The Obama administration's plan to stave off foreclosures could fall flat in California, where nearly one-third of mortgage holders are underwater on their loans -- many of them by amounts that would disqualify them for government-sponsored refinancing.
The problem is likely to be especially acute in areas like the Inland Empire, where homes have lost more than 40% of their value in the last year and nearly half the homeowners owe more on their loans than the properties are worth.
"They're underwater by six figures in many cases," said Greg McBride, a senior analyst with Bankrate.com. "Many homeowners in Southern California are left to twist in the wind."
Under the Obama plan, people who are current on their mortgages could obtain new loans with lower rates for as much as 105% of the value of their homes. That means people could borrow $315,000 against a home worth $300,000.
The problem is that in California, many people owe far more than 105% on their homes, McBride said.
The second part of the administration's plan would pay cash and fees to mortgage companies to encourage them to modify homeowners' loans so their payments are no more than 31% of their incomes.
But to get a modification, you have to be able to make payments -- which usually means having a job. That could also be a problem in California, where the state unemployment rate was 10.1% in January, compared with 7.6% nationwide.
Melanie Eslava of Glendale is an example of someone who would be left out of both parts of the Obama program.
Eslava, 28, bought her two-bedroom, 1,100-square-foot condominium two years ago for $385,000. She put no money down, so when the condo lost value, she instantly owed more than it was worth. At first it didn't matter because Eslava had a good job as a software saleswoman. Then she was laid off.
When Eslava tried to sell the home, the best offer was $285,000, far less than she owes. That kicks her out of the group of people who can refinance under the program because she is too far underwater. Because she doesn't have a job, Eslava can't qualify for the loan modifications either.
The need for the plan was reinforced by a report from the Mortgage Bankers' Assn. on Thursday that found that nearly 12% of U.S. homeowners were in arrears on their loans or in foreclosure. The numbers were even worse in battered states such as California, where 13% of homeowners were behind on their payments, and Florida, where 20% were late.
It was the highest level of distress ever recorded by the trade group, whose numbers go back to 1972.
Areas like California's Inland Empire and Central Valley are suffering from all three factors hurting the housing market, said Jay Brinkmann, the mortgage group's chief economist: high levels of subprime and exotic loans, overbuilding of homes during the boom and surging unemployment.
Unemployment is driving the latest wave of delinquencies, as so-called prime borrowers -- the ones with good credit -- lose their incomes and fall behind on payments. That bodes ill for the second prong of the Obama anti-foreclosure plan, an aggressive effort to offer new incentives to mortgage lenders and servicers to modify the terms of loans to make them more affordable.
Estimates of the number of distressed homeowners vary. Moody's Economy.com estimates the number of negative-equity mortgages -- the loans totaling more than the house is worth -- at 12 million, and says that is likely to rise to about 14 million this year.
First American CoreLogic Inc. estimated this week that 10.5 million mortgages -- a quarter of all U.S. home loans -- are either underwater or within 5% of being so.
Of the 1.9 million borrowers who are underwater in California, 300,000 are in the Los Angeles area, according to First American CoreLogic. The company said 723,000 mortgages in California were in "severe" negative equity, with loan amounts 125% or more of the home value. That's nearly one-third of the national total of 2.2 million such loans.
Anna Bielski, the real estate agent who represented Eslava, has two other clients who are facing foreclosure because of unemployment. One is trying a short sale, in which the house sells for less money than the homeowner owes. The other just pulled his home off the market to file for bankruptcy protection.
Bielski said she was representing more sellers like them -- people who had been current on their mortgages until they were laid off.
The rescue plan "is only good if you have a job," Bielski said. "It's no longer a problem with the loans. It's because they're unemployed."
Obama's plan, which relies on having government-controlled mortgage companies Fannie Mae and Freddie Mac refinance loans, also won't help many affluent Southern California homeowners, including families with two professional incomes, who bought homes in million-dollar neighborhoods as housing prices ballooned.
The maximum limit for a Fannie Mae or Freddie Mac loan is $729,750. Jumbo mortgages larger than that are hard to find and often have interest rates a percentage point or more higher than the smaller loans that Fannie and Freddie can buy or guarantee.
To be sure, such high-end neighborhoods are becoming rarer. The median price for a Southern California house in January was down 50.5% from the peak of the housing bubble, in part because few expensive and new homes were selling, according to MDA DataQuick. In Riverside County, prices had tumbled 54.9%, to $195,000 from $432,000, and in San Bernardino they sank 57.4%, to $162,000 from $380,000.