Free foreclosure help - if you can wait

NEW YORK (CNNMoney.com) -- Organizations approved by the Department of Housing and Urban Development (HUD) have helped homeowners for years, but their phones are ringing like never before.

Tracy Morgan is a spokeswoman for the Home Ownership Preservation Foundation, which operates a foreclosure hotline (1-800-995-HOPE) for Neighborworks. Last year, she said, the hotline handled about 75 calls a day nationwide. By June, 2007, the number ballooned to 750. For this September, the average day has brought about 1,300 calls.

Foreclosure assistance counseling with Neighborworks used to start almost immediately. Now, weeks may go by before clients are served. And the organization doesn't have enough counselors to serve everyone on a case-by-case basis anymore - instead it schedules more group sessions.

"There's a big resource gap," said Doug Robinson, spokesman for Neighborworks, adding that Neighborworks has added 1,800 staffers.

According to Robinson, it's contributed to what he called the "mixed success" that Neighborworks is meeting with these days.

"The easiest cases to help are the ones whose mortgages are held in portfolio," he said. Those are the ones that lenders have not sold into secondary markets but kept on their own books. That gives lenders more flexibility in dealing with delinquent borrowers and more incentive to help them keep their debts current, rather than taking the big expenses that come with foreclosures.

But often, the counselors have to tell home owners something they don't want to hear - that their income, credit scores or lack of home equity make it impossible to help.

Even outcomes defined as "successful" may be less than ideal. These include advice to do a "short-sale" or accept a deed-in-lieu-of-foreclosure deal from their lenders, which should be better for them than outright foreclosure.

"Foreclosure really damages your potential to be a homeowner again, or even a renter," said Morgan.

But, according to John Snyder, a home ownership specialist with Neighborworks, the organization helps a substantial percentage of the people who come to it.

"Loan modification is very frequent," he said. In those cases, lenders add the missed payments and back interest back into the principal, often stretching out the length of the loan from, say, the 340 months remaining to 360 months. The monthly payments should be about the same as before the borrowers fell behind.

Major fixes are also being offered to some borrowers. These include rate reductions for some borrowers who've been on-time payers before their payments adjusted upward. Some borrowers are even being offered refinancings from ARMs to fixed-rate loans.

Neighborworks and other non-profits act strictly as mediators; they have no power to force agreements on lenders or borrowers. The value they provide is to get the parties talking early.

By working with non-profits, rather than approaching lenders directly, borrowers can improve their work-out prospects, according to Morgan.

"We work at a high level with 17 or 18 major servicers," she said. "You have an advocate that really knows the ins and outs, has the contacts and can facilitate the work-out process."

Counselors bypass the collections departments of lenders in favor of mitigation departments, where they can get things done. Sometimes the advice is to hold off before contacting a lender.

"We can look at a borrower and say, 'You're not a good candidate for a work-out right now,'" said Morgan. "'Take three months to repair your credit score, find some extra income by renting out a room to a relative or taking a part-time job. Then, you can go back to the lender in a much stronger bargaining position.'"

Counselors can sometimes offer very tangible aid, according to Kaye Britton, a loan officer with the Home Ownership Center of Greater Cincinnati. She has connected clients with grants of up to $3,000 or three months mortgage payment, whichever is less, from the Ohio Home Rescue Fund for 35 borrowers who came to her through the HOPE hotline.

The program is open to home owners with incomes of up to 65 percent of the median for the area. Another fund will make money available to troubled borrowers who earn up to 140 percent of median income in HUD-targeted areas, but that comes in the form of a loan, not a grant.

Britton's agency also works closely with a lender who will do refinancings for home owners with resetting ARMs. The lender requires the owner to have at least a 10 percent equity stake in the home and a credit score of 530. The interest rate is very competitive, currently about 6.8 percent.

There are lists of HUD-approved, non-profit counseling services available on the HUD Web site. The services are free of charge.