Foreclosures are the result of too many missed mortgage payments. When a homeowner can't pay his mortgage lender, the lender can legally take possession of the home and sell it in order to regain the lent money. Lenders don't like foreclosures since it can cost them more than $50,000 to process each foreclosure claim [source: MBA], and they generally end up selling the house for significantly less than the original amount the buyer paid for it.
The Federal government decided to intervene in the foreclosure crisis that started in 2008 in order to prevent people from becoming homeless and to save the lending market. It created four main plans. Home Affordable Refinancing is a program where homeowners can refinance their mortgage to a lower rate; the option is available to borrowers whose property value is in a rapid decline and who remained current on their mortgage payments. Home Affordable Modification is a program designed for people whose mortgage payments are more than 31 percent of their monthly gross income and who have had major setbacks in the recent past, like large medical expenses. In such a case, the government will work with the homeowner and the lender in order to devise a payment plan the homeowner can afford.
The Second Lien Modification Program is meant for people with second mortgages. It offers enticements to lenders to forgive borrowers' second liens or to lower their interest rates to one percent. Lastly, in the Home Affordable Foreclosure Alternatives, the homeowner makes a short sale or offers a deed in lieu of foreclosure. In a short sale, the property is sold for a loss, but the mortgage lender gets the sale price. When a lender gets a deed in lieu of foreclosure, the borrower gives the lender ownership of the house, but he doesn't have to pay off the rest of his mortgage. Either way, the homeowner gets $3,000 from the government to pay for relocation costs [source: MakingHomeAffordable.gov].