The mortgage loan modifications were supposed to reduce the mortgage interest rate thus providing a lower payment for three months. At the same time borrowers were to provide financial documents to include an explanation of hardship. Banking officials are responding that many homes placed in a temporary plan failed to make timely payments for the temporary period or simply failed to provide paperwork. Lights of a recovering real estate market could be dimmed if the foreclosure crisis isn’t contained before another wave of adjustable rate mortgages reset in the new year.

1. Don’t ignore your mortgage problem – If you are unable to pay your mortage, dont hide from your lender. Call them and try to work out a plan to keep you current and in the home. If your lender is unwilling to speak work with you then visit a housing counseling agency. Many times these services are offered through your municipality.

2. Know the terms of your mortgage – Oftentimes homeowners are unaware of the type of mortgage they have, let alone the terms. Keep all mortgage closing documents close by when talking with your lender.

3. Know Your Options – When faced with the inability to pay the mortgage, the homeowner has a plethora of options. From selling the home, mortgage modification to taking in a tenant; speaking with a variety of real estate professionals can give you some ideas to as to the plausibilityof your options. Also consider how you can cut back on monthly expense…including having your hazard insurance policy shopped for a cheaper rate and having your home reassess to possibly lower porperty taxes. And if you are considering bankruptcy be sure to speak with a few attorneys before making any final decisions.

4. Beware of foreclosure scams – Negotiating a modified mortgage or short sale while the stress of losing your home looms over your head is not easy. However, don’t fall victim to scam artists that will request up front fees to “fix” your problem. There are some good housing counseling companies that have well serviced their clients, but talk with several referred real estate professionals as well as the various local goverment housing assistance departments and you may save yourself time and money. If you feel you have been preyed upon by a “foreclosure prevention” company, contact you State’s Attorney General’s office and the Federal Trade Commission immediately.

5. Know Your Ability and Live to It – Whatever plan you are able to work with the mortgage company should reflect your input on not what you think the mortgage company wants to hear, but what you can realistically afford and consistently pay. The banks would rather get regular lower payments than a few sporadic larger payments. And by all means, stick to the plan worked with the mortgage company.

When mortgage loans are made, the company/bank that lends the money, pools the mortgage with other mortgage loans of similar terms, interest rates and risks. These pools are securitized (in short – packaged in a various dollar denominations and given an investment grade and interest rate) and sold on the bond market. US mortgage backed bonds are popular investment instruments and are purchased around the world by individuals and other countries’ governments as relatively safe investment…until two years ago.

So going back to mortgage loan modifications…when these investors get notice requesting permission to reduce a mortgage loan payment through a loan modification, the notice is essentially saying, would you, the investor, mind reducing your income from a bond and decreasing your investment portfolio substantially? The negative response by many of these bond holders/investors are causing many loan modifications to face rejection and a return to a foreclosure status after homeowners and loan servicers alike believe the loan is modified. Many housing finance experts think these investor actions will cause another flood of foreclosures over the next six months. Coincidently, if the homes go to foreclosure, the likelihood these investors will lose most of their investment is high. US Senator Durbin (D) has been arguing the defeat of the bankruptcy reform that allowed bankruptcy judges the ability to re-write mortgages of petitioners (someone filing bankruptcy) is the necessary teeth needed to motivate banks and investors to modify the very mortgage loans that caused the current economic depression.

Typically, this would not be a detrimental issue, but coupled with the rising interest rate increases of adjustable rate mortgages (ARMs), the market has fostered a short sale environment. The sub-prime market, in particular, has suffered the worse fall out throughout the country as many loans have gone into default, foreclosure rates have risen and lending institutions have folded. When consumers find themselves “upside down” in property value, unable to afford their adjusted mortgage payments and delinquent on their home loans, they are often forced to financially weather the storm, foreclose on the property or engage in a short sale of the home.

A short sale occurs when a bank opts to work with the homeowners to sell the property in lieu of foreclosure. In most investment scenarios a short sale occurs when stocks are borrowed from a stockbroker’s inventory and then sold at a particular price with the hopes of that stock’s price declining within a given period. If the stocks fall as hoped, the investor will purchase the stocks at the new, lower price and return the borrowed shares to the inventory from which the stocks were borrowed and possess a handsome profit. However, in the real estate market, the term “short sale” is a far cry from an investment strategy. Since the home’s value is less than what’s owed on it, a sale of the property for the lower fair market value as opposed to the higher amount owed on the mortgage would leave a shortage in the sale proceeds…hence the term “short sale.” This type of sale creates a profit loss for both the homeowner and the bank, but has become prevalent enough that you should be familiar with the particulars of such a transaction.

According to the National Association of Realtors, existing home prices have fallen on average more than 6% over the last year. However, many markets have seen their home values drop as much as 25% over the last two years. This drop in housing values equates to an extreme loss in equity for many. Experts profess that it was inevitable as the housing “bubble” was bound to correct itself after the rapid rise of home prices from 2002 – 2005. Although local housing markets generally experience periodic peaks and valleys in home equity appreciation, the onslaught of short term Adjustable Rate Mortgages left many homeowners faced with adjusting mortgage payments that are well out of the realm of affordability. Furthermore, borrowers are unable to refinance their existing loans because they owe more than the appraised value of the property.

As the US real estate market deals with a projected 2.4 million foreclosure incidence for 2007, homeowners are scrambling to find solutions. Currently, existing home inventories in the US are listing “For Sale” for over eight months and newly constructed homes for six months. A recent report by Merrill Lynch states that over 60% of homes currently on the market are listed for selling prices well above what the current market will bear. Banks have begun to react to these statistics by allowing delinquent homeowners to sell their homes for a market supported price that is under the balance of the mortgage lien, thus creating a short sale. However, banks are reluctant to accept any losses on loans and the homeowner must be able to demonstrate an undeniable inability to pay the monthly mortgage or be prepared to payoff all or part of the balance on the note.

Short sales offer a great option for homeowners to relinquish their home without having a foreclosure entry placed on their credit profile or facing a slew of lawsuits and judgments after the foreclosure auction has occurred. Additionally, once the mortgage debt is satisfied, many homeowners can escape filing for bankruptcy, which may have been prompted due to any balance left over from a foreclosure auction or voluntary abandonment. Often times the bank will even set up interest free payment plans for the short sale balance. However, do not plan any course of action expecting the lender to offer debt forgiveness or payment plan options. First, and foremost, banks are concerned with getting the loan repaid. In a short sale transaction, the bank is also able to waive the costs of collections, auctions, advertising legal notices, attorney fees and other expenses usually incurred when foreclosing on a property. Additionally, the bank can report the debt as “closed” and/or “paid” and not as a foreclosure to their shareholders. Although the homeowner is still obligated to move out of the property, they are able to maintain some ground on their credit profile, putting them in a better position to buy again sooner rather than later.