Many homeowners have been affected by a job loss, divorce, a mortgage re-set, a mortgage re-cast, or any number of other potential factors that have made it difficult –if not impossible—to afford their mortgage.

With the economy in shambles, soaring unemployment, foreclosures are occurring at the highest rate in history and no one knows exactly when our economy will recover! No wonder the only companies thriving in this economy are companies like McDonald’s, Wal-Mart, Anheuser-Busch and Pfizer!

But the reality is, most foreclosures can be prevented. While there’s no magic bullet, the most important thing a homeowner can do is….

Stay Positive and Stay in Touch!

Many borrowers are so overwhelmed by their financial situation that they stop staying in touch with their lender. This is a big mistake. Loan modification is getting easier to do with many (but not all) lenders, and with the Obama plan, many lenders have simplified the process. Moreover, the banks have been under increasing pressure on banks to find every alternative to foreclosure for distressed homeowners. I have clients I’ve coached who just 3 months ago couldn’t get their bank to work with them, and now lenders have become much more cooperative.

While trying to keep up with one’s mortgage payments and the threat of foreclosure can create serious financial distress be emotionally draining, it is imperative to keep the channels of communication open.

As my title indicates, more than 50% of foreclosures could be prevented by staying in touch. The lesson is simple: STAY POSITIVE AND KEEP IN CONTACTl!

If loan modifications are supposed to help borrowers, why are so many going bad?

“Toxic” Terms:

Surprise, surprise, but many lenders have not been modifying mortgages aggressively enough to actually make them affordable to distressed homeowners. Some lenders are in fact modifying mortgages with terms that the borrower could never afford. So it’s not a shock that borrowers are quickly in the same place they were before they modified. Often times, the servicer and/or investor wants to squeeze out as much money as possible from the borrower, believing that foreclosure is inevitable. The modified terms may be more affordable than they were before the modification, but they don’t go far enough.

Other Debt:

Many, if not most borrowers, are behind not only on their mortgage debt, but they are behind on payments to other creditors as well such as credit card companies and student loan providers. These borrowers may feel compelled to use the cash they are saving on their mortgage to pay off their other debts. So essentially, their overall relief—if any—is minimal. Many people no matter what the terms of their modification are will never be able to get caught up until they address the other financial problems they are having.

Negative Equity:

Negative equity—or what’s known as the “underwater effect”—has been a major contributing factor in the high default rate of loan modifications. Most loan modifications do nothing to address the issue of negative equity in which a borrower may owe significantly more on the property than it is actually worth. Many of these borrowers have little incentive to keep their homes because it will take such an incredibly long time for them to be in a positive equity position again. They think, “I’m still underwater on my home. Why bother paying the mortgage?”

Overextended Borrowers:

Many borrowers are simply overextended on their home loan. They may have gotten a loan with a short-term teaser rate, but they really got in over their heads, and bought more home than they could ever afford. Even if the lender significantly reduces their payment, it still may not be enough for them to afford the property.

Moral Hazard:

Some distressed borrowers may be expecting another round of modifications if they default again. There is a “moral hazard”: the borrower may feel that since the modification was negotiated once, the potential to renegotiate exists.

Job Loss:

With unemployment headed into double digits, more and more borrowers are losing their jobs. Once they’ve lost one of their main sources of income, the chances of them being able to afford even a modified mortgage are greatly diminished.

Back in the good old days, it was simple. You went to your local bank or Savings & Loan to get a mortgage. You spoke to your personal banker or loan officer who helped you get a loan.

The institution had lots of customers who put their money with the institution in a savings account, CD, checking account, etc. The institution paid interest to their customers, which gave them the right to use money to lend out to other customers.

You can see why banks did not want to give bad loans to people. They were lending the money of other customers and the loans remained on their books. Likewise, if a borrower got in trouble, they were very motivated to keep them in the home. This was often your local bank in your community. You had developed a personal relationship with them, and they were tied to the community. If the community could get hit hard by defaulting mortgages, so could the bank, hence they were highly motivated to work with you.

The Problem of “Securitization”

But, then this all changed. In the 80s, many Savings & Loans institutions went out of business, and in the 90s something called “securitization” became popular.

What exactly is “securitization”?

Essentially it is a process in which loans are pooled together and then sliced and diced into securities which can then be sold on the secondary market on Wall Street. So basically, you have no idea who actually owns your loan. Your loan probably started with a broker who used a loan originator who then immediately sold off your loan.

The administration of your loan is now handled by a company you’d think was your lender. You send your payment to them, but they are actually just a “servicer”. They get paid to service your loan, but they don’t actually own it.

Lender vs. Servicer: The Challenges

Unfortunately, since they only service your loan, getting a loan modification isn’t necessarily that easy. They are bound by lender guidelines which define what they are and aren’t allowed to do in the event that a borrower becomes financially distressed and must modify the terms of their loan.

To further complicate the issue, servicers generally represent numerous investor pools, all of whom have slightly different guidelines. If they all had the same guidelines, life would be much simpler. You could simply find out what the guidelines were and what kind of modifications were available, and from the outset of this process you’d know if you were going to get approved because there would be no mystery.

Instead, you have to go through a long a laborious process with your servicer to get your modification approved, and ultimately there is no guarantee that it will actually get approved. However, armed with a little knowledge, the process will at least be a demystified for you and you will dramatically increase your chances of getting approved.

But facts are facts, and the fact is the government has acted in cahoots with the lending industry to put the interests of the banks ahead of the interests of homeowners. They have cynically crafted an overly simplistic message which implies that governmental action has made obtaining a loan modification easier than getting an oil change!

Here are the talking points:

* The “Making Home Affordable” program will help the vast majority of distressed homeowners

* Free help from the government and lending institutions is easy to get and always better and more beneficial than hiring a professional to help negotiate a loan modification
But, the evidence simply contradicts the position of the government and the lending institutions. Foreclosures are not abating, and the problem is actually getting worse. Here are some of the facts:

* According to a report from the Federal Housing Finance Agency (FHFA), completed foreclosure sales increased 900% between March and April this year.

* According to RealtyTrac, a company that compiles foreclosure data, 342,000 households received at least one foreclosure-related notice last month. This is an increase of 32 percent compared with notices issued last April and is the second consecutive month in which more than 300,000 households got a foreclosure filing.

* According to the Wall Street Journal on April 15th, 2009, one the nation’s largest mortgage servicers, GMAC, acknowledged that only 10% of their customers facing foreclosure qualify for Obama’s “Making Home Affordable” program.

First hand, I’ve spoken to distressed homeowners who believed the hype, did what they thought was the right thing, and relied on free help from HUD counselors and/or Acorn to help them save their homes foreclosure. What was their reward for believing the government? They lost their homes!

The reason I created a free loan modification program is due in large part to much of this misinformation that has been spread by the government and the banking industry–not to mention the countless fraudelent loan modification companies. I believe that homeowners armed with knowledge about the intricacies of loan modification will be in a much stronger position to negotiate a loan modification that favors their interests over that of their lender.

Further, I do recognize and acknowledge that there is a place for paid loan modification programs. For many—if not most—distressed homeowners, I believe our free program can help them achieve a viable loan modification. However, every homeowner’s personal circumstances are unique, and some homeowners may benefit from the assistance of a paid professional. A good attorney specializing in loan modification may be able to help a homeowner negotiate better terms than they can on their own.

That being said, homeowners should be very cautious if they decide to hire a loan modification company or law firm, as many of these firms are inexperienced or worse, unethical. Homeowners should always check references and find companies with a track record of success.

Whatever a homeowner’s circumstances are, the place to start is with our free loan modification program. In this comprehensive program, homeowners will not only learn more about the “Making Home Affordable” program, but they will learn valuable tips and strategies on how to negotiate a loan modification. Likewise, should they still decide to hire a loan modification company, they will be in a stronger position to be able to identify a credible, ethical company, and protect themselves from the many unscrupulous loan modification companies out there trying to scam vulnerable homeowners.

Even more disturbing, the foreclosure crisis seems to be worsening:

• According to RealtyTrac, a company that compiles foreclosure data, reports that 342,000 households received at least one foreclosure-related notice last month. This is an increase of 32 percent, compared with notices issued last April. It is also the second consecutive month in which more than 300,000 households got a foreclosure filing.

• According to a report from the Federal Housing Finance Agency (FHFA), completed foreclosure sales increased 900 percent between March and April this year.

• According to the Wall Street Journal; on April 15th, 2009, one of the nation’s largest mortgage servicers, GMAC, acknowledged that only 10 percent of their customers that are facing foreclosure actually qualify for Obama’s “Making Home Affordable” program.

While the Obama Administration should be commended for taking a proactive approach by promoting loan modification as a tool to prevent foreclosure, more needs to be done and the administration needs to be honest with the American people about who can realistically be helped with ‘Making Home Affordable’.

There does seem to be some hope. Good news came out yesterday. Citibank, Chase, WAMU and EMC announced they will no longer require homeowners to be late on their mortgages to qualify for loan modification.

I’ve also developed the only truly free online loan modification course. The course is seven lessons and covers all aspects of the loan modification process.

The program is not only good for distressed homeowners, but realtors and CPAs who want to learn more about loan modification. The only requirement to participate is the completion of a brief, one page application, at which point you’ll be immediately provided with a username and password with access to the full loan modification program.

The good news is that there is help available.