It’s bad enough for a family in distress facing a possible home loan foreclosure. But what compounds the misery is how it affects a neighborhood.

When a home is foreclosed upon, the value of other homes in the neighborhood drop. Which may not seem fair, but it’s just the way the system works.

Banks lose too in a foreclosure. Because of costs associated with those legal proceedings, a bank will lose on average $50,000 per property. This number is higher in recent months because of the strong drop in home prices overall. If the loan was for $300,000 and the resale on the house ends up around $260,000, there’s $40,000 in a loss right there.

All parties – the borrower/homeowner, the bank and the neighborhood – benefit when the mortgagee is able to achieve a home loan modification. This is when the bank agrees to recast the mortgage, changing payment and other terms. Generally speaking, the bank sees a drop in income on that particular loan, but it’s less than what a foreclosure would amount to.

Homeowners can attempt to negotiate a loan modification on their own, but third party loan modification specialists are doing most of these transactions today. They charge a single fee, about a month’s mortgage payment, with no points or recurring costs. If they fail, the money is paid back to the borrower in full (from reputable firms, anyway). Experienced modifiers (lawyers, accountants, finance experts) know what they’re doing, and generally can predict with high accuracy if they will be successful.

For all involved, a loan modification can be a means to alleviate the economic pressures of the housing crisis.

A relatively new phenomenon in the home loan foreclosure crisis is the trending toward loan modifications. Not exactly a refinance, loan modifications are when the bank determines they will work with a mortgage holder in distress (usually, in foreclosure proceedings) to find payment terms that are more manageable to the borrower.

The reasons for the borrower being in distress can be many: ARM adjustment that goes beyond the borrower’s repayment potential, loss or drop in income, illness or divorce are among them. What the bank would prefer to do – as does any neighborhood in the vicinity of the property in foreclosure – is stop the foreclosure. A bank stands to lose as much as $50,000 on average when a homeowner loses their house. Why? Legal fees, staff time spent on property management and reselling the property in a depressed market all add up to costs to the bank. They’d rather keep the customer paying for years into the future. The neighbors don’t want a foreclosed property either because it devalues their home values too.

Home loan modifiers, third party intermediaries, can smooth the process for the homeowner and get them a better deal. They work on a one-time fee basis, generally a month’s home mortgage payment, to review documents and then approach the loan officer with an offer. They have industry insider information that enables them to project with good confidence (90 percent accuracy) if a bank will deal, and at approximately what amount. If the modifier is unsuccessful, that fee should be refunded.

All in all, it’s a win-win-win for homeowners, lenders and neighborhoods.

There may come a day in the not too distant future when financial intermediaries can be hired to work on all matters for individuals. The reason for this is evident in the home loan mortgage crisis currently threatening the economy overall and millions of Americans who are in danger of losing their homes.

Home loan modification firms are now rising to help persons in distressed mortgages. They are lawyers and finance specialists who understand the position of banks and other mortgage lenders. They know that a bank does not want to lose a customer, nor are they interested in owning individual properties. It consumes staff time, an expense, they are stuck trying to sell homes in an undervalued market, and they lose a customer. Foreclosures are losers for banks, and home loan modification experts understand how to leverage that to the homeowner’s advantage.

Of course what led to this is how many borrowers did not understand the terms of their mortgages. This may be an ARM that increased dramatically over three to five years. But also many households expected to continue employment, that there would not be such a deep recession as we see today.

Loan modifiers work on a fee basis, not tied to “points” or other factors related to the new mortgage terms. They generally charge one month’s mortgage payment — as they recast the mortgage terms for 30 years into the future (a significant savings over time).  If they are not successful – an unusual situation, as loan modifiers usually know with 90+% certainty what their outcome will be – they should refund this fee to an unsuccessful homeowner.

Any home purchased in the past three years, since 2006 or earlier, has likely declined in value anywhere in the U.S.  In some cities, home value drops are greater than others. Add to that home mortgages with ARMs that have adjusted upwards and the dilemma of distressed mortgages is easily understood.

Of course, any homeowner in this situation may well be distressed under otherwise normal circumstances. But now, with massive job losses and cutbacks in hours worked for those who still have their jobs, it is clear that adjustments need to be made. The government is working on bailouts for homeowners, which will apply to some people. But others may not be eligible, or that help will come too late.

But any homeowner in difficult and unmanageable circumstances, even those in the process of a home loan foreclosure, may be able to work their own solutions out through a home loan modification. Either they, or more often their representative in a home loan modification firm, can deal with a bank directly to find a lower interest rate or other terms that bring the mortgage back into affordability once again.

Professional loan modifiers are generally teams of lawyers and finance specialists who understand the mortgage industry enough to predict success at loan modifications before contacting the bank. They charge about a month’s mortgage payment and, if reputable, will provide a 100% money back guaranty if their efforts fail to provide satisfactory modified loan terms.

Many homeowners in or near foreclosure proceedings are unaware that the terms of their mortgage can be changed, even at a late stage. A bank/mortgage company will do this if they see a lender is able to make payments if the monthly payments are lowered.

Why would a bank do this? This is simple: a bank does not do well owning a house, particularly in this housing market. They are stuck with property maintenance, liability and the process of selling it again. This is not what banks do, and often they lose money in such situations. 

The question is where does a lower monthly payment and other mortgage terms, for example going with a fixed rate in place of an ARM, still beat the lower revenue the bank will get from a recast mortgage? An average homeowner is not usually able to figure this number out on their own. But when a professional mortgage loan modification firm is engaged, they are able to use their experience and industry information to come up with a number that is beneficial to all parties. It’s truly a win-win solution.

The better loan modification firms charge approximately one month’s mortgage payment on a property as their fee for service. And those experienced firms will know with a high degree of certainty – 90 percent, usually – in advance whether they will succeed at renegotiating the mortgage terms to a successful outcome. If not, the homeowner should be provided a 100 percent money back guaranty, thus making it a no-lose proposition for that individual.

Just like on “Who Wants to be a Millionaire?”, life sometimes has its lifelines. If you’re in a home loan foreclosure situation – already in process, or close to it – a home loan modification consultant is your lifeline.

Here’s how it works. If you are unable to keep up with your mortgage payments – due to the economy, illness, divorce or other reasons – your lender might be open to reducing your monthly payments by reducing your interest payments, the length of the loan, or by other means. A recast mortgage can mean the difference between keeping and losing your home.

There are several reasons you would hire an intermediary. One is that getting through to the right people at your bank may be a frustrating experience. This makes a little more sense when you realize that the average loan officer has a caseload of 700 homeowner mortgages. They are stressed too. Also, the loan modification specialist has industry knowledge of what a foreclosure would cost a bank.  Keep in mind banks don’t want to own homes — they are far better off with monthly payments and not managing real property, selling at a below-value amount and liability issues. So the loan modifier is essentially finding that point between where the bank loses money and where you can afford to be. Also, a loan modification firm is made up of home mortgage experts and lawyers who can deal without the emotion typically attached to a foreclosure situation. Minus the emotional factor, a rational solution is more likely.

Maybe your home is or is not worth a million dollars. If you can hold on to it, with a monthly payment that you can manage, you will probably get greater value from it in the future.

In this economic crisis, everyone wants to find a recast button. “If only we had made better decisions back when…” is said or thought in corporate boardrooms and at kitchen tables alike.

In fact, homeowners in mortgage distress are discovering they can achieve a home loan modification, actually negotiating better terms on their mortgage – good enough they can save their homes. The facts are that banks don’t want to foreclose. They are not in the business of owning, maintaining and selling homes – and are unlikely to unload these unwanted properties at their preferred prices in an historically low market.

But a large percentage of homeowners are uncomfortable with the loan modification process. They may not know they exist, or what can reasonably happen. The terminology is likely unfamiliar, and they fear they will make mistakes similar to the loan terms they agreed to at purchase of their property that got them in trouble in the first place.

This is why loan modification consultants are on the rise. Thousands of people have retained ownership of their homes, or exited with better terms, because they were able to use “loan mod” specialists. Legitimate loan modification firms can work around borrowers’ bad credit, assessing hardship and presenting a business case to the bank that helps all parties with loss mitigation. Their services stop foreclosure even in process, in some instances. Quality consultants will also limit fees to around $300 or slightly more, depending on the location, and not take a case until they’ve examined the details enough to proceed with high confidence.

Banks can be reasonable, if approached professionally, dispassionately and with an understanding of what they’re up against on their side of the equation.