In one common situation, the borrower has two mortgages, which add to an amount well in excess of the value of the property, and he can no longer afford both payments. If the same lender holds both mortgages and if the borrower can afford some reduced payment, his objective should be to persuade the mortgage lender to modify the notes to lower the payments.
The burden of proof is on the borrower. He has to document that he will be forced to default on the existing mortgages but could afford the payment on a new mortgage that would cost the lender less than foreclosure.
If the second mortgage is held by a different lender, the challenge is greater. The first-mortgage lender is unlikely to modify the note as long as the second-mortgage lender remains in a position to foreclose.
I suggest that borrowers in this situation approach the second-mortgage lender first, with the objective of inducing that lender to get out of the way. The borrower can offer the second-mortgage lender an unsecured promissory note for a portion of what is owed. Because the second-mortgage loan has little or no value except as a nuisance, any reasonable offer is likely to be accepted.
But not every troubled borrower is in the same situation. Not all have second mortgages. Some have large amounts of nonmortgage debt, complicating the process. While many have negative equity in their properties, some have positive equity. In some cases, a loss of income appears temporary, in other cases permanent. In some cases, borrowers plan to dispose of the property, while in other cases they want to hang on.
In principle, there is a "best possible outcome" for every situation, but only rarely do borrowers give me all the information I would need to find it, even if I had the time. Few borrowers know what their options might be, and fewer still understand the information they must provide before a best option can be identified. But some resources are available.
There is an article on my Web site called "Mortgage Payment Problems: What If You Can't Pay?" which I wrote in 2006 and updated in 2007. (At http://www.mtgprofessor.com, type "can't pay" into the search box.) It covers a wide range of situations and suggests the remedies that appear most relevant to each.
PMI and Genworth, which provide private mortgage insurance, recently developed Internet sites directed at preventing foreclosures. They cover essentially the same ground I did, but they break the problems down into bite-size pieces. Further, they include a number of videos that many people will find easier to follow than written explanations.
These sites are for people who are prepared to invest the time needed to figure out their options. They will not hand-tailor a solution but will provide useful guidance nonetheless.
At a second site, http://hoa.mortgageinsurance.genworth.com, Genworth takes a step toward customizing solutions. It provides forms that, when filled out by borrowers, provide the raw materials from which personal solutions are derived. However, there is no automated genius to generate solutions; the information is referred to a Genworth counselor, who will do it manually. Unfortunately but understandably, the counseling service is available only to borrowers whose lenders have mortgage insurance with Genworth.
That does not mean this Web site is useless for other borrowers in trouble. At some point, every borrower who expects help must pull together all the information about his or her financial situation that is relevant to a best possible outcome. If the intention is to go directly to the lender, providing this information at the outset will go a long way to placing someone at the top of the applicant pile.
I have been searching for a program that will automate the last step -- that is, after the borrower enters all relevant information, it would produce a "best possible outcome." While such programs exist, they have been developed for license to major players, and I have not yet been able to shake one free for direct use by borrowers.