Underwater mortgages are those situations where the homeowner is said to hold “negative equity” in his property — he is “upside down” — because he owes more to the lender than he can get if were to sell the property.

Which makes it tempting for many to consider what to do about this situation: should they walk away from it or keeping making a monthly mortgage payment that has no realistic correlation to the amount that they could hope to get in a sale of the property?

In last month’s Miami Herald, several Florida homeowners gave real-life examples of being underwater, or upside down, in their mortgages.  In an article written by Toluse Olorunnipa entitled, “The curse of negative home equity,” a real estate agent was interviewed who owned a Coconut Grove condo with a $230,000 mortgage where units in her building are now selling for $80,000 and a Highland Lakes homeowner who owned a lakeside home he purchased for $550,000 and which now has a fair market value of less than $330,000.

These are just two examples of how bad things are for some Floridians.  In yesterday’s Gulf Coast Business Review, it’s estimated that 2,100,000 Florida homeowners hold underwater mortgages.  That’s almost half (47%) of all Florida mortgages.  In Broward County alone, reports the Sun-Sentinel, 51% of current mortgages are underwater.

Underwater mortgages are a national crisis – it’s not just Florida that’s hurting.

Florida isn’t alone.  This is a national economic crisis that is causing a national response and public outcry.  For example, the Iowa Citizens for Community Improvement have just issued a news release where they announce joining with fellow organizers in Florida and the remaining 48 states involved with the National People’s Action (NPA), PICO, and the Alliance for a Just Society to try and find solutions to the problem.

This week, these underwater mortgage activists will meet with the Attorneys General from all 50 states during the March 2011 meeting of the National Association of Attorneys General. Their goal will be to force action in the form of changing state laws across the country to deal fairly with this growing problem:

“A $20 billion settlement [between the State and the mortgage lenders for foreclosure fraud] is chump change compared to $3 trillion in underwater mortgages,” said Deacon Mike McCarthy, an Iowa CCI member from Des Moines. “This settlement must be in the hundreds of billions of dollars and must include mandatory principal write-downs for underwater homeowners. If that’s not good enough for the big bank CEOs, then they should be prosecuted in criminal court for defrauding the American people.”

What does Florida Law provide to help those with Underwater Mortgages?

Under Florida law, a mortgage transaction is made up of two legal documents – the note and the security interest – and those documents are governed by several provisions of Florida Statutes relating to contracts, promises to pay (e.g., the note), usury, security interests (e.g., the mortgage), recording, just to name a few. However, none deal with underwater mortgages.  Until rules and/or laws are passed or  adopted by the Florida legislature to deal with the underwater mortgage crisis, the fact that homeowners are facing being upside down has no special legal remedy.

Florida law does not have a special set of laws (yet) designed to deal specifically with this recent economic development of widespread underwater mortgages.

Which means that there are continuing news stories about lenders who have failed to respect longstanding Florida real estate law only to face the dire consequences of wrongful foreclosure.  A few examples:  law firms being investigated by the Attorney General for illegal acts; lawyers who have represented banks being held in contempt; banks being ruled to have improperly foreclosed, leaving the title with the defaulting homeowner and a lawsuit for damages by the unsuspecting buyer(s).

It also means that until things change, borrowers must respect longstanding Florida contract law or face the consequences of failing to do so, including deficiency judgments against them brought by the banks.  Under contract law, the fact that the fair market value of the home has dropped doesn’t matter: the contract still requires that monthly mortgage payment be paid.

Searching for Solutions: Strategic Defaults, Loan Modifications, Short Sales

In Florida and elsewhere, everyone involved want (and need) relief from this bad financial situation with few legal options open to them.  This is a serious issue among those tempted into “strategic defaults” by sites like “YouWalkAway.Com” where upside down homeowners are coached on how to default on underwater mortgages regardless of their ability to continue paying their note.  To lenders a strategic default means a breach of contract lawsuit against the homeowner for the remaining loan balance.  Strategic defaults are not clean legal solutions to an underwater mortgage and short sales can be arduous.

One answer appears to be the loan modification programs touted by the government, where the lender and the borrower negotiate a new deal between them along with government involvement.  The old contract is amended, and a new note (contract) is entered into that more accurately reflects the current market value of the property.  However, loan modification programs thus far have been less than stellar; the possibility of private lender settlements may become a more successful route for the homeowner to escape an underwater mortgage.

If you are underwater on your Florida mortgage, make careful decisions.

Any homeowner with an underwater mortgage must consider whether or not it’s time to walk away each month as he makes that monthly mortgage payment.  This is true whether or not the mortgagee is financially distressed and not able to afford making the high payments due to life events (loss of job, illness, divorce, etc.) or whether or not the homeowner can afford the payment but wonders how financially savvy it is to continue paying a note that does not have any reasonable correlation to its corresponding security interest.

No matter where any Floridian is on the continuum, the ramifications are serious and sometimes life-altering no matter which route they choose.  Stay put, seek a modification, short sale, opt for default: all these alternatives have serious legal and financial consequences.  It’s very important to seek legal counsel before any action is taken, especially in today’s chaotic state of affairs.  If you are underwater in your Florida mortgage, then it’s very important to get expert third-party advice before you take action.