How to sidestep the wave of foreclosures

And it's especially bad news for homeowners. Trott handles residential foreclosures for banks.

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"It's alarming," says Trott. "There's a tremendous increase in the number of foreclosures."

As the economy continues to sink, the number of homeowners paying their mortgage late or having their homes repossessed by banks continues to creep up.

Between July and September, the delinquency rate for one-to-four unit residential properties rose from 4.63 to 4.87 percent, according to the Mortgage Bankers Association (MBA). And those numbers don't reflect the effects of the Sept. 11 attacks, since most people had mailed in their September mortgage payments before that date.

Some homeowners teetering on the edge are finding some relief through refinancing. Lower interest rates mean a homeowner who secured a 30-year fixed-rate mortgage worth $165,000 last year at the average interest rate for such mortgages, 8.1 percent, could save more than $100 a month by refinancing now, says Doug Duncan, chief economist for the MBA.

But looser lending practices over the past decade, combined with rising unemployment, are pushing the percentage of homeowners paying late to levels last seen during the recession of the early 1990s, economists say.

Lenders extended riskier home loans over the past decade to lower-income borrowers who had to put less money down before buying a home. And more consumers took advantage of generous refinancing offers that allowed them to borrow as much as 125 percent of equity to pay off credit-card debt, says Jennifer Mason, client-creditor specialist at the Tri-State Consumer Credit Counseling Service (CCCS) in Madisonville, Ky.

Now, though, those borrowers are being laid off or having their work hours reduced. Many have no equity left to pay off credit cards, and little to cushion them when the mortgage payment comes due.

The MBA survey found foreclosures rising fastest in upper Midwestern states, including Michigan and Illinois, where thousands of manufacturing jobs have been cut this year.

"It's a reflection of the economy," says Robert Van Order, chief economist for mortgage giant Freddie Mac.

Mr. Van Order predicts that past-due mortgages and foreclosures will continue to rise in the final three months of the year, as the impact of the terrorist attacks ripples through the economy. But he expects that foreclosure rates will probably not hit the highs of the 1980s, when high interest rates and the oil bust drove thousands of people, particularly in Texas, Oklahoma, and Louisiana, from their homes.

Still, credit-counseling agencies throughout the United States report record numbers of people asking for help this fall, says Daniel Fenton, housing director for the National Foundation for Credit Counseling.

"It's a vicious cycle," says Elba Font, counselor at the Spanish Coalition for Housing in Chicago. "Many people are not ready for this, emotionally or financially."

No matter how far behind a homeowner has fallen, though, bankers and credit counselors agree it's almost never too late for borrowers to avoid losing their homes - if they're willing to act quickly and seek help.

Lenders much prefer negotiating a new payment plan to going through the time and expense of foreclosure, which usually results in the bank losing thousands of dollars, says Brian Israel, vice president at the Harris Trust and Savings Bank in Chicago.

"That's always a last resort [for a bank]," Mr. Israel says. "It's a process no one looks forward to."

But borrowers must contact the mortgage lender and keep the company informed of their circumstances.

Homeowners should ignore too-good-to-be-true offers on the Internet promising to make mortgage payments on your behalf or stop the foreclosure process, says Mr. Fenton. Usually, such operations wind up taking title of the property or stripping remaining equity.

Instead, contact a housing-counseling agency approved by the Department of Housing and Urban Development (HUD) that will provide free or low-cost assistance.

At the Tri-State CCCS in Kentucky, Ms. Mason says counselors sit down with clients to map out a realistic monthly budget and consider options for paying the mortgage debt.

Counselors will also help renegotiate debts with banks to stretch payments over a longer period of time, or reduce them until the homeowner finds a new job.

"Once they see a solid repayment plan in place, there's a good chance the foreclosure will be prevented," says Fenton.

Homeowners who are between four and 12 months delinquent, not already in foreclosure, and able to make full payments, may also be able to work with lenders to obtain interest-free loans from HUD. HUD pays off the outstanding loan and puts a lien on the property until its share is repaid, interest free.

Call 1-800-388-2227 to locate a HUD-approved credit-counseling agency near you, or visit the website, www.debtadvice.org.

WHITNEY WOODRUFF MOODY - STAFF SOURCE: MORTGAGE BANKERS ASSOCIATION