One and one half million families in 2007 and a projected two and one half million families in 2008 are going to face the problem of foreclosure because they are caught in a sub-prime mortgage that they were granted despite the fact that they had bad credit.

No down payment home loans, with adjustable rates (sometimes teaser rates to attract business but still elevated because of the borrower’s poor credit) seemed like a perfect idea.

But the value of the underlying collateral, the home, is falling fast, and these mortgages have no equity because of no down payment.

Interest rates close to 10% meant mortgage payments of over $2,000 on homes that cost only $200,000. Even a small adjustment in the ARM (Adjustable Rate Mortgage) could result in a $300 to $400 increase in the home loan payment. The Catch-22? Refinancing at more advantageous rates and terms is almost impossible because of a poor credit rating and upside down mortgages. (Now the balance of the mortgage is more than the value of the house.)

Is there anything that a homeowner with this problem can do? The government is currently looking at a few different rescue packages, but a homeowner can do something even now to avoid problems by taking some aggressive steps of his own.

The one thing a homeowner should not do is to ignore the problem. As soon as a homeowner realizes he may have a problem with this month’s payment, he should get in touch with his lender. If there has been some extenuating circumstance, such as illness or job loss, the lender will work with the borrower; it may be a different story if the borrower has been squandering his money.

Get in touch with a counselor. HUD (the Department of Housing and Urban Development) has a list of counselors they work with who can assist homeowners to find a way out of this problem.

Lower your expenses, most especially high interest rate ones. There may be some expenses that you have no choice about, especially as food and energy prices are increasing, but non essential items should be examined carefully. The savings can go to your high interest credit card debt or to catch up on the mortgage.

You may be eligible for a government initiative to help out. There is a new program for low income families that will allowthem to switch to a 30 year fixed rate mortage (as long as they were current on their original home loan before the ARM rate increased.)

There are some more dramatic solutions, but if all else fails, you may not have a choice.

Put your house on the market. Selling the house in today’s market may result in a loss, but working with the lender may also mean that they will accept the sales price in settlement of the loan. This is a better solution for them in the long run than foreclosure.

Choose bankruptcy. This is a last ditch resolution since you will be tied in terms of your long range financial plans. It will further injure your already poor credit, but if you have no other solution, it is a way to have debt consolidated, reduced and in some cases even forgiven, depending on your income.

There are solutions to be found, but the borrower with a problem home loan cannot afford to bury his head in the sand, but instead get out there and search for the solution.

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