06/27/2011 04:09 pm ET | Updated Aug 27, 2011

Are You Draining Your Nest Egg to Stay Afloat on an Underwater Mortgage?

One out of every five Americans spends more than s/he earns, according to FINRA, and 38 percent of Americans with home-equity loans are underwater. There have been 9.3 million foreclosure filings since 2007 and 2011 could be another record-breaking year of foreclosures. According to James J. Saccacio, chief executive officer of RealtyTrac, "Data from the Mortgage Bankers Association shows that about 3.7 million properties are in [a] seriously delinquent stage." Clearly, a large number of Americans are in trouble.

So, if you are one of those seriously delinquent homeowners, or one who is draining your nest egg or tapping home equity to make the mortgage payments, is there a way to hang on long enough to reach the promised land? Or should you abandon ship, swim to shore and start all over? Below is a sobering look at seven available options for homeowners who are underwater on their loans, with resources and tips from experts in real estate.

1. Hanging On
2. Selling to a Friend
3. Loan Modifications
4. Short Sales
5. Foreclosures & Bankruptcies
6. Tapping Your Retirement Plan.
7. Recovering Your Credit Rating.

1. Hanging On.
May prices, on a nationwide basis, are down another 5% this year over last, according to Dr. Lawrence Yun, the chief economist for the National Association of Realtors. Certain areas, like North Dakota, Alaska, many parts of Texas and Washington D.C, are seeing a local renaissance in home prices, largely because the job market is stronger. So, look to the local economy for signs of when real estate will recover in your neighborhood. If the math makes sense for another 2-5 year horizon (at some point, retirees should start snatching up bargains in some of the most distressed areas) then hanging on could be an option for you.

2. Selling to a Friend.
Think that you should short sale to a friend, who can then sell your property back to you in a few months for a more reasonable price? According to Pamela D. Simmons, a partner with the Law Office of Simmons & Purdy, who is an expert on mortgage lending law, you could be risking jail time. In the short sale process, you have to list your home on the open market and sign papers declaring that you have not used a straw buyer. If you lie, that's fraud.

3. Loan Modifications.
Buyer beware. There have been far too many distressed homeowners who put their faith in a company that promised them the moon and the sky, after a rather substantial upfront fee, only to be ripped off. Don't trust fee-based strangers, especially when the advice you need is available from HUD-approved counselors for free at If you received a loan modification a few years ago, you could qualify again at even lower interest rates. So, this is an option to consider, especially if you've done the math on hanging on and determined that this is your best course going forward.

4. Short Sales.
Some short sales come with hidden terms that could Shark Attack you while you're trying to swim away. According to Simmons, "Lenders have become rather sophisticated in making it sound like they are going to release you from liability on the loan, when in fact, they are going to release the security interest, meaning the property, but they are not releasing you from the liability." After you complete the short sale, the shortfall is then sold to a debt collector who comes after you to pay it. In order to protect yourself, be sure to have an attorney with a strong background in real estate review the short sale document to ensure that you are being released from all liability and that the account is being closed.

5. Foreclosures and Bankruptcy.
Let's take the case of Roger, who is a semi-retired widower, who has two grown children with young families. Roger was lonely and got sucked into seminar land, where he was convinced that if he purchased real estate, he could flip the property for a profit and become a multi-millionaire. Roger got stuck with five houses in Las Vegas that are worth half the price he paid. His ARMs reset and for the money he is spending each year, he could buy two homes for his kids free and clear. The banks refuse to work with him because he has a lot of money in his retirement plan. So, should Roger use his retirement funds to pay his mortgage - even if that strategy will only last a few years before his retirement funds are completely depleted?

6. Tapping Your Retirement Plans.
As Pamela Simmons counsels, "If you are using debt to pay your mortgage, you really need to stop." Why? Simmons says, "No matter what happens, you can almost always count on being able to protect your retirement fund from the lien holders. So why would you want to spend that money?" The truth is that your nest egg may be the only lifeboat you can row away with, if you purchased more home than you can afford, at the top of the market. If you're underwater on a mortgage and struggling to survive, the last thing you want to do is to give up your lifeboat. If you can't afford the home, face reality. Don't go through all of your retirement money, rack up additional high interest debt and completely bankrupt yourself.

7. Recovering Your Credit Rating.
A few years ago, anyone with a heartbeat and the willingness to lie on a no-doc, no-down loan could access enough credit to buy a home. Now, the richest person on the planet might have a problem borrowing money from a bank. As Steve Dietrich, President of Financial Research Group, points out, "It is hard to say what the future is going to hold in terms of credit. Probably, however, it might take 5-7 years before you could repurchase a home [after a bankruptcy or foreclosure]." Then again, if you've got enough money in your retirement account, you might be able to pay cash.

Losing a home to foreclosure is one of the hardest decisions you'll ever make. Short-selling is a risky process that might not get rid of the problem. Tapping your retirement plan or taking on more debt is a no-no. And your best bet for a loan modification is available for free at Once you have the facts, you can and must do a serious evaluation of the best course for you, including putting the option of the unthinkable on the table.

Go to to listen back to the complete radio show that I hosted with Pamela Simmons and Steve Dietrich, on June 8, 2011. This show is available 24/7 streaming on demand, or by pod cast. So be sure to share this article and link with your friends (and with Roger).

Natalie Pace is the author of You Vs. Wall Street. She is a repeat guest on Fox News, CNBC, ABC-TV and a contributor to,, and As a philanthropist, she has helped to raise more than two million for Los Angeles public schools and financial literacy. Follow her on and on For more information please visit