SPECIAL REPORT : FIGHTING FORECLOSURE : There are legitimate ways homeowners who face losing their homes can slow or even block foreclosure and perhaps protect credit record as well.

The specter of foreclosure looms large for increasing numbers of Southern Californians--from those ensconced in Hancock Park estates to owners of Van Nuys condos.

A lengthy recession--the longest since World War II--and a white-hot real estate market turned frigid helped nearly double the numbers of foreclosures in California in the last year, according to the Mortgage Bankers Assn. of America. In Southern California, one out of three notices of default ended up in notices of trustee sales earlier this year. Last month the number peaked at two out of three, according to Dataquick Information Services of La Jolla.

Fortunately, there are ways to forestall and even stop the death march to foreclosure that banks initiate when borrowers miss monthly mortgage payments. The following guide should helpyou buy some time while you get back on your feet.

But remember, there are no blanket solutions or quick fixes to forestalling a foreclosure. Be aware that lenders, insurers and government agencies consider delinquencies on a case-by-case basis.

Contact the Lender

Banks and credit counseling agencies advise borrowers to contact lenders early about potential late payments--and phone often once payments stop. But an increasing number of borrowers say lenders turn a deaf ear to their pleas for loan work outs.

“Their attitude was purely business, a feeling that they couldn’t lose,” said Robert Warsaw, who bought his Sherman Oaks home in 1988 for $425,000 and lost it through foreclosure this past October. “I sent dozens of letters to the real estate division’s VP. They were never answered. It’s infuriating when your home and life savings are on the line and you can’t speak to anyone beyond a senior clerk.”

Warsaw, who lost his $150,000-a-year job as senior vice president of an accounting firm two years go, lost not only his home, but also his flawless credit rating and substantial savings. “And the bank lost thousands of dollars by dragging it out,” he said.

Other homeowners claim they are told by lenders to miss two or three payments before repayment strategies can be discussed.

Some lenders may show meager interest in your mortgage because they no longer own it. Up to 80% of loans are serviced by other companies or sold to secondary markets, such as the Federal National Mortgage Assn. (Fannie Mae) or the Federal Home Loan Mortgage Corp. (Freddie Mac).

The official line from banks, of course, is that they welcome phone calls about potential or actual mortgage delinquencies.

“We’re not in the business of acquiring an extensive real estate portfolio,” said Larry Padilla, first vice president of Great Western Bank’s loan service administration. “We consider any reasonable offer of loan repayment. We’ll even wait a month or two for payment if there’s real hardship.”

It’s in a bank’s best interest to work with borrowers, because lenders may lose thousands of dollars when selling a foreclosed home in a depressed market. Each foreclosure can also cost banks up to $5,000 in various fees.

Padilla said it’s important to demonstrate your willingness by calling lenders before they call you about late payments. If they’ll listen, phone several months ahead of anticipated missed payments with news of a job loss, serious illness or death in the family. Or call during the 10- to 15-day grace period before your payment becomes delinquent. Lenders want to hear about genuine financial hardship--an excuse about credit card misuse won’t get you far.

Seek out a person with authority, such as the head of the loan service division. After missing a payment, ask to see them in person. It’s easier to foreclose on a faceless borrower.

Arrive with a financial portfolio of your assets, liabilities, past two years of tax returns, proof of employment or unemployment, monthly budget, your home’s current market value and a realistic sense of potential employment or resources. Document all of the above, including any major repair or necessary improvements made to your home. And if you’ve visited a credit counselor, it’s to your benefit. Also, phone lenders often to remind them of your willingness to find solutions.

Present a reasonable repayment plan or loan work out.

Loan Work Outs

“Your highest priority should be to save your equity and credit,” said Larry Blachman, head of Fred Sands Realtors foreclosure group. “If you don’t want to sell, your best bet is to talk creative financing with your lender. Be prepared to work through various strategies and definitely go in early. I’ve seen too many cases where it’s just too late to help.”

Be aware that work outs are more successful when borrowers possess sterling credit histories and can guarantee future employment.

Here are some suggestions:

--Forbearance, a time during which either a lower mortgage payment or no payment is made, usually lasting from one to six months. Again, demonstrating true hardship will be a major deciding factor. Lenders should give borrowers a written account of the length of reduced or suspended payments and when usual monthly payments will resume.

“The agreement protects both sides,” said Padilla, adding that forbearance does not stop foreclosure, but only suspends it until missed payments are cleared up.

“If something significant happens while on the repayment program, like an anticipated income tax return doesn’t show up, borrowers should contact their lender right away,” he said. “It’s crucial they don’t overreach and agree to repayment plans that are unrealistic. Forbearance may be their last chance.”

--Refinancing for better terms can be a long shot. Be aware that payments may be reduced as little as 5% or 10%--a bare nick off your monthly payment.

--Borrowers with FHA-insured loans should seek Housing and Urban Development (HUD) delinquency counseling to help speed work outs as HUD will often intervene on behalf of the borrower. HUD allows lenders to wait up to one year from the original default (usually one month after non-payment) before commencing foreclosure.

--If lenders resist work outs on loans guaranteed by the Department of Veterans Affairs (VA), borrowers should request “supplemental servicing” in which VA works directly with the lender. VA forbearance can be granted for up to 12 months before further review on such loans. Refinancing is also possible.

VA also may extend the loan term, reducing the amount of principal paid with each monthly payment. Extra years, such as years 26, 27 and 28 are simply tagged on to a 25-year mortgage, especially effective for older loans where much of the interest has been paid off in early years. Most loans, unfortunately, enter default during their first five years.

--Assignment, which transfers your loan to HUD, is possible only with FHA-insured loans. To be considered, hardship must have caused your delinquency (death, illness, job loss, divorce), your loan must be three or more months delinquent, foreclosure must be imminent, you must reside at the property and you must have employable skills. Also, borrowers are not allowed to own other FHA-insured loans.

Under assignment to HUD, loan payments may be reduced or suspended for up to 36 months. Full payments must commence on the 37th month. The loan can also be extended for up to 10 years. The consideration process takes about 90 days, and can be appealed.

“It’s important to be timely when sending HUD documents about your mortgage and financial situation or you may lose consideration,” said Enrique Ramirez, supervisory loan specialist at HUD’s Los Angeles office. “Also, your first priority should be to try working out the situation with the lender. If there’s no cooperation, HUD will back you up.”

The VA will not accept loan assignments.

--Assumptions for FHA-insured and VA-guaranteed loans are possible in two ways, both enabling the seller to move out while a buyer moves in and pays the monthly mortgage. In full assumptions, sometimes called formal assumptions, lenders must approve credit-worthy buyers, and sellers are often released from obligations for loan repayment.

Simple assumptions do not require lender-approved buyers and the seller remains liable for the loan. Such assumptions are possible only for those whose loans originate prior to 1986. In both full and simple assumptions, buyers receive the property deed and become the new owner. Loan payments must be current for borrowers to qualify.

--The Soldier and Sailor’s Relief Act of 1940 prevents military personnel from losing their homes while they’re on duty. The mortgage must have been assumed before the borrower joined the military and any delinquency accrued while serving must be erased within three months after the borrower’s military discharge.

Fight for Your House

While you’re negotiating with your lender for restructured payments, initiate a no-frills budget that puts your mortgage payment as your No. 1 priority.

“If you lose a house in Southern California, good luck getting another one,” said Richard Pittman, counseling director of the nonprofit Consumer Credit Counseling Service (CCCS), a HUD-certified agency. “Everyone has finances that can be pared down to make room for house payments. We’ve had people come in here who say they absolutely need $1,100 a month for food--for one person. There’s room to trim there.”

Pittman suggests making a list of assets that can be sold, including stocks, bonds, collectibles, cars and boats. Consider holding a garage sale to raise cash. Borrow against your life insurance or retirement account, provided you can get a favorable interest rate. Take on a boarder or move in with friends or relatives while you rent out your entire home, he suggested. Or take on a second job. Pay your house payment first before sending a cent to credit-card companies.

In short, be willing to swallow your pride and make sacrifices to save your home, especially if you’ve built up substantial equity.

Credit counseling services can help draw up a budget or create a debt management program. At CCCS, such a program allows clients to repay their debts (usually credit cards and various loans, excluding mortgages) to CCCS over an average of 30 months at a service cost of less than $20 a month. CCCS then doles out payments to borrowers’ numerous creditors. Clients must bring all bills, payment records and recent salary stubs to the counseling session. Such plans may sway banks to consider loan work outs.

John and Maria, who asked that their last name not be used, now pay a consolidated monthly debt payment of $855 to CCCS, after debt mismanagement edged them to foreclosure.

After amassing $25,000 in debt, $15,000 of which was on credit cards, the couple refinanced, put in landscaping and paid off their car loans and credit cards--a strategy that raised their house payment from $1,000 to $1,700. “It made sense at the time, but it doesn’t now,” said Maria, who lives in La Verne.

After ringing up yet another $15,000 in credit-card debt and missing a few house payments, the couple began paying $1,700 every two months, hoping to stave off foreclosure proceedings which often start during the third late month.

“CCCS said to stop paying everything else and accumulate enough money to get current on the mortgage,” said Maria. “Creditors were screaming at us but we just said our house comes first. It took us two months to catch up. We started a repayment program this month.”

Credit counselors may also act as mediators, temporarily halting foreclosure proceedings while assisting with loan work outs. “It was two days before my foreclosure and CCCS got my lender to hold off--they bought me two weeks while I worked things out with the credit counselor,” said Joe Jackson, who recently struck a loan workout plan with his lender, allowing him a four month catch-up period.

“The lender wanted me to come up with $2,000 a month, but CCCS negotiated for what I could handle--$1,190,” added Jackson. “I wouldn’t have been able to negotiate that kind of deal. They’re familiar with lenders around town and can mediate for you. That really helps.”

Eleventh-Hour Strategies

--Consider selling your home, especially if you’ve built up substantial equity.

--Should the home be worth less than what you owe on the mortgage, consider a short-term payoff, an arrangement in which the lender and/or insurer of the mortgage accepts a loss on a loan’s unpaid balance after a house is sold. For example, a lender and insurer might split an $8,000 loss when a house, which has an unpaid mortgage balance of $220,000, sells for just $212,000.

“I’m seeing more and more payoffs,” said Blachman. “I’ve seen lenders forgive amounts of $5,000, $10,000 and up to $50,000,” he said. “It’s totally negotiable.” Usually only VA and private mortgage insurance companies offer payoffs, and negotiating the deal may require considerable expertise.

--Deed in lieu of foreclosure, a rare occurrence, confers the property deed to the lender in exchange for the owner being relieved of all mortgage responsibility. Lenders will shun this arrangement if there are any liens against the property. Deed in lieu works best when the property is worth more than the borrower owes against it. Both borrower and lender can benefit should an agreement be struck allowing the borrower to continue living in the home in exchange for maintaining the property and showcasing it to potential buyers.

“Remember to negotiate with the bank so they don’t report missed payments to credit reporting agencies,” said Steve Love, a personal financial adviser in Torrance, “That can ruin your credit rating for up to seven years.”

HUD welcomes deed in lieu for its FHA loans. Again, to qualify, the loan default must have been caused by hardship. If a solid work-out plan is possible, an FHA deed in lieu is unlikely. HUD is able to strongly advise lenders on deed in lieus and it often helps to obtain HUD’s sanction first by phoning the director of management or development at your local HUD office. The VA will also consider accepting a deed in lieu, but rarely, and only when borrowers are faced with extreme hardship.

--Filing bankruptcy won’t help you make your mortgage payments, but it will delay foreclosure, even if you file just a few days before the proceeding. You’ll need to stick to a payment plan after filing Chapter 13, which requires that you have a source of income. Filing bankruptcy, which usually requires an attorney who prepares and files papers, should cost between $500 and $1,500. The action will appear on credit reports for at least 10 years.

--A temporary restraining order or an injunction can be granted quickly, halting the foreclosure process for days or weeks. Sufficient legal grounds for filing such an action include fraud in the original loan transaction and irregularities in the sale procedure, such as flaws in the notice of default or in the notice of trustee sale.

--Civil code allows for a 24-hour postponement of a foreclosure auction. “Borrowers can literally walk up to the trustee minutes before the sale and request postponement,” said Nancy Cohen, Great Western Bank’s vice president of loan service. The request, its purpose to obtain enough cash to pay the debt or enter the bidding process, must be in writing and must identify said funds.