When it comes to the foreclosure process, most homeowners are clueless.

According to an update of Freddie Mac’s “Foreclosure Avoidance Research Survey,” homeowners are generally unaware of many of the options available to them if or when they are struggling to make a mortgage payment.

Worse, the study found that 20 percent of people say that nothing would happen after missing three or more mortgage payments because “it takes a while for anything to happen if a person is late on a mortgage payment.”

In fact, in some states the foreclosure process can begin as quickly as 30 days after you have missed a mortgage or home equity loan payment.

Why aren’t more homeowners tuned into to the repercussions of the foreclosure process?

“Fear and embarrassment,” explains Robin Stout Migala, senior delinquency resolutions manager for Freddie Mac. “Some borrowers bury their head in the sand, hoping that everything will be okay tomorrow.”

In the survey, 75 percent of those who are delinquent on their mortgage said they tried to contact their mortgage lender directly to discuss their financial difficulties. But Stout Migala says industry observers commonly believe just half of those who go through the foreclosure process have spoken to their lender.

“They think foreclosure is the only option, and that there is no hope, and that nothing can be done,” so they don’t call, she says. “After we foreclose on a piece of property, we find all the literature from the mortgage servicer in the home, unopened.”

The number of foreclosures jumped nearly 80 percent from 2006 to 2007. But if the more than 2 million Americans facing foreclosure this year don’t wake up to the options that are available, the number of actual foreclosures could grow exponentially.

What most homeowners don’t realize is that Fannie Mae and Freddie Mac, the largest players in the secondary mortgage market, encourage mortgage servicers to avoid foreclosure whenever possible. They grade servicers on how well they’re working out delinquent loans.

“We not only do we rank them, we pay them to do workouts. They get a certain dollar amount for every workout type. We spent $7 million in cash bonuses on the program last year,” Stout Migala explains.

What should you do if you can’t pay your loan?

  1. Call your lender immediately. The sooner you contact your lender (look for the toll-free number on your monthly statement), the more options will be available to you. Ask for the loan mitigation department.

  2. Talk with a reputable credit counseling agency. You can call the Homeownership Preservation Foundation (toll-free 888-995-HOPE), or find a local HUD-approved counseling agency (toll-free 800-569-4287 on weekdays) or go to www.hud.gov.

  3. Know your loan modification options. Depending on how quickly you call your lender, the following loan modification options may be available to you: forbearance (an agreement to temporarily let you pay less or nothing while you get back on your feet); reinstatement (pay the total amount you’re behind in a lump sum by a certain date); repayment plans (you’ll be given a fixed amount of time to repay the amount you’re behind by combining a portion of what’s past due with your current payment); and, loan modifications (a written agreement between you and the lender that permanently changes one or more of the original terms of your loan to make it more affordable, such as extending the loan term or lowering the interest rate).

If your financial circumstances have changed so much that you can no longer afford to keep your house, your mortgage company may offer you one of the following options to forestall the foreclosure process:

Loan assumption. Even if your mortgage isn’t assumable, your lender may allow someone else to take over the payments and bring the loan current. This may allow you to sell your home.

Short sale. This option, which has been in the news lately, allows you to sell your house for less than the amount that is owed on the mortgage. Recent, but temporary, changes to the IRS tax code mean that the difference between what you owe and the amount you’re selling for may no longer be taxable as income.

Deed-in-lieu of foreclosure. You may be able to transfer title to your property to the mortgage company in exchange for the complete cancellation of your mortgage debt. In most cases, your lender will have required you to try to sell the house for 90 days before a deed-in-lieu will be considered.

If you find the possibility of foreclosure to be overwhelming, and want more information, be wary of going to friends and family or even the Internet for guidance, Stout Migala warns.

“There could be a lot of misinformation going around,” she says.

You could also wind up being snared by Internet scam artists posing as credit counselors or in a foreclosure rescue scam. The best place to start your search for information on the foreclosure process is at the HUD.gov website.

Feb. 10, 2008.