A homeowner is "underwater" on their mortgage if they owe more on their mortgage than their home is worth. "Underwater" homeowners are much more likely to default on their mortgages, sometimes voluntarily. The average homeowner accepted into HAMP owes over $1.50 for every dollar that their home is worth. Even when these individuals have their mortgages modified, temporarily or permanently, they remain "underwater" on their mortgage. When a homeowner gets their monthly mortgage payment reduced they oftentimes are just paying less of the principal down, and with the rapidly declining real estate market they end up further "underwater."
Part of the reason that HAMP homeowners are more likely to be underwater is because of the Net Present Value (NPV) test that the lenders use to determine whether to foreclose or to modify. Under the NPV test the lenders chooses modification or foreclosure based on which route will make their investors more profit. Unfortunately this test leads the "underwater" homeowners towards loan modification and the homeowners that have equity in their homes to foreclosure.
