As a professional, the idea that everyone sues whenever there’s a problem is music to my ears. Except my billing system might break under the strain. But, as an advisor, it’s nonsense. Never let it get that far! You get better results by dealing with a situation before it gets bad enough to litigate. Even though you find a pro bono attorney, or an attorney is prepared to act on a contingent fee, or your state’s legal aid services will pay some or all of your attorney’s fees, the stress of going to court is not worth it unless you have no choice.

So what’s the problem here? Look at the real estate market. Falling resale prices are producing negative housing equity — your home is worth less than you owe on the mortgage. The credit crunch is here. Failing banks are being taken into conservatorship. The economy is weakening. Price inflation makes basic necessities more expensive or a big bill has unexpectedly hit, and your income no longer covers your outgoings.

Threats? What threats?
If you cannot keep up the payments, the company holding the mortgage can foreclose. That pushes you out of your home and possibly into bankruptcy. Why bankruptcy? Because foreclosure does not cancel the debt. The mortgagee can sell your house at the going rate and claim any outstanding balance from you.

Is the Federal Government helping?
When a bank like IndyMac fails, the Federal Deposit Insurance Corporation helps struggling borrowers repay their mortgages and stay in their homes. But that’s only a few people. The Federal Housing Finance Reform Act of 2007 set up the Federal Housing Finance Agency (FHFA) to oversee Freddie Mac, Fannie Mae, and Federal Home Loan Banks. Unfortunately, the mortgages held by these three are the best end of the mortgage market. The first wave of foreclosures affected the subprime mortgages. Although defaults are rising fast in the Alt-A loans, most of the mortgages regulated by the FHFA are not in immediate danger.

So this leaves us with all the subprime mortgages where people were sold on the idea that property values would rise indefinitely. So much optimism! There were probably some deceptive practices and predatory lending in there as well.

Time for straight talking
A big percentage of these mortgages can never be saved. Even if Federal Government orders a mass modification, say by reducing interest to 3%, many will still find the monthly instalments unaffordable. The only effect will be to roll the foreclosure problem a few more months into the future.

In theory, practical help is available through the Foreclosure Resource Centers set up by the Federal Reserve Banks. Some counseling resources and support services are available, but not enough people are employed to help everyone in trouble. Worse, the mortgage companies are reluctant to agree modifications. On October 1, 2008, the Federal Housing Administration (FHA) will expand targeted mortgage assistance to homeowners. Hope for Homeowners allows some struggling families to refinance into more affordable FHA-insured mortgages. Note “targeted”. This is only for the one or two who are “eligible”.

What about you?
The government term is a “delinquent mortgage” — what an insulting way of describing you! It’s not your fault that bills have gotten on top of you. If you are in arrears, do not wait for a foreclosure notice. First, try to get help. Secondly, do not fall prey to the scammers who offer to stop the threatened foreclosure. Some are dressed up as counseling services or rent-to-buy schemes. This is the fastest road to perdition you can travel. If you approach a Credit Counseling Agency, make sure it is approved under 11 U.S.C. § 111 (check this link . If all else fails, look out for yourself.

Now check out who holds the mortgage on your home. Then start negotiating with that company. Because most of the subprime mortgages were sold through brokers, packaged and sold on, you may find the current mortgagee is new to you. Never rely on the telephone alone. Always write letters or send e-mails (and make sure you back up all copies). You want a paper trail to show you made every reasonable effort to resolve the problem. Why should these companies talk to you? Because it saves them money! The foreclosure process is expensive and all it gives them is a wasting asset: an empty house that gets vandalized with a falling sale price that will not cover the mortgage debt. If the finance company push you into the bankruptcy system, it will only get a few cents in the dollar back. It makes better economic sense to modify your agreement and keep some money coming in.

Next, never deal with the mortgage on its own. Paying separately on your auto loan, credit and store cards is the same road to perdition. Look at a complete debt consolidation package. Defending your credit score is important in the longer term. Avoiding bankruptcy is desirable.

If all fails, you may have to sue or produce an affirmative defense to the foreclosure action. How you do that is another story.