than from modified loans. That’s because about 30% of homeowners who are behind on mortgage payments are able to begin paying again without help from a mortgage lender.

The Fed study also says about 30% to 45% of people who have mortgages modified are likely to end up missing payments again. Loan modifications simply postpone foreclosure for some people, the study says, and mortgage lenders end up recovering less money when those homes eventually end up in foreclosure.