Your lender doesn't want your house

Those factors were among the reasons that nearly one in 10 households with a mortgage had zero or negative equity in their homes as of September 2005, as I reported in "The negative equity epidemic."

Recent borrowers were even worse off, according to the study by First American Real Estate Solutions, with 29% of those who bought or refinanced in 2005 having zero or negative equity. And 15% were underwater by 10% or more.

And that was back when the real estate market was still booming in most areas. The percentage of folks who can't sell their homes for what they owe has doubtless increased as home prices have stalled or fallen in most markets. That has significantly increases the foreclosure risks for lenders.

Lenders getting pressured to help

Finally, important fact No. 3:

The pressure is on to fix rather than foreclose. Several years ago, the two agencies that bought most home loans -- the now-defunct Fannie Mae and Freddie Mac -- and the Federal Housing Administration started leaning on lenders to come up with programs that would help troubled borrowers keep their homes.

That pressure turned a tide of foreclosures, thanks to these "loss mitigation" programs.

And "loss mitigation" is the phrase you need to remember if you want help from your lender, noted Harper, of the Consumer Credit Counseling Service. Too often, borrowers who call their mortgage company's customer-service line to report payment problems get shunted to the firm's collections department.

"The collections side of the process is more likely to say, 'I don't want to hear it -- just pay,' " Harper said. "Loss-mitigation departments are where it gets warm and fuzzy. They're not just saying, 'Pay up.' They have options."

Among the most common loss-mitigation techniques:

• Forbearance. The lender allows you to skip a few payments until you're back on your feet. The skipped payments are typically either tacked onto the principal or you make larger payments for a while to catch up.
• Reduced payments. The lender may allow you to make smaller payments for a time. The options for repayment are usually the same as with forbearance.
• Loan modification. The lender may change the terms of your loan by, for example, stretching the loan term out for a few more years. If you're several years into a 30-year mortgage, for example, the lender may give you the option of paying the rest of your balance over a new 30- or even 40-year period.

With all these options, and with the success of loan-mitigation departments, why don't all lenders send troubled borrowers to the right place on the first call? It could be as simple as poor training.

Then again, there may be a darker agenda at work. Guttentag believes some lenders aren't willing to work with homeowners until the borrowers run out of good alternatives.

A borrower who has equity in the home and good credit, Guttentag notes, usually can refinance the loan with another lender, taking business away from the existing lender or servicer. Another option is a home equity line of credit -- homeowners can borrow against the credit line to pay the primary mortgage at least for a while, a tactic that reduces and perhaps eliminates any remaining equity in the home. That, in turn, makes foreclosure a riskier proposition for the primary lender.

Once the borrower has skipped two payments, though, his or her credit is trashed, and few, if any, other lenders will be willing to help, which is why some collection departments may be handing out the "come back after you've missed two payments" line.

What actions you can take

Clearly, you want to avoid that predicament if at all possible. Here's your game plan:

• Arm yourself. Read "Facing foreclosure? 9 options" so you know all your choices. Also think about how you will present your problem to your lender or servicer in the best possible light. Telling a lender you're about to miss a payment because you overspent on Christmas presents or credit cards isn't likely to elicit much sympathy. You're more likely to get the lender on board if your trouble was caused by a lost job, reduced hours, a divorce, an illness or some other serious setback, Harper said, and if you have a plan for getting back on your feet.
• Contact your lender as soon as possible. You want the company to know you're serious about trying to save your house, Harper said. Insist on talking to the loss-mitigation department, then follow up with a letter sent certified mail, return receipt requested, summarizing the predicament you're in and when you expect your fortunes to improve (if you do).
• Get help from a housing counselor. A counselor can help you review your options, work out a budget and deal with your lender. You can get a referral to one by calling the federal Housing and Urban Development Department at 1-800-569-4287. If you have a Veterans Affairs Department loan, you can call 1-800-827-1000 to get a referral. Legitimate credit-counseling services, such as those associated with the National Foundation for Credit Counseling, also typically have housing counselors.
• Consult a bankruptcy attorney. If you can't get the lender's attention -- some are swamped right now, given the spike in defaults -- talk to a bankruptcy attorney to see if a Chapter 13 filing might help. A bankruptcy can stop a foreclosure, at least temporarily, and give you time to work out a repayment plan with the lender.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated Oct. 22, 2008

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