When a homeowner misses one payment, they are technically in default on that loan. Does the lender immediately start a foreclosure (as they are legally entitled to do)? Of course not – they try to work it out with the homeowner, have the homeowner pay some late fees and get a ding on their credit record. But what happens when several payments are missed? Now what?

In today’s world, this is the common starting point for the homeowner who starts trying to get a loan mod.  There seems to be a pervasive sense that once I’ve start to apply for a loan mod, the lender won’t foreclosure on me. WRONG!

Many of these homeowners have waited until the lender starts the foreclosure process by recording a Notice of Default. This starts a 3 month window before the lender can file a Notice of Trustee Sale which sets an auction date about 3 very short weeks in the future.

Frequently, the left hand doesn’t know what the right hand is doing at the big servicers. So while you’re waiting for someone in one city to review and approve your loan mod, another department in another city is foreclosing on your home. This is the “dual track” lots of people are talking about.

Two major forces are trying to deal with this issue. First, this week a number of obscure (to most laypeople)  Federal agencies issued settlements with the major banks that would stop foreclosure – but only after the homeowner has been approved for a temporary loan mod. Otherwise, the clock keeps running. Consumer groups railed against this because in their view it still leaves the homeowner vulnerable while the homeowner waits for that approval (which, after all, may not come).

Opposing that position is the group represented by the 50 states attorney’s general. They seek a much more restrictive agreement that would prohibit the foreclosure while the homeowner is applying for the loan mod. Big difference!

So in the meantime, if you’re waiting for that loan mod and you feel like you’re trying to punch your way out of a paper bag with your lender, be advised your lender can (and will) sell your home at auction.

A solution to losing all in foreclosure is to consider the US Treasury’s HAFA short sale program. If you’re already in foreclosure, applying for a HAFA short sale (not a traditional short sale!) will ultimately stop the foreclosure. The lender can still publish the Notice of Trustee Sale (which sets an auction date), but can not go to sale. This affords you, as the US Treasury program states, the opportunity to make a “graceful exit” from your home. It’s a pre-approved sale with your lender. Once on the market, your home is marketed and sold like a “regular” home sale with a normal escrow, closing, etc.

As part of the HAFA program, at close of escrow you’ll get $3,000 as a re-location allowance, funds that come from the TARP program that bailed out the banks in 2009.

The banks got billions of TARP $$ – all I got was this lousy T-shirt…!