Originator Digest

HUD has regrettably increased the annual mortgage insurance premium and soon will have succeeded in reducing the allowable seller concessions.  It's easy to know that this will have a big impact but it will actually change the lending landscape by dramatically decreasing FHA's presence in the marketplace and shifting loan volume to Fannie Mae and FreddieMac who share an uncertain future to say the least.  It will also shift loans to private mortgage insurers, most of whom are either financially anemic or are still reeling from the volatile markets of the last 2.5 years.  And it needn't be said that the private sector isn't ready, willing and able to jump into the residential housing lending market just yet.  In a time where tinkering with the housing market should be done delicately, this change will torpedo an already fragile housing market.

IMPACT ON AFFORDABILITY AND HOUSE PRICES

A buyer in Saint Paul, MN purchasing a three bedroom home at the median sales price and qualifying with Saint Paul's median household income, is going to be a harder thing to do.  Let's use these statistical examples and assume the borrower has a car loan of 330 dollars a month and a credit card payment of 65 dollars.  Currently, this is affordable.  Now that FHA has increased the annual mortgage insurance premium, this same buyer will now lose $6,500 in purchasing power and could not purchase at 151,000 dollars but rather at 145,500 or more interestingly 4.3% less of the Saint Paul median sales price (assuming market property taxes and hazard insurance rates).  So, with this change, an entire class of buyer has lost purchasing power and whenever this many people lose this kind of purchasing power, it would be naïve to think that it won't have an adverse impact on already precarious home prices.

With these changes in place, it will make more sense for nearly all buyers with a credit score of 680 or higher and debt to income ratios of 45% or lower to use conventional financing.  Firstly, private mortgage insurance will be equal to or cheaper than FHA insurance in most cases.  Secondly, there are more choices in types of mortgage insurance and means of payment with conventional financing.  Thirdly, after HUD reduces allowable seller concessions, the allure of a low down payment loan with FHA will be gone to this type of borrower (this change is a back door way of FHA increasing the down payment requirement).  Some may see a silver lining in these changes but it will have unintended consequences.

EFFECT ON BUYER'S LOAN DECISIONS AND UNFORESEEN CONSEQUENCES

Each mortgage insurance company has its own set of underwriting guideline overlays and most have their own declining markets lists.  With some, if a property is in the wrong zip code it will be subject to a loan amount cut of 5% of the appraised value or purchase price (whichever is less).  With others you won't know if a loan might get cut until the appraisal comes back.  If the appraisal comes back with the "oversupply" or "declining" box checked in the One Unit Housing Trends section, a loan officer might only know then that the loan will be cut. 

To navigate this, a loan officer must have control over the selection of their mortgage insurance provider and know their respective guidelines.  Some do but they are the best of the best.  In short, buyers, sellers and Realtors will be subject to unexpected transactional disruptions when this trend inevitably emerges.  Sadly, these transactional difficulties will happen to the very best of borrowers. 

WHICH BORROWERS WILL BE DRAWN TO FHA LOANS NOW?

Despite the changes, there will still be buyer and borrower profiles that make a match for FHA.  Here is a brief list:

• 203K rehabilitation mortgages
• HECM reverse mortgages
• Loans for borrowers with credit scores at or under 679  & with loan to values over 80 percent
• Loans for borrowers with high debt (many investors will approve FHA loans for borrowers with debt to income ratios of up to 55%)
• Loans for borrowers who either own or are buying a home in a declining market (FHA loans aren't cut if a property is in a declining market)
• FHA to FHA streamline refinances (although they are now less appealing as well)
• Loans in need of manual underwriting due to no credit or strange circumstances such as incorrect data on a credit report from an ex-spouse if the items are covered by a divorce decree

That's about it.

HAS HUD SUCCEEDED IN THEIR GOALS?

HUD's stated objective in making this change was to shore up their capital base.  The not so stated objective was to reduce their market share.  They will succeed in the latter (with a flight of high quality borrowers).  Ironically, they will fail in their stated objective.  While it may work out financially for HUD in the short term, we have to consider the long-term consequences of HUD chasing the highest quality borrowers away from their insured portfolio leaving behind an insured portfolio of loans that will have a lower average credit score, higher average debt to income ratios and the loans will be secured by housing that will be more susceptible to being in a declining market.  These soon-to-emerge portfolio weaknesses will increase the number of defaults and claims against the FHA insurance fund and, in time, this policy change will be looked back on as a disaster.  It is likely that this change is HUD cutting off its nose to spite its face.

Since mid 2007, the mortgage originator as we know it has ceased to be.  The requirements for technical knowledge, industry awareness and precision have skyrocketed to the extent that a modern day loan originator is more of an “Under-iginator.” He/she must be 50% loan officer, 15% customer service/sales rep, 5% appraisal reviewer and 30% underwriter to have any business talking to a customer about a mortgage.  As well, the role of a processor has too changed.  Some repetition-based duties have been replaced with technological automation.  While those responsibilities have gone to the wayside, the secondary mortgage market has forced the job of a processor into that of a junior underwriter.  More is now required of all.

Having clear sets of responsibilities and divisions of labor for and between loan officers and processors is one of a two part need in making sure that file follow goes as it should (or more especially, as it can).  Because of the new demands of the modern mortgage marketplace, a loan officer and processor need to understand underwriting and the underwriter’s job in order to originate and process loans.  When an underwriter, processor and loan originator all have a modicum of understanding of one another’s job, empathy is achieved and that empathy improves the “hand off” of the files in the loan cycle.  While the collective skill level of loan officers in today’s market is higher than that of 2007, more is asked of us.  The approach outlined below is good for all of us and consequently, good for the customer.

I have done all kinds of training.  Most of it is a joke.  The best underwriting training that I’ve participated in for underwriting was sponsored by Freddie Mac (outside of certification classes).  Because most loan officers are a Third Party Originator (TPO) or Seller Servicer with Freddie Mac, they can get this training for free.  HOWEVER!!!, when you schedule your class, should you not be able to make it for whatever reason, you have to formally cancel or you’ll be subject to a 50 dollar fee so make sure you attend.  Freddie Mac’s training can be found at http://www.freddiemac.com/learn/uw/.  Registration for their classes can be done here (you’ll have to set up a student ID).  When registering, be prepared to provide your Freddie Mac TPO/Seller Servicer number.  At a minimum, loan officers and processors should take the following classes:

• Documenting Acceptable Sources of Funds
• Underwriting Income and Employment
• Getting Started with Loan Prospector® – Part 1
• Getting Started with Loan Prospector® – Part 2
• Collateral Assessment Review

In lieu of doing this training, you could become a certified mortgage underwriter (CMU) from the National Association of Mortgage Underwriters (http://www.mortgage-underwriters.org/certified-mortgage-underwriter-cmu).  Some might see this as overkill but not only does it help with building a knowledge base, it also helps when dealing with underwriters.  By this designation, they will know you to be trained and credible.  Lastly, your HUD Homeownership Center will sponsor some web based underwriting training that can be worthwhile.

The other benefit of doing this is that you’ll be equipped to use what I think is the best method of origination available.  It follows this process:

1. Take accurate 1003, structure loan, price loan and run findings.
2. Look for what might kill the deal and make sure that there are no guideline violations by using the following methods:
   1. Consult co-workers
   2. Consult FNMA and/or FHLMC sellers guides (link below) – if conventional
   3. Consult HUD FHA Credit Analysis Handbook (link below) – if FHA
   4. Consult VA Credit Analysis Handbook (link below) – if VA
   5. Consult PMI guidelines (if applicable)
   6. Consult investor guideline overlays via their online selling guides
   7. IF AND ONLY IF ALL OF THESE METHODS FAIL contact the underwriter but if these methods failed don’t expect him/her to necessarily know either.
3. After you’ve followed this logical process of due diligence, make sure to notate the loan file in your LOS’s conversation log with the guideline passages, conversations, links of interest and other documentation so that other staff won’t need to do the same work twice.  Always remember that there isn’t a lot of trust in lending these days so don’t expect someone to take your word for it.  Proof is the key.
4. Collect docs and disclosures
5. Reconcile income and assets on the 1003 with documents provided by the borrower.
6. Re-run findings
7. Submit loan
8. Forget about the loan and let the processor do the rest unless absolutely needed

Each time this process is done, it gets easier to do.  It is THE MOST PRECISE way of originating and processing loans and precision makes the process go faster which ultimately serves us and the customer best.  Below, please find invaluable pre-underwriting resources and methods by which you can stay on the cutting edge of lending changes. 

Useful Underwriting Links

• Fannie Mae’s Seller’s Guide
  • https://www.efanniemae.com/is/brokcorresp/index.jsp?cred=bandc
• Freddie Mac’s Seller’s Guide
  • http://www.freddiemac.com/sell/guide/
• Fannie Mae’s Support Number
  • (877) 722-6757 (they are not very helpful)
• Freddie Mac’s Support Number
  • (800) 373-3343 (have your TPO/Seller Servicer number ready)
• HUD FHA Credit Analysis Handbook
  • http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/index.cfm
• VA Credit Analysis Handbook
  • http://www.warms.vba.va.gov/pam26_7.html
• USDA Guidelines
  • http://www.rurdev.usda.gov/regs/hblist.html  

As a mortgage professional, you must not be content to wait to hear about upcoming changes from investors; you know that you need to follow Fannie Mae, Freddie Mac and FHA.  The changes have been fast and furious over the last three years.  Browsing web pages and trade journals can be a time consuming nuisance.  They are helpful for clarification should you already have the information in your hands but I recommend the following e-mail subscriptions and RSS feeds to stay on top of things:

Fannie Mae: Fannie offers you a choice of alert types and updates to subscribe to at https://www.efanniemae.com/lc/newsletters/index.jsp.

Freddie Mac: Freddie has similar offerings at http://www.loanprospector.com/news/subscribe.html, and http://www.freddiemac.com/learn/subscribe/.

FHA: The best free resource for FHA updates would be subscribing to this RSS feedhttp://www.hud.gov/offices/adm/hudclips/whatsnew/hudclipsrss.xml (internet explorer) and the best paid subscription, in my opinion, would be Chip Cummings’ ABC’s of FHA found here http://www.fha-lending.com/.

Most have thought that this approach is overkill and that nobody will go to the trouble of making these investments of time and energy into academic pursuits.  What I have seen is that those who do make this investment end up out producing those that don’t.  Also, these loan officers have better lock pull through, underwriting pull through and better relationships with other parties in the loan cycle.  Most of all, the loan officers that take these steps seem to inspire more confidence in their clients and Realtors.  To me, that alone makes the investment worth it.

I was going to write an article on this topic but Amy Jones of ReMax in Arizona did a fine job of summarizing it.  She asks a question at the end and I chimed in this way:

"This will create new industries within an industry. 3rd party services for occupancy checks, QC policy review, loan auditing and reporting. It will add to the cost of lending. Inevitably, that will be passed on in some way in the same way the the additional costs of HVCC have been passed on to the consumer. It will also slow down the lending process just when it was beginning to speed up again. Sadly, I don't think that there will be a meaningful increase in loan quality as a product of this initiative. I am watching Freddie Mac. So far, they haven't gotten on board with a LQI initiative. They did get on board with the delivery of the appraisal data and conversion to XML but that's it so far. If they don't jump on board with this overkill, look for lenders to switch from selling to Fannie Mae to Freddie Mac (which would suit me fine because I'm a Freddie lover)."

Charles Dailey - iLoan - NMLS ID# 79048

I've written on this subject before but I want to be more thorough this time.  There have been too many articles put out lately that discourage people from contemplating a home purchase after doing a short sale.  These articles express cynicism about home sellers' financial habits and Realtors alike.  Most Realtors doing short sales know how to cover the bases for their client to make sure they're in a good position to buy a home down the road.  Further, in my area (Saint Paul, MN), nearly 39% of homeowners are upside down on their home.  Only a minority of these homeowners who would do a short sale on their home have destroyed credit.  All too often unfortunately, they are told that they won't be able to buy a new home for 2-7 years and, consequently, they let their credit go.  This assumption of a waiting period is not true and serves as harmful information to the homeowner doing a short sale.

Prior to December 16^th of 2009 there was no FHA rule prohibiting homeowners who had a recent short sale from purchasing a home.  Few took advantage of this because the lending industry was wary and wanted clarification from HUD on whether this was ok or not.  On December 16^th of 2009, HUD gave that clarity with Mortgagee Letter 09-52  which allows a people to buy a home after a short sale if "they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and the proceeds from the short sale serve as payment in full."  One caveat to this; FHA will not allow the new loan if the borrower did a short sale "simply to take advantage of declining market conditions, and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance."  When this rule came out, many thought that despite the fact that HUD allowed for a purchase subsequent to a short sale, no lenders would go along with it.  They were wrong.  Most lenders have adopted the rule as outlined in the mortgagee letter without additional underwriting guideline overlays.  

But this did not deter the naysayers.  They would assert that even if HUD and lender guidelines allow for it, the IRS would kill the deal.  It's true that a short sale can create a taxable event.  Because I am not a CPA or a tax lawyer, I will refer you to IRS Publication 4681 which explains in detail what the tax consequences can be after a short sale.  There are handy scenarios, examples and useful information of every kind.  So a buyer who has a tax lien can't buy a new home, right?  Wrong.

According to the FHA mortgage credit analysis handbook 4155.1 REV-5, 2-5 (B), a homebuyer with a tax lien is eligible for a FHA loan when, "the delinquent account is brought current, paid, otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing. Tax liens may remain unpaid provided the lien holder subordinates the tax lien to the FHA-insured mortgage. If any regular payments are to be made, they must be included in the qualifying ratios."  It goes onto read, ""Since the IRS routinely takes a second lien position without the necessity of independent documentation, eligibility for FHA mortgage insurance will not be jeopardized by outstanding IRS tax liens remaining on the property unless the lender has information that the IRS has demanded a first-lien position."  That's right.  The lien can be left unpaid and it will automatically subordinate to the new FHA loan without the need of additional paperwork.

But the naysayers are not yet done.  They will say, "Oh but with a short sale and a tax lien, their credit will be obliterated.  There's just no way they'll qualify."  All a borrower needs is a 620 middle credit score.  Some lenders (I'm not one of them), will even go lower.  I'm going to address this objection with an anecdote (and really, this is not an isolated incident - sadly, it happens more common than you think.)  I recently had an applicant pull a 622 middle score.  On this credit report was a judgment and 19 collections.  That's it.  This person had defaulted on every extension of credit ever given and still pulled a 622.  Not that an IRS tax lien and short sale aren't damaging but, come on, they far from rule anything out.

My point in writing this is to serve as a reminder that in a lot of areas nearly two fifths or more of us are upside down, may want to move and are not deadbeats.  Also, I wanted to get this out there to provide the facts to dispel the myth that homeowners who do a short sale are only welcome to take a timeout from homeownership.  This is not their only choice.  They're welcome to continuing homeownership in the same way as the rest of us, . . . . Conditionally. :)

It is inevitable that FHA will play less and less of a role in the lending market.  As this unfolds, it's critical for loan officers, Realtors and borrowers alike to understand the many options in the improving private mortgage insurance market.  In the distant days when home values were increasing, it made perfect sense for borrowers to opt for monthly mortgage insurance and wait till their home had appreciated to the point where they had a twenty percent equity position. They'd soon call their lender to get an appraisal ordered and drop their monthly mortgage insurance.  Those days are gone.  In times prior to the days where home values were increasing, there was not a diversity of private mortgage insurance products to choose from nor were there dramatic differences and complexities in the underwriting of private mortgage insurance.  Those days are gone as well.

As though there isn't already enough to know, real estate professionals need to know the differences between the mortgage insurance providers (i.e. RMIC, PMI, Radian, MGIC, Genworth, United Guaranty, Commonwealth and others).  They also must know the advantages and disadvantages of the different types of premiums.  For simplicities sake, let's just mention lender paid mortgage insurance (LPMI), borrower paid monthly, split premium and single premium.  Sadly, if you look up mortgage insurance on Wikipedia, you won't even see split premium or single premium and they make more sense than LPMI and borrower paid monthly offerings.  This typifies the problem borrower's face in today's market.

Let's start with the basics.  Here are some working definitions:

1.       Borrower Paid Monthly Mortgage Insurance - For this premium type, the cost of the monthly premium is rated by the loan to value and credit score.  Although guidelines vary between insurers and from state to state, typically, the monthly payment must be made for a minimum of 2 years and isn't droppable until the borrower has a twenty percent equity position in their home.  For this to happen through making the minimum payments and appreciation in this market,  it would be a long time before that happened.  For that reason, in this market, monthly mortgage insurance is the worst of all choices. 

2.       Lender Paid Mortgage Insurance - First one should know LPMI really is.  It's basically an insurance premium that the lender pays on behalf of the borrower.  However, this is done by offering a higher than market rate.  When there weren't tax benefits associated with private mortgage insurance or a diversity of mortgage insurance products in the marketplace, LPMI had its role.  These days, that role is minimal at best.  There are instances where it makes sense but they are so few that they aren't worth mentioning.

3.       Split Premium Mortgage Insurance - This is the newest of the offerings.  It works similarly to FHA mortgage insurance premiums.  A portion of the overall premium is paid up front (by a borrower or seller) or it can be financed into the loan and in exchange, the amount of monthly mortgage insurance is reduced.  Not all insurance providers offer this product and it really should only be used when single premium mortgage insurance is not an option due to excessive costs or something of that nature.

4.       Single Premium Mortgage Insurance - In most, and I dare say nearly all cases these days, this is the best option.  This is where there is a fee paid one time and it eliminates any monthly mortgage insurance and does not adversely affect the interest rate.  And that's it.  One time and it's gone.  In nearly all cases, where a borrower has a middle credit score of 680 or better and a loan to value of between 80.01% and 95% (assumptions apply to the market as of the date of this article), this premium will pay for itself in approximately 24 months.  Sometimes it takes a little longer and sometimes it takes less time to pay for itself but it's usually approximately 24 months.  This single or one time premium can be paid by the borrower, a seller and in some cases financed into the loan.  A common misperception is that a seller can't pay for more than 3% towards closing costs.  This is only true for loans with loan to values greater than 90%.  For loans with loan to values between 80% and 90%, the seller can pay up to 6% towards closing costs so the premium can often be worked into the seller concessions in a purchase agreement.

Between the middle of 2007 and the 4^th quarter of 2009, private mortgage insurance premiums rose and guidelines were tightened.  That trend has reversed.  For the private mortgage insurance companies, getting the word out that their products have improved has been difficult at best.  PMI even went to the trouble of creating an online calculator to show how much cheaper private mortgage insurance is when compared to FHA's mortgage insurance premiums (particularly how much cheaper single premium insurance is).  The sooner real estate professionals are aware of this trend; the better the public will be served.

Always shop for mortgage insurance!  This is a big one.  I don't know of a meaningful mortgage insurance company that doesn't have an online mortgage insurance calculator.  Not only are there definite price differences between premium types but there are different prices between mortgage insurance providers.  Most borrowers spend less time shopping for a mortgage than they spend shopping for a car and they spend most of that time evaluating rates and closing costs when, often times, they'd save more money shopping for mortgage insurance.  These mortgage insurance calculators can tell a borrower which vendor they want for their transaction even in the event that their loan officer doesn't counsel them on the choices.

Another misperception is that the mortgage broker, mortgage banker or banks dictate who the mortgage insurance company will be.  This is only partly true.  If a mortgage broker is arranging a loan for a borrower through say, AmTrust, they can request mortgage insurance from MGIC or RMIC (and perhaps others).  A mortgage banker or correspondent lender is rarely only setup with one mortgage insurance company.  And rarely would a bank be captive to one insurer.  So, a borrower can and should shop for their mortgage insurance company and ask for them by name when they are asking for quotes on interest rates and closing costs.

A lot has changed in the housing market and those changes have changed the private mortgage insurance market.  Get to know your split and single premiums, shop for your private mortgage insurance and lose your belief that FHA is the high loan to value loan of choice (as far as I'm concerned, it's the loan of choice for borrowers with lower credit scores, rehab loans and buyers who just had a short sale and that's about it).

Click here to shop for private mortgage insurance using these online calculators!

In my home state of Minnesota, Minneapolis and Saint Paul have nearly 39 percent of homeowners under water.   I've had the question, "I'm upside down on my home, what are my options?" so many times that I wanted to prepare a menu of options for people to reference.  This article briefly outlines 9 potential solutions that may serve you well.  The target audience here is not necessarily someone who's in default on their loan but simply one who owes more than the home is worth.

All too often, when one is upside down on their home and/or struggling with their mortgage, they reach out for one to three options that they may have heard about on the news or from a friend.  What homeowners should be doing is seeking the advice of qualified real estate agents, real estate attorneys and a skilled loan officer.  But, . . . before a homeowner picks up the phone, there's a lot of homework to do!  Before one calls the professionals, they'll just be spinning their wheels until the following items are ready:

1. Know your address.  You may know it to be one thing but for these purposes, your address is whatever http://www.usps.gov/ tells you it is.  So go to this website, click on "find a zip code" and type your address.  The postal service will then give you the address it has registered for you.  This is the address that Fannie Mae and Freddie Mac use so it would serve you well to do the same.
2. Collect your financial documents.  Whether you're working with a loan officer on a loan, a Realtor on a short sale or an attorney on a bankruptcy or modification, they'll all need a complete set of your financials.  This includes 09 and 08 tax returns, W2's and 1099's.  If you're self employed, you'll need 2009 and 2008 tax returns from your business.  If you haven't filed your 09's, get it done.  You'll also need copies of your most recent paystub, most recent bank statement, most recent statement on any retirement accounts, and a copy of a mortgage statement on each mortgage you have.  Getting these documents scanned to image documents such as Adobe Reader can really speed things up.
3. Collect your legal documents.  It would be wise to, at the very least, have a copy of your mortgage note.  If you are planning on meeting with an attorney, it would be much better to have your entire closing package.  This should have been provided to you by the title company that closed your loan.  Again, getting these documents scanned to image documents such as Adobe Reader can really speed things up.
4. This isn't necessary, but it's wise.  Get a copy of your credit report at http://www.annualcreditreport.com/ (this site is truly free and not a scam).  Knowing the content of your credit will help you write letters of explanation if you're doing a mortgage loan or a hardship letter if you're doing a short sale.

Getting this done is arduous but it will prove invaluable to those you ask for help.  Now you're ready for that menu of options:

1. Fannie Mae DU Refi Plus - If your loan is owned by Fannie Mae, you may be entitled to refinance up to 125% of your home's value.  You can get a loose idea of what your home is worth at http://www.cyberhomes.com/.  To see if your home is owned by Fannie Mae, go to http://loanlookup.fanniemae.com/loanlookup/ and enter your address as it appeared at http://www.usps.gov/.  If it is owned by Fannie Mae and you owe less than 125% of the value of your home, you may be eligible for this loan.  The rates are slightly higher than normal advertised rates because of pricing add ons but they are close enough to market rates to be a heck of a deal.
2. LP Open Access - If your loan is owned by Freddie Mac, you may be entitled to refinance up to 125% of your home's value.  You can get a loose idea of what your home is worth at http://www.cyberhomes.com/.  To see if your home is owned by Freddie Mac, go to https://ww3.freddiemac.com/corporate/ and enter your address as it appeared at http://www.usps.gov/.  If it is owned by Freddie Mac and you owe less than 125% of the value of your home, you may be eligible for this loan.  The rates are slightly higher than normal advertised rates because of pricing add ons but they are close enough to market rates.  This program will not let you finance more than 5 thousand dollars in closing costs and prepaids so if your settlement charges exceed 5 thousand, be prepared to bring cash to closing.
3. FHA 115% Write Down Refi - This one doesn't have a name yet so I just made that up.  It's a complicated program and I'm not sure how successful it will be.  Essentially, if you're refinancing a non-FHA loan, you'd take a loan out at 97.75% of your home's value.  A balance may be subordinated to the first mortgage thus becoming a 2^nd mortgage but that loan may not exceed 115% of the homes value.  For any of this to happen, the existing lender/s must write down their loan balances by at least 10%.  Here is the announcement for this program.  You must be current on your mortgage to qualify for this loan.  A history of late payments will likely disqualify you for this loan.
4. FHA Short Refi - This one is a little simpler.  Essentially, you get preapproved for a 97.75% loan to value FHA refinance.  This loan will support a certain amount to be paid to your existing lender.  Whatever the loan can't support, assuming you can't come up with the difference in cash, will have to be written off by your existing lender.  You'd be surprised how many lenders are willing to do this (I know I have been).  This was officially permitted by HUD in December of 2009.  You must be current on your mortgage to qualify for this loan.  A history of late payments will likely disqualify you for this loan.
5. Modification - You do not necessarily have to be in default to get a loan modification.  If you've had any kind of hardship (i.e. involuntary reductions of income or unavoidable increase in expenses that indicates that you might go into default and you feel that you owe so much on your home and at such poor terms that you're losing your incentive to repay, that might be enough to qualify.  Many people have their own opinions on this and I don't assume that mine is the best but I don't recommend contacting your lender directly as a starting point for a modification and I don't recommend calling a pay for hire service either.  I recommend calling 1-888-995-HOPE (4673) to speak with a HUD approved counselor for free.  They will conduct an interview and serve as an initial intermediary between you and your lender.
6. Chapter 11 Bankruptcy - It's expensive, it's a long and hard process but unlike Chapter 7 and Chapter 13, a judge can order a mortgage modification under a Chapter 11 bankruptcy plan.  It is the most flexible type of bankruptcy and is thus difficult to explain.  Consult an attorney with specific Chapter 11 experience.
7. Deed in Lieu - This is where the owner of a property deeds the property back to the lender to avoid foreclosure.  Obviously, this only makes sense if you want to get out of the situation quickly and don't want the house anymore.  I highly recommend the assistance of an attorney in this to ensure that the act of deeding in lieu serves as payment in full of your mortgage to prevent both damage to your credit and the potential of deficiency judgments. 
8. Short Sale - A short sale is where a homeowner and lender cooperate to sell a home in a situation where more is owed on the home that the house is worth.  The buyer and their Realtor prepare the home for sale and market it and in exchange, the lender writes down the balance of their note to facilitate the sale.   It is less costly that foreclosure so lenders are typically willing to do this.  Often times, with the help of a good Realtor, damage to your credit can be ameliorated.  When choosing your agent, make sure they have a lot of past experience with short sales, are aware of what is changing in short sales and, preferably, they have done short sales that involve your current lender.
9. Foreclosure - Now I hesitate to even mention this but a fact is a fact.  Foreclosure is an option.  If you're upside down and you can't make your payments, sometimes you just have to let go.  Too many people think the sheriff's sale is the end.  It's just a step in the process.  Although it varies by state, foreclosure is usually a 9 month process.  So, 9 months of living there and then you move out.  It's an ugly option. . . but it's an option.

When we are under stress, we often reach for the first or easiest option that might get us away from the cause of that stress.  In the case of the underwater homeowner, that can be a huge mistake.  Few know how many options they really have and, if these options are weighed carefully, they can learn that with some effort on their part and the help of qualified professionals, they can get away from their problem with a good solution in hand.

Please remember that all four of these loan types are very difficult and consequently, you'll need an excellent loan officer.  Managing your legal risk in a deed in lieu situation or conducting a Chapter 11 requires a seasoned and sophisticated attorney.  Proper execution of a short sale is both a science and an art so, if that's the route you take don't make a quick decision on a Realtor.  Just because they advertise as a short sale expert doesn't make it so.  Choose your professionals wisely, be deliberate in choosing the solution that you want and be organized and you'll find that you're closer to being stress free again than you think.

My heart goes out to you for your situation and, . . . if misery loves company, . . I'm right there with you!