Participation in the mortgage modification program by mortgage servicers is voluntary, but most of the big ones are playing along. One reason: The program provides monetary incentives to servicers for keeping people in their homes and to lenders for agreeing to modify the mortgage. (The incentives make it less likely that a servicer would make more money off a foreclosure than it would modifying your mortgage to the 31% debt-to-income level.) Note that once a mortgage servicer accepts any federal "bailout" money, its participation in this program is mandatory.

The program also includes incentives for mortgage servicers who are able to extinguish second liens (second mortgages, for example) on the property. Extinguishing second liens will make mortgages more affordable, improve loan performance, and help prevent foreclosures.

Starting the Modification Process

Your mortgage servicer is supposed to contact you if you appear to be eligible for the program, though there is no guarantee this will happen. Before contacting your lender, it's a good idea to talk to a nonprofit housing counselor certified by the Department of Housing and Urban Development (HUD) about your options. To find a free counselor, call 888-995-HOPE or go to www.hud.gov and click on "Talk to a Housing Counselor."

Don't Pay for Modification Assistance

Under no circumstances should you pay anyone to help you with your mortgage modification. Don't pay $1,000 or more for the same services you can get for free from a HUD-certified housing counselor. Because laws in some states prohibit people from taking money up front to help rescue people from foreclosures, some of these modification companies are hiring lawyers--who are authorized to accept up-front payments--to be their pitch persons. Lawyers can be helpful in certain situations--for instance, you may want to hire a lawyer to challenge a foreclosure in court or to help you file for bankruptcy--but lawyers have no magic keys to the kingdom of mortgage modifications. Again, you and your wallet will be better off with a free HUD-certified counselor.

Weigh Your Options

Before signing off on any new mortgage terms, ask yourself whether you would be better off holding on to your house or walking away. If you can get a lower payment under the new laws, you may be more inclined to keep your house, but it may depend on just how big a reduction you can get and whether your negative equity is so large that it makes more sense to use your state's foreclosure laws as a means to put away some money. In other words, even if you qualify for a monthly reduction in payments of several hundred dollars, you might be better off allowing your house to be foreclosed on -- by not paying your mortgage altogether, you could save thousands of dollars during what is often a very slow foreclosure process. If you decide that it's in your best interest to walk away from your mortgage, but you want to stay in the house as long as possible payment free, the only effect that applying for a modification is likely to have is to lengthen the time you can stay before you have to leave. That's because mortgage lenders must suspend foreclosure proceedings during the processing period (and because they will be busy negotiating modification terms with other homeowners, making them less efficient in bringing foreclosure actions).

For more information on these and other ways to avoid or delay a foreclosure, see Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket, by Stephen R. Elias (Nolo).

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