As more and more American homeowners are dealing with unemployment, undervalued homes, and debt, prominent mortgage lenders and bank are learning to adapt with more personalized communication systems to try to avoid allowing people to default, or letting mortgage troubles escalate to foreclosures. They’re also trying to avoid gathering too many expenses in dealing with foreclosures and loan resolutions.

In this light, getting loan modifications and other loss mitigation tactics like short sales makes sense from all points of view, and homeowners in trouble can take heart in knowing that banks have the same goals that they do. It doesn’t have to be an us-against-them, win-lose situation.

The idea is that proactive, highly personalized forms of communication between banks and lenders and their customers really help allow mortgage lenders to cooperate with individuals. Then both parties can avoid foreclosures and minimize the astronomical costs of all the paperwork of loan workouts, refinancing, and restructuring.

One of the country’s biggest financial holding companies, for example, recently cut down on first payment defaults by more than sixty percent in the last few years. Bigger lending groups are focusing in on mortgage and consumer lending research, trying to optimize conditions and expand departments to save everyone the most money.

We talk a lot about loss mitigation here, but it seems we never give a full, descriptive definition. This is the gist of what the HUD (Department of Housing and Urban Development) says counts as loss mitigation:

Loss mitigation is a service provided by a third party with the goal of helping a mortgage-possessing homeowner lessen the amount of money they lose if they can no longer make their mortgage payments. Usually, it is a division within a lending bank, though it can also be a private financial firm. The process by which these experts try to help decrease the amount of money lost by the bank and the homeowner is to facilitate negotiation between the two parties. Usually they do their best to avoid outright foreclosure.

New terms are often reached through either loan modification, short refinance negotiation, real estate short sales, a deed-in-lieu of foreclosure, or some other form of loan work-out.

These types of services use to be relatively uncommon and reserved for special cases. Nut ever since the 2008 recession hit, more and more homeowners have been turning to loss mitigation tactics to try to deal with financial burden. Unfortunately, this places a big strain on banks, who are unused to having customers feel they are entitled to this service and are struggling to grow their departments.

That’s where outside firms step in and fill the gap- to try to benefit both the overwhelmed bank and the overworked homeowner.

The Federal Trade Commission chairman declared last Thursday that the government agency is now entering talks to consider banning all upfront payment requirements for  ‘borrower help’ companies that advertise their ability to help homeowners stay good on their home loans.

Officials in the federal and state government say that there is a relatively high percentage of scammers in the industry, and that this is a trending phenomenon among financial-related industries. Unscrupulous ‘businessmen’ take advantage of desperate borrowers who are in danger of having to default on their mortgages, and who are looking for help. Those who charge upfront fees in the thousands of dollars rarely perform services that pay off.  If it’s that expensive on the outset, it’s unlikely to be a legitimate company who will try to help you stave off foreclosure or short sale.

California loss mitigation companies will be the next state to undergo judicial rulings on the matter. Two companies, “Nations Housing Modification Center” and “Infinity Group Services” have had files charged against them by the Federal Trade Commission.

Limits may also be placed on how these types of companies may advertise, and additional ‘false advertising’ restrictions may be layered upon the pre-existing ones.  More than twenty-two companies have had files charged against them by the government in recent months, and the government wants to emphasize that upfront payments should be minimal for most homeowners, if the company is legitimate.

The government does offer free loss mitigation services, but the wait times are often quite detrimental to the effort. Sometimes you do have to pay a little to get the attention and expediency you need.

Just as recently as five years ago, real estate short sales were fairly uncommon, and before that, they were extremely rare. However, in the current economic climate of high unemployment and lots of mortgage default, many more homeowners are turning to short sales to compensate for the fact that home values are falling.

According to a recent study conducted in California, almost twelve percent of all sales in the real estate business were short sales in the past few months.

This sudden onslaught of popularity of the this maneuver has left bankers at a loss- short staffed and undertrained, they are trying to keep up their service people numbers to contend with all of the new loan modification requests and short sale dealings, each of which is very time consuming and labor-intensive to execute.

There is a very sharp learning curve for both mortgagers and mortgagees, as well as loss mitigation specialists and other intermediaries. Banks are striving to close the short-sale close gap, making sure that a higher percentage of houses that go on short sale actually get purchased. Though home sales are on the decline in general.

Fifteen United States Senators, including Senator Jack Reed from Rhode Island, wrote to Secretary Shaun Donovan of the Housing and Urban Development department, calling for some sort of plan to help/incentivize lenders and bankers to be more responsive to homeowners.

They say a particular issue is those who have been told by HUD-approved counselors to talk to their lenders and have been turned away or put off for months. One of the first steps to getting a loan modification, counsel most specialists, is to get a hold of one’s mortgage lender and begin working out a solution. If they can’t even be reached in the first place, there’s not much you can do.

California loan modifications in particular require a lot of paperwork. One family put together a ‘workout’ package that was more than two hundred pages long, and then was informed, three months after they sent it in, that it was outdated and they would have to re-do it. In the end, they had to re-do it four times over five months.

Legislators are trying to introduce bills that will take measures to help banks hire more service people and loss mitigation specialists.

Recently, the U.S. Department of Housing and Urban Development (HUD) has passed new guidelines allowing FHA borrowers to seek to cut down their monthly payments on their mortgage through a Making Home Affordable loan modification program starting August 15th.

Before this, homeowners struggling to make their payments on an FHA-backed mortgage were not allowed to get a loan modification.

Now, at-risk mortgagors will be able to lower the principle they must pay on their loans by up to 30% in what is being called a ‘partial claim’. However much the principal is reduced will be combined into a second, no-interest mortgage that isn’t due until the first one is completed, or the property no longer belongs to the borrower.

Reducing the principal on the original mortgage in this way will allow homeowners to lower their monthly mortgage payments to an amount they can afford, preventing foreclosures and defaults. The old MHA loan modification program used to leave the principle alone, reducing only the interest rate.

The goal of either method, however, is to reduce monthly mortgage expenses for homeowners to 31% of their income.

An added bonus of the new MHA program is its ability to bring borrowers up-to-date on their payments: it includes all past due payment into the second, no-interest mortgage.

The program is called FHA Home Affordable Modification, and in order to qualify, a borrower must already be in default on their mortgage, (that is, at least one month past due on payments) but not more than one year past due. This, hopefully, will prevent those who are irresponsible and completely unable to make payments from joining, and also preventing those who can make their payments just fine from taking advantage of the program

The new program doesn’t only incentivize the mortgage owners, but lenders as well. It offers up to $1,200 for each loan to lenders. Homeowners who do not have an FHA mortgage should try to get a loan modification through the first Making Home Affordable loan modification programs which deal mainly with changes of interest rates.

Banks in today’s market are made to deal with higher demand for mortgages and mortgage/loan services, including but not limited to refinancing and loan modifications, than ever before. The backlog at lending and banking companies is starting to effect everyone’s ability to access loss mitigation services.

In areas where unemployment is booming, mortgage delinquencies and foreclosures are also on the rise, and even those who manage to successfully secure loan modifications could be in trouble again in home balues continue to fall, or incomes continue to drop.

Lenders are doing their best to expand their loss mitigation services as requests skyrocket, but officials in the industry have commented that the delays are greatly hindering everyone’s efforts to revive the housing market. Loan modification programs are suffering, and short sales are taking way longer than they should. Banks were not prepared for this.

Senators have written to the Secretary of Housing and Urban Development, Shaun Donovan to help formulate a new strategy to help and coerce lenders to help homeowners quicker and more often. Even HUD-approved counselors are having a hard time getting homeowners access to loss mitigation departments.

It takes a very savvy counselor or professional to get banks’ attention and expedite the process. California loan modifications especially are on the rocks.

If you’re in a position of falling behind on your mortgage payments and fear foreclosure, the first and best step you can take is to talk to your lender. Don’t wait until the situation is dire, and you’re delinquent or on the ropes and considering a short sale. Get in touch as soon as you foresee any payment problems.

When you call, double-check and make sure that you have your account information right on hand so you don’t have to make them wait. Be able to give a quick summary of the financial problems you are having, and be sure to have hold of recent income statements and your household budget.

Also, mentally prepare yourself for having this conversation several times, and then to talk to the same person a few times. You will likely have to fill out what’s called a loan “workout” package, to be eligible for a loan modification or other help.

Ask your lender how much time they plan to give you to do the workout, and what your obligations are under its stipulations. And try to swing for your property being kept off foreclosure lists as you work through the workout.

Don’t be afraid to call your lender- it’s not the end of the world to do a little homework and be prepared to save your home form the possibility of foreclosure.

According to a New York Times survey conducted last year, from November 2008 to February 2009, the amount of non-subprime mortgages that ended up being delinquent for at least ninety days was reaching record heights of 1.5 million. The loans that we either in foreclosure, delinquent, or in the process of being repossessed by the lender totaled more than two hundred billion dollars.

In that same time frame, subprime mortgages in the above three categories were topping 1.6 million dollars, and the troubles loans of those with only slightly tainted credit numbered in the hundreds of thousands.

All totaled, more than four million loans, worth more than seven hundred billion dollars, were either 90 days delinquent, being foreclosed on, or being repossessed.

The government is trying to rectify the situation, but is having a hard time putting a dent in the sheer number of people in distress.

One comment: if you’re even nearing the point at which you think you may not be able to cover your payments, act immediately. Do not let yourself get even a little behind- it will only become a more difficult battle from there. Enlist help right away, and contact your lender to see if there’s not something you can work out between you. Between the options of loan modifications, reamortization, restructuring and reinvesting, not to mention short sales, there are many ways to avoid having to go totally delinquent and get your house foreclosed.

The law passed in July of last year forcing lending institutions in California to accept most loan modifications within certain parameters is now helping homeowners avoid foreclosure situations.

California Loan Modification Code (Civil Code 2923.6) took effect last year, and has since been applied to all residential loans from January 2003 to 2007 that are secured by residential mortgages and are the primary home of the owner. The code broadens and extends the Pooling and Service agreements that all residential mortgages have, including a duty to optimize present net value to investors and related parties, to requiring lending servicers to agree to loan modifications.

Basically, homeowners in the State of California have added a new weapon to their arsenal to guard against foreclosure and default, thanks to the California government.  Lenders are literally contractually bound to provide loan mods, which is a total turnaround from standard practice just a few years before, when loan modifications and real estate short sales were relatively uncommon. Now, it seems foreclosure is the absolute last resort, not the norm.

Failure on the part of a lending institution to comply with the Civil Code then allows borrowers to sue for wrongful foreclosure or specific performance problems in any State Court.