For those that negotiated an ARM, the mortgage knife cuts in two ways: home values are plummeting while mortgage payments are jumping up. This could result in default when payments exceed the owner's ability to pay, but then the resale price is not sufficient to cover the original mortgage to begin with. So, that's how we got to where we are now.

Is there a way out of this mess? The easy answer is, maybe.

The current credit market is by no means as favorable as it was just a few years ago. Lenders were much more prone to making high-risk loans, which endangered not only their business but the borrowers as well. In those boom times, teaser rates were the hook used to entice borrowers into mortgages that appeared to be good in the short term. This was all put in the positive light of home values, which were believed to keep rising. Borrowers were betting on an uncertain future that seemed to be bright. Now that future is here, and it is proving to be more difficult than the borrowers or lenders could have ever imagined. So now those same borrowers are seeking ways to alleviate the mortgage crunch, but are finding few options. What they need to understand is that through some patience, determination, and the ability to reach out to those that can help.

Here's a case study of a family that nearly lost their beautiful home, as many other families have endured recently. The happy owners of a spacious Colonial home, they refinanced their mortgage, as most do, to shore up their finances and day down debt. In this case they had college expenses for two of their children to tackle. Their monthly payment was $3700, well within their means, and they seemed to be doing just fine.

The troubles started when a location of their small business, a restaurant owner, had to close along with the other businesses in the mall where they leased space due to financial problems. After infusing their business with personal savings, they still did not have the ability to cover their impending financial crunch from an interest rate that was increasing from 6.5% to 9%. Try as they could, they could not stay afloat, and were expecting foreclosure notices to arrive at their home. As a final attempt to get back to square one, they attempted to renegotiate with their lender. The one option they were offered was a balloon payment of $20,000, which was out of the question at that time.

By chance, they came upon a notice in a newspaper that mentioned a not-for-profit organization that worked with several large lenders to renegotiate terms on behalf of home owners to prevent foreclosure. Luckily, one of the firms this organization worked with was this family's lender!

National Training and Information Center (NTIC) came through on their promise. On the family's behalf, they modified the loan from adjustable to fixed, which resulted in a mortgage payment of $3,900, not much higher than their original payment. The lender also avoided the costly procedure of foreclosing and selling the property. Unfortunately, not everyone can have the good outcome this example shows.

Those that have expertise in housing financing have the following advice for those facing foreclosure or ARMs on an upward swing:

• Determine the value of your property, and compare it to the outstanding debt. While selling may not be your first option, it sets the plan for the steps to come. Don't forget to incorporate closing costs into the equation.
• Do not rule out refinancing. It may be difficult or very costly if your credit history is less than worthy, but there are good deals out there. If it sounds good, get it in writing.
• Communication with your lender is key. While most borrowers may shy away from this approach, any delay in attempting to renegotiate only makes the situation worse and leaves you with less options. As proof of your good faith efforts to fix the problem, track any communication by writing down any phone calls and visits in a logbook. Make sure to get the name of the person you talked to at each turn.
• Loan modification and loss mediation departments can be the answer to your prayers. If you are facing default, the people that work in the loss mediation department of your lender will have the ability to work with you directly to change terms of loans and avoid the loss of your home. Often, lenders will seek for you to put up cash in show of "good faith" efforts, so scrounge where you can!
• Seek assistance from non-profit groups. These can be good resources for advise, or even to act as mediators in negotiations with your lender. The HOPE Hotline, (888) 995-4673, serves on a nationwide basis to provide referrals to the organizations like the ones mentioned above. Governments can also lend a hand. Some states have home-owner assistance programs, and the Housing and Urban Development federal agency can also provide connections to resources from their website, http://www.hud.gov/.
• Be careful to not fall into "rescue" scams. You can protect yourself by never discussing mortgage information with callers that you did not initiate. Many of these scams are characterized by requests to sign over your deed or may a large sum of money in exchange for debt relief. The simplest way to keep these sinister callers at bay is to just hang up the phone.
• Don't rule out selling your home. While no one likes to be displaced, especially not by their own choosing, do not resort to such messy tactics as refinancing your mortgage multiple times. This is sometimes coupled with the complete depletion of equity, and it still fails to keep the family in home. In cases like these, selling the property would have been the best case scenario.
• Choose wisely, even when the options seem bleak. One of the most damaging occasions to credit is a foreclosure, and that damage is lasting. As we have offered here, seek other options. Research signing a "deed in lieu of foreclosure" to transfer ownership to the lender. There is also the proactive approach by some lenders that will allow you to sell the home at less-than-market value, even if it does not cover the loan.

You must keep perspective on the situation at hand: a very unforgiving housing market. It has become an environment that causes headaches and heartburn at its mere mention. Here are a few more tips if you are in the market for a home and a loan:

• Study the new terms under which borrowers and lenders are setting for mortgages. The credit crunch has changed many of the rules that were once seen as standard. Gone are zero-down mortgages. Back with us is documentation of income and credit worthiness.
• There is still a good market for conforming borrowers, or prime loan. These will generally be for loans of $417,000 or less. For amounts above this threshold, lenders will generally require down payments of 5% and will have higher interest rates.
• Look to untraditional sources for information about obtaining loans. Community action groups regularly hold seminars to educate potential home buyers, all free of charge. Also, government agencies like HUD that we mentioned earlier can be great resources.
• Address blemishes on your credit history ASAP. Most lenders will not extend financing to those with credit scores lower than 620.
• Take time to shop for the best deal, especially in light of the current market. If one lender, like an Internet lender, can't help you, try your local bank branch.
• Be realistic about meeting your needs. The downward pressure on home prices will probably keep your investment from outpacing interest rates.