Foreclosure figures are rising right across the continental USA and any county or State in particular, once it is normalized for regional variations, can act as a reliable weather vane for what is happening in every part of the country.

In California, the number of foreclosures is on the increase. Foreclosures are a distasteful but unfortunately necessary part of the Real Estate business. Lenders use foreclosures to send a strong message to borrowers who would otherwise default on their payments at the first sign of trouble with their finances.

To be honest, lenders do not like having to foreclose on a property and will, initially, exhaust all other avenues they have, trying to communicate with the property owner before they decide that it is now time to call it in and take possession of the property.

There is something here, at this highly emotive stage, that may people lose sight of: once a property moves into the foreclosure zone all is still not lost. Lenders may not be the kindest organizations on the planet but they work best when they lend money and receive payments back. Taking possession of a property, creating a huge administrative load dealing with a hard-to-reach house owner who has suddenly fallen on financial hard times, and then moving in and selling the property, are all loss-making activities.

The lender, by default, is geared up to try and find ways to minimize this loss. Precisely because of this there exists the possibility of a home owner moving out of the foreclosure zone and saving their property and credit rating by engaging in any of the following activities: 1. They could bring their payments current. 2. They could refinance either by taking another loan or a second mortgage which releases equity in their property 3. They could sell their property, pay back what they owe and move on.

Now all of these are viable options in a market that is still buoyant. However the moment the market tightens up the choices available to a home owner looking to save their property significantly narrow. This then leads to an increase in foreclosures as those in financial trouble are unable to get out of it.

The current figures available for California show that roughly half (54.6 percent) of the homeowners in default emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was 88.0 percent. The decrease is significant because it shows that we are now in the grip of a bear market for real estate which will only get worse as lenders are forced to dispose of the properties they have acquired at a loss and then proceed to tighten their own lending procedures further restraining the growth of the home buyers’ market.

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Here’s a nightmare scenario: You have bought your dream property and you are mortgaged to the hilt but managing. Just when you thought that you could make ends meet you lose one of your jobs and your wife begins to get ill. This is just the kind of situation which can turn a manageable credit crunch into a catastrophic scenario which leads to foreclosure.

It happens more often than it should and the question is, what can you do, if anything to avoid it?

For a start let’s get one major thing straight: lenders hate foreclosures. It means they will end up with a property on their hands they will have to sell at a loss, their administrative costs will sky rocket and their workload will shoot up and they will end up losing money. They do face a dilemma however as they cannot just let things slide either. After all, they are able to make sure everyone pays what they owe on time precisely because they are able to force a foreclosure and take a property in default away from its owner.

So where does that leave you? As a property owner who has, for one reason or another, fallen behind on payments you need to start opening up communication lines with your lender and fast. I understand that the moment you begin to fall behind on house payments you are struggling with many different issues and you are under pressure and the temptation not to respond or talk to your lender is great but that is the fastest and surest way to lose your house.

So, whatever pressures you are facing you need to make sure you establish contact with your lender. Be honest about the situation, explain what the problem is and see if something can actually be arranged. After all the lender does not really wish to foreclose on your house and if you come up with a temporary solution which will satisfy the lender and give you the room you need.  This will lead to the both of you being satisfied and you will greatly increase your chances of saving your property.

Each lender, of course, has different guidelines and procedures regarding missed payments, mortgages in arrears and negotiating with house owners. The thing here is to be realistic, resist the temptation to take advantage, offer genuine solutions, stress how temporary they are and why you need the breathing space, and see how far you can actually get and what arrangement you can come to.

Remember that this is a temporary situation designed to produce a win-win scenario: you get to save your house and the lender is satisfied that they will get their money back and you will bring the payments back up to what they should be. Approach it in this way and the chances of a foreclosure are greatly reduced.

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In real estate, every single action is followed by an opposite and sometimes equal reaction. The news that Bay Area sales of new homes have slowed to their lowest point in 15 years signaled a rise in tension as lenders began to nervously examine their lists of borrowers who have fallen behind on payments.

Let’s take a moment to examine why one area should be affecting the other. Lenders make their money by doing what they do best: lending money to borrowers who pay it back with interest thereby leading to a large profit. There is a certain remorseless logic of specialization in this area which occurs by default.

What I mean by this is that lender’s are happiest when they lend money and collect payments because that’s what their business is really geared up to do and borrowers need to borrow money at a rate they can afford to repay it.

Now the moment you have house sales dropping and borrowers defaulting, lenders begin to get nervous. They get nervous because they sense that the economy is taking a dip which means that those borrowers who are teetering on the edge and are just managing to make the payments and have now fallen behind, and are finding it tougher to make ends meet. You would think, at this point, that the fact that lenders have lent money with a house as a collateral would be enough to take the edge off their nervousness. After all, logic tells you, the moment a house owner cannot make payments and the loan goes into default (and remember these two things do not happen simultaneously, there is a lengthy process involved) the lender will take possession of the house, call foreclosure upon it, and get their money back.

Ok, logic here is wrong. Here’s why: Lenders have specialized. Taking possession of a home and selling it is the worst case scenario for them because they know the have no specialized staff to do this. It is a costly exercise for them in terms of administrative costs, because they are not geared up for selling houses and they will get back in most cases is going to be well below the house’s market value. That means that the moment a lender decides to play hardball with a house owner (who can no longer make payments and take possession of the house), they are losing money and are only trying to decide what is an acceptable loss.

This leads me into the Bay Area news which is bad for those home owners who have fallen behind on their payments and those lenders who have loaned money to them. A slow down on house sales means a slow down on the economy which means a dip in house prices and a buyer’s market. For a lender who has taken possession of a house because the owner defaulted on the payments means that house prices are dropping and their loss is increasing. This makes it more likely for them to foreclose on properties which have not yet reached the normal default stage, because the lender does not want to risk waiting and having to sell the property six months later at a greater loss.

This is bad news for borrowers struggling to make ends meet because the lenders are getting trigger happy and are less likely to listen to a home owner who has fallen behind on their payments. Suddenly, the news coming out of Bay Area is a clear signal that suddenly there is a very cold wind blowing in the home buying business and lenders are getting uneasy.

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