The issue has caught the attention of Congress, which included language in the economic stimulus package to compensate service members who sell their home at a loss or have been foreclosed upon because they were forced to move after a base closure, reassignment or a combat wound required them to be relocated near a health facility. The program also covers surviving spouses of those killed in combat.
Under the new provision, the government will cover 95 percent of a loss if a service member is forced to sell. The government can also choose to acquire the title of a home by paying off the balance of a service member's mortgage or paying the owner up to 90 percent of the home's previous value. No dollar ceiling has been set.
The $555 million undertaking expands the Defense Department's Homeowners Assistance Program, which helps military and federal personnel whose homes have lost value because of a base closure. The new measure would likely help the Diazes, and would expand the homeowner assistance program to as many as 17,000 claims, according to the office of Sen. Tim Johnson (D-S.D.), who sponsored the measure.
The program does not cover all military members facing a loss because of a home sale.
In an attempt to limit the number of claims, the program applies only to a service member's primary residence, and only to homes purchased before July 1, 2006, roughly the time the market began its free-fall. The Army Corps of Engineers said it has not determined what proportion of families will be eligible.
The prospect of foreclosure is particularly daunting for career service members, as credit checks are required to gain security clearances. The increased financial stress comes at a time when many active service members have been deployed to Afghanistan and Iraq, military advocates said.
"We have an all-volunteer force, and we are asking them to deploy overseas to fight the global war on terror," said Michael Hayden, deputy director of government relations for the Military Officers Association of America, one of the largest military advocacy groups in the country. "And yet we are also in the midst of all this crisis, and the one thing we shouldn't have to burden our service members with is trying to manage their mortgages."
That argument resonated with legislators who sought to help people such as the Diazes, who thought that buying their four-bedroom, two-bathroom house in a new Jacksonville subdivision for $252,000 made sense. With the real estate market booming, Diaz figured they would at least be able to break even when they moved.
Today the home is worth about $50,000 less, according to information the couple found on home valuation Web site Zillow.com. A nearly identical house across the street sold for about $185,000, the couple said. They still owe about $217,000 on their mortgage, so selling now would mean taking a loss. Renting would probably leave them $400 to $500 short of covering their monthly mortgage payments.
During the years of easy credit, use of the Department of Veterans Affairs' guaranteed home loan program fell considerably. Mike Frueh, an assistant director of the program, said higher-risk products such as adjustable-rate mortgages and no-down-payment loans became popular with military members.
Thus the origination of government-backed mortgages for veterans and active-duty members plummeted 73 percent from fiscal year 2003 to 2007, before ticking up again in 2008. During those housing boom years, the VA program offered fixed rates for 30 years and did not change its underwriting practices, which required financial evaluations and credit checks, Frueh said.
Last fall, new legislation allowed service members who were struggling with subprime loans or other types of mortgages to refinance into a VA loan.
R. Joe Gladden, a retired Navy captain and Gainesville real estate agent who caters to military clients, said subprime or other high-risk loans were not necessarily the problem for military members. Gladden and Susan Wallace, a Chantilly mortgage broker who works with him, said generally military families make good clients because they maintain excellent credit and are decisive when it comes time to buy.
Wallace said that many of her military clients asked for adjustable-rate mortgages and no-down-payment loans because their investment was often intended to be temporary. "If you were a military person and moved to the D.C. area, but you are moving again in three to five years, it made sense," Wallace said.
Both now are inundated with calls and e-mails with tales of woe from families who are stuck in homes that have fallen in value. On his business Web site, Gladden has sponsored a forum for people to post such stories.
One who did was 30-year-old Christina Messer of Arlington. Her husband is stationed at Fort Myer as an honor guard. The couple bought a $438,000 condominium in a new low-rise complex in Arlington in the summer of 2007. They used a no-money-down loan, with interest-only payments for the first five years. They anticipated moving in a few years, and thus saw no point in paying down the balance, said Messer, who spoke on the condition that she be identified by her maiden name so as not to affect her husband's career.
The problem now is that they cannot sell the home for the value of the mortgage, nor can they find a renter. Messer's husband has orders to relocate to Texas in April. She fears they will face foreclosure or bankruptcy.
"We are talking to a few real estate agents about a possible short sale, but that is just like filing for a foreclosure," she said, referring to a sale when a property is sold for less than the balance on the mortgage. "It stays on your credit record for the same amount of time and affects your credit very harshly -- he could lose his rank."
Because they bought their home in 2007, the couple would not be helped by the provisions in the stimulus measure.
The Diazes, meanwhile, watched the stimulus debate with deep interest and are hopeful the new program will help them. They spent Presidents' Day weekend in Northern Virginia, looking at homes in Lorton and Woodbridge, as well as some Alexandria apartments.
"We are going to be looking at everything, just about everything, just because we are not sure," Stephanie Diaz said. She said that once they are certain they are covered by the new plan, they will immediately put their house up for sale.