When homeowners face foreclosure, the equity they thought they had in their house usually completely disappears by the end of the process. Especially if a house goes all the way through foreclosure and is sold at a public auction, there is more likely to be a deficiency than any profit from the sale. But even if the homeowners find a solution before that point, they can often find themselves quite dismayed at the evaporation of their home equity.

Equity in a home is destroyed during the foreclosure process by a series of circumstances. On the level of the individual house and mortgage, it can be erased by the bank's piling on of fees and charges, and by the desperation of homeowners to find a solution to the problem. On a larger social level, foreclosures in high numbers can lead to a general decline in property values in a real estate market.

When homeowners miss a mortgage payment, the bank will immediately begin charging as many extra fees as they can, many of which will accrue interest over time. All of these extra charges, if unpaid, will be counted against the homeowners' equity. Late fees, legal and court costs, and interest on unpaid balances can easily add more than $10,000 to the amount needed to pay off a loan, which has the effect of lowering the amount of equity people have in their homes.

Selling a house in foreclosure is also a difficult situation due to the lack of time homeowners may have to find a buyer and close the transaction. For this reason, they may be forced to give up much of their equity by lowering the asking price for the house to entice someone to purchase quickly. In the meantime, the bank will still be adding their own fees to the mortgage balance, which makes it even more difficult to get any profit from the sale.

The state of the housing market in the past year has deteriorated so that values are falling in general throughout the country due to higher than expected foreclosure rates and a lack of available credit. As property values fall, the equity in homes may completely disappear, with the homeowners going "underwater." This means that they have negative equity in their properties, owing more on the mortgage than the house is currently worth.

Thus, when foreclosure victims attempt to work out a solution and get ahold of their equity in a property, they may discover that much of it has disappeared. The longer it takes to resolve the foreclosure, the more charges the bank will add onto the balance, and the less time the owners will have to arrange a sale. As more homeowners face foreclosure throughout the country, property values will also fall further as more homes are placed on the market than can be purchased in a short period of time.

By the time a house goes to a public auction, it may be clear that the home is currently undesirable to most potential buyers. By this time the lender has added as many extra fees as it can, and the property will most likely be auctioned off for less than the total amount owed on the loan. This leads to the property selling for less than what is owed and the homeowners having a deficiency. Banks in some states can then try and sue the owners to get a judgment for this amount, although this is somewhat rare.

In the rare event that a house sells for more than what is owed on it, then the owners have a right to these profits. This is their return from the sale of the house, and they can claim it with their local county. They must do this with the county, though, because the local government will often not inform the owners that they are entitled to their profits from the sale of the property. The longer the homeowners do not claim this, the more likely it will simply be taken by the state as unclaimed property. It is always in the best interests of the owners to find out how much their property sold for at the sheriff sale.

The negative effects on a home's equity during the foreclosure process often destroys most of the equity that homeowners once believed they had. This is one reason why it is so important to try and work out a solution as quickly as possible, to avoid many of the extra charges the bank will add to the balance of the loan. But even if a method to stop foreclosure can be worked out quickly, the larger problem of generally declining property values can also have severely damaging consequences on homeowners' equity positions.

When homeowners move out of a foreclosure house after selling or losing the house at an auction, they often wonder what items they can take. Especially if they are moving into lower-quality housing or could use the extra cash selling some items may bring, they may consider removing essential items like water faucets, copper pipes, or even the furnace. Determining what can and can not be taken can be one of the more difficult aspects of dealing with a house after foreclosure.

There are a few general rules about what appliances and items may be taken out of a house when homeowners either sell or are foreclosed on. With the large number of homeowners facing foreclosure right now, news stories have been reporting that many former owners essentially strip their properties of anything useful or salable, including copper pipes, furnaces, kitchen sinks, ovens, and so on. But not all of these can be taken in not all circumstances, and to prevent lawsuits for damage to the property, homeowners should be aware of what they can and can not take.

The most general rule on what may be taken after a sale or foreclosure of a property involves the distinction between fixtures and personal property. In many cases, aspects of these types of items can overlap, making it somewhat difficult for homeowners to decide on if an item belongs to one or the other category. Especially for items with sentimental value that are affixed to the house, determining whether they can be moved or must remain is not a simple process.

However, if removing an item from the house would cause damage to the property or make it unlivable, then the item is most likely a fixture. Laundry machines are often just hooked up to a few vents and power outlets, making them personal items, for instance. They can safely be removed from the house. On the other hand, furnaces, ovens, air conditioners, and the like would make the house unlivable or cause damage to the property, and they are often considered to be fixtures.

The size of items or the work put into them do not automatically determine whether an item is a fixture, either. Just because an item is small or natural does not mean it can always be taken. The keys to the house, for example, as always considered fixtures, and trees or bushes can not be easily removed from a property without causing damage to the ground. Both are integrally related to the functioning or current use of the property and will most often count as fixtures.

A second issue in determining what can be taken after foreclosure is the original intent of an item: was it installed to be a permanent part of the house or not? Items installed as permanently attached to the property are most often considered fixtures, such as the furnace, copper pipes, faucets, doorknobs, and so on. A house without these items would not be livable without expenditures to repair or replace these items.

Related to both of these previous issues is if an item is attached to the property in some way. Items that are attached are often considered fixtures, whereas items not attached may be considered personal property. A bookcase built into the walls of the house, for instance, will most likely be considered an attached, permanent fixture; but a bookcase the owners purchase and put together themselves that is not attached or built in can easily be moved and counts as personal property. Similarly, pipes and faucets and some appliances will also count as fixtures, since they are attached to gas lines, water pipes, or other items that make the house livable.

Items that the homeowners deem to be fixtures must be left in the house, but these items can be replaced with ones of a similar or lesser value. If antique doorknobs were installed on the outside doors, these would count as fixtures, but the owners could replace these with cheaper (although working) knobs and take the ones they previously installed. If they put in a new oven but still have the old one, they can take the new one if they reattach the original. This gives homeowners some leeway in deciding what they would like to take, especially for items with sentimental value. The heirloom fan or chandelier may be taken if the damage to the property is repaired and other items are substituted.

Following these few general rules, homeowners moving after foreclosure should be able to determine most of what they can and can not take with them. The issues of damage if the item is removed, original intent of its installation, and attachment to the property should be used with any appliance or item located on the property that the owners are unsure whether they can keep. Leaving a house after selling it or losing it to foreclosure is complicated enough; worrying about a lawsuit for damage to fixtures should not be one more headache homeowners have to deal with when attempting to make a fresh start.

Many times, it seems help arrives too late in a foreclosure situation to be of much service to the homeowners faced with the loss of a house. A new job, higher salary, lottery winnings, or long-lost inheritance may be welcome gifts, but if they come too late to save the house, they can be very bittersweet. Especially in the case of repairing the financial situation and overcoming the hardship by obtaining better employment, homeowners may expect more from their improved position than is realistic.

Just having a higher salary after the initial hardship leading them into foreclosure is not going to be good enough to qualify for a foreclosure refinance or to purchase the house back right after foreclosure. Since the homeowners just got the new job with a good salary, they can not show any stable job history with the current employer, which is one of the main requirements for a mortgage loan. So just having a better job, although it is a positive, is not enough to qualify for a new mortgage right after foreclosure.

This makes it absolutely essential that the homeowners also have some assets or savings plan, which may be unrealistic if their financial hardship was sever. However, if they have some money saved up to use as a down payment or to apply to the defaulted mortgage, they might be able to persuade a foreclosure bailout lender or a hard money lender to give them a new loan, regardless of their unstable income and low credit score. But these types of lenders usually do not give loans on properties with less than 30% equity in them, so the owners will have to put down a good amount of money to qualify for the loan.

Sometimes after a sheriff sale, the bank will be willing to sell the house back to the homeowners for much less than they originally bought the property for. The fact that the bank is willing to sell the house back for half of what was originally paid for it, though, is somewhat irrelevant to the homeowners being able to get a foreclosure loan. The house may now be only worth half of what they originally paid for it, if property values have fallen. In that case, the loan the foreclosure victims get on the property will be for 100% of its new market value, unless they put something down, and 100% loans are really not available to anyone at this point due to the credit crisis and subprime mortgage fallout.

Having a good salary after facing foreclosure definitely works in favor of the homeowners, but it is not enough on its own to get a new loan to stop foreclosure. If the owners have any savings or assets that can be turned into a significant down payment, then they might be able to get what they are looking for. Otherwise, it may be a good idea to try a few different foreclosure lenders, but homeowners should not be surprised if they are turned down several times in a row. It may be better to consider other solutions to foreclosure.

One alternative way to get the loan would be to have someone with better credit purchase the house and lease it to the former owners. If a friend or family member could do that, then the foreclosure victims might be able to keep the house and pay an affordable interest rate. Then it should be easy enough to just keep up on the payments and work on their credit histories for a few years until they can refinance into their own name. There are also companies that specialize in this type of arrangement and can offer reasonable deals to homeowners in financial trouble.

There is never a good time to fall into a financial hardship, but recovery often comes just a little too late to be of much good. Once the damage has been done and the credit score is destroyed and the house is sold at a sheriff sale, homeowners may feel as if their ability to overcome adversity will be worth little or nothing in their efforts to stop foreclosure before being evicted. While a new job or sudden cash windfall can certainly help in a foreclosure situation, homeowners always need realistic expectations as to how their current financial situation can assist them and what weaknesses they must still work through.

The creative tactics that foreclosure scam companies use to steal money and trick innocent homeowners out of their houses would be entertaining if the results were not so tragic. From phony documents and forged quitclaim deeds to pointless mitigation services and companies that change their name every other week, the number of potential scams seems endless.

One group of scammers, though, had put a 19th century spin on this 21st century foreclosure crisis. A San Diego, California based company called Federal Land Grant Company that has been shut down by that state's attorney general persuaded homeowners to transfer the deed to their house into a vehicle called a "land grant." This vehicle is absolutely fraudulent and has not been used in over one hundred years.

For some historical background, the Federal land grant system was used during the colonial period to encourage settlers to move into and develop newly acquired property. As America expanded further westward, it ended up with vast swaths of mostly empty, unsettled land and used this system to encourage further expansion. It was also used to facilitate industry and transportation, with four out of the five transcontinental railroads being built with assistance from the land grants.

But this type of instrument has not been used since the 1800s and is no longer recognized by any competent court or county government. However, this company charged $10,000 per house to be transferred into the land grant, had the homeowners sign over the deed to their house, and then had the audacity to charge rent. All for a completely fraudulent scam.

Using documents from hundreds of years ago, the company persuaded homeowners that this phony solution would actually prevent the bank from being able to take the house back through foreclosure. In the end, many of the victims were simply evicted from the house after the court proceedings and sheriff sale. Transferring ownership of the property, whether through legitimate or phony documents, does not transfer the responsibility of paying the mortgage.

This should be a stern warning to homeowners against trusting any company that offers a solution to foreclosure that seems too good to be true. Just because a company offers weekly seminars and uses complicated terms to describe their "unique," "creative," "proprietary" process does not mean that the company has anyone's interests at heart besides its own.

At the very least, before considering transferring ownership of a property to stop foreclosure, homeowners should consult with their own legal counsel. Deed transfers, land trusts, land grants, quitclaim deeds, or whatever term the scammers use should all be reviewed by someone competent to read and understand the contracts and the ramifications of entering into such agreements.

This Federal Land Grant Company had tricked over 300 homeowners into transferring their properties into the phony system. This means that 300 properties have now been transferred out of the hands of the original owners who are still facing foreclosure on these houses. If any of them had consulted with an attorney or knowledgeable real estate professional before entering into the agreement, they could have avoided this situation.

Now, for the majority of these homeowners, matters are much worse. They do not currently own the house but have to find some way to avoid losing it to foreclosure. Without a clear title, refinancing, selling, or even offering a deed in lieu will be much more difficult. And although this particular scam will be forced to shut down and may have to to provide refunds to their clients, they will have been responsible for the loss of a significant number of homes.

Staying away from foreclosure scam operators is not easy when faced with the loss of a home. Desperation to save the house and ignorance of how the foreclosure process works contribute to homeowners being more susceptible to these scams than they would be otherwise. If ownership of a house is to be transferred, though, homeowners should consult with a competent legal adviser and clearly understand what will happen to the mortgage if they no longer own their home.

During the boom years of the real estate market, banks could not hand out subprime mortgages quickly enough to meet demand. This demand, though, was from a segment of the population that, until the advent of no money down, interest only, adjustable rate mortgages had been largely locked out of mortgage borrowing. But it may have been the general decline in the creditworthiness of Americans that prompted banks to lower lending guidelines so precipitously.

A good question that should be investigated is whether or not the credit scoring guidelines changed at all during the period when large numbers of subprime loans were originated. However, even a study of this sort may not shine much light on the situation. As we know from the bond rating agencies' failure to acknowledge the risk in the subprime loans, it is clear that manipulating credit ratings or scores is surprisingly easy.

But one thing that is known for sure is that the savings rate of Americans has been dropping over the past decade and even longer. Without substantial savings, people are unable to react to a short-term downturn in their financial situations, and can not begin to improve their lives in any significant way. In times of hardship, they turn to credit cards to finance their lives or are forced to cut down drastically in their standard of living to avoid falling into bankruptcy.

This type of cycle is incredibly difficult to break for many people, who fall further into debt at every little hardship and spend the rest of their lives trying to climb out of the hole. The prevalence of subprime mortgage loans requiring little or no money down allowed people who may have had little or no assets throughout their lives to purchase homes with no financial investment. They were not required to save up 10 or 20% as a down payment, so they had far less emotional attachment to the property, and did not have to alter their financial habits.

If a borrower had a history of late credit card or car loan payments, and was then offered a house loan with no money down regardless of their credit score, why should they care if the mortgage payment doubles in a few years and they can no longer afford it? The banks should have recognized that these borrower have a history of paying late and not saving for an emergency fund, but they were offered a seemingly great mortgage loan anyway.

For these homeowners who had nothing, were offered it all, and then had it all taken away again, there is always the good chance that they will get away from the foreclosure house with no negative consequences, besides more damage to their already meaningless credit score. And a bad credit history did not stop banks from lending hundreds of thousands of dollars in the past with little more than a signature, so the former homeowners can probably just wait a few years until credit conditions ease and apply for a new mortgage.

It is clear that not every homeowner to obtained a subprime loan was a poor credit risk or taking advantage of the loose lending. However, these types of borrowers, who had previously been turned down for loans due to poor credit and no savings, were given the subprimes. Whether they were just somewhat ignorant of the entire system or were trying to get in on the boom by buying a dozen houses and flipping them, the banks obviously overlooked past poor payment histories, to their own detriment.

Lenders did not have to lower their lending standards in response to this demand from borrowers with no credit or assets for creative financing vehicles requiring no financial investment on their parts, but for some reason, the banks did lower standards dramatically. If they did this in an attempt to stay in business a little longer, it was an extremely shortsighted goal with severely negative consequences for the majority of American homeowners, whether they are facing foreclosure or not.

Refinancing to a lower interest rate seems to be the first option that homeowners rely upon to save their homes from foreclosure. Far too often, it is also the only option they seriously consider, and when they are turned down through one broker, they go on to the next and the next and the next, until they have run out of time to put any solution together.

Refinancing a house to stop foreclosure is possible when facing a financial hardship, but it is certainly not a very easy option. Homeowners who have recovered from their hardship and can prove enough income and job stability may want to try applying for a foreclosure loan through a few different places. However, it is important to have backup plans in case the loan does not go through.

There are very few traditional lenders who will do foreclosure refinancing loans, though, so homeowners need to search for alternative sources of funding. These usually include banks that specialize in equity-based lending and hard money lenders that are willing to consider foreclosure properties based on equity. Neither of these types of lenders use credit scores as a qualifying factor in their decisions to provide loans, which makes them very useful for the average foreclosure victim, whose credit has taken quite a hit because of the defaulted mortgage.

Banks that specialize in this type of refinancing situation often require there to be high levels of equity in a property. They may not loan more than 65% of the value of the house, which puts many homeowners out of the running for a loan altogether. With declining property values, it is becoming even more difficult to qualify for a foreclosure bailout loan from a traditional lender. This can be a useful solution if the property qualifies, however, as it replaces the current mortgage with a brand new one and gives the owners a fresh start on making monthly payments.

Hard money lenders are almost no different in terms of their requirements. They may go up to 70-75% of the value of the house, which is slightly higher than banks, but this still makes foreclosure loans somewhat uncommon. These lenders often charge a much higher amount on the front end of the loan, as well, taking 4-5 points right when the loan closes. This makes it a more expensive solution over the long term, as homeowners need to pay back the interest on these extra charges. Hard money lenders also typically operate in only a couple to a handful of states, so it is up to homeowners to look up many of these companies on their own.

Declining property values and the trend in the housing market to leverage a house to near 100% of its appraised value have made foreclosure loans more difficult to qualify for. Although lenders may be willing to do short sales to help a client sell a house, it seems they are less likely to go for a short payoff, which would allow homeowners to refinance for a lower amount. However, short payoffs may become more acceptable as more properties fall into foreclosure and property values decline further.

Many of the circumstances in the real estate market are currently discouraging foreclosure loans from being pursued by most lenders. This is one reason that homeowners should carefully evaluate any foreclosure lender that they consider working with and critically analyze their chances of being approved for such a loan. It does not make sense to keep applying for bailout loan after bailout loan if no progress is being made and precious time to stop foreclosure is being wasted.

One unambiguous result of the subprime mortgage meltdown has been a realization that credit scoring and bond rating systems are easily manipulatable and almost entirely worthless once they have been manipulated. But the consumer credit scoring system has been relied upon for years to estimate the reliability of borrowers to pay back a loan based on their previous payment history.

A result of the credit crisis may be that this system is de-emphasized or even replaced by lenders, who are facing the consequences of defaults in the subprime and prime mortgage markets.

In the short term, this will obviously not happen due to the uncertainty in the housing market and falling property values. Credit is drying up for nearly every type of borrower for every type of credit, not just the ones with bad credit. Loans are even more difficult to get for small and large businesses, with the money markets being tighter now than a year ago.

But in the long run, lenders may have to put new systems in place to prevent a collapse of the credit markets as is being experienced now. Banks may not just hand out money to people with bad credit to buy whatever home they want, which was one reason so many subprime borrowers and real estate flippers took out loans they never intended to pay back unless they could make an immediate profit.

Credit scores, though, may become less of a deciding factor in purchasing a house in the future. Obviously, credit scores determined whether borrowers would get a lower or higher interest rate, but neither subprime nor prime borrowers are having an easy time keeping up with ARM payments. And no matter how much they make and how good their credit is, people do not like the feeling of paying more for a house than it is worth.

Since one consequence of the fallout in the housing market will be lowered credit scores for large numbers of people, lenders may begin focusing on the borrowers' financial positions, instead of just pulling a meaningless credit score. That means down payments, stable income and job history, and some extra cash in the bank may be more important in the next few years than having a great credit score.

A lot of people will not have great credit scores to show, due to experiencing any kind of financial hardship, and having a foreclosure or bankruptcy in the previous few years is not going to help at all. But if prospective borrowers have saved up some money and can make a substantial equity investment in their next home purchase, banks may be willing to overlook the credit situation.

So the credit markets may have no choice but to move from a broad credit scoring system that groups potential borrowers to a more case-by-case basis of looking carefully at individual financial positions instead. With so many homeowners currently facing foreclosure, repossession, bankruptcy, or charged-off credit cards, a more adaptable system seems to be needed. The current one has obviously been abused to the detriment of homeowners across the country.

Obviously, for homeowners now attempting to stop foreclosure, this can only mean good news in the future. If they are able to save a home now and can begin the process of financial recovery, they may be able to qualify for a lower interest rate down the line. And for those who lose their houses and simply need a fresh start, lowering their expenses, saving up a new down payment, and establishing a savings plan may allow them to purchase a new home at a decent rate even a few years after foreclosure.

If you are facing foreclosure, you will need as much help as you can find. Lenders and servicing companies will make things hard for you, and unless your a lawyer, you probably wont understand much of what's happening throughout the process. These questions and answers are meant to help you understand more of what's happening, but we always recommend seeking professional help to help you successfully stop foreclosure.

Homeowners who fall behind on their mortgages will often try and work out a solution with their original mortgage lender before moving on to any other options. Lenders often require people in foreclosure to fill out loads of financial paperwork, submit copies of income and tax documents, and explain why the fell behind on their loan. It is this explanation in the form of a hardship letter that is designed to pull everything together.

Although the hardship letter may not always be read by the loan workout specialist, it is important to put in the effort to make the letter as detailed and individual as possible. There are numerous templates and examples of hardship letters available online, but simply copying and pasting a little bit of information into a standardized document will almost guarantee that it is not read.

Most bank representatives can tell in a glance whether a hardship letter was written by the homeowners themselves or if it was most likely taken word for word from an online template. The people working in the loss mitigation department in large mortgage companies receive numerous requests for help every day, and they quickly learn to discount hardship explanations that have nothing to them.

Of course, this is not to say that homeowners should ignore the examples that they find online, but these should be used as guides. They should not be used as a simple way to avoid explaining the reasons why they faced a hardship, when it happened, how long it went on, and why it has gotten better and that they can afford their mortgage again. The form of the templates can be especially helpful because most homeowners have never written a hardship letter before, but the content of the letters should be highly individualized.

One of the most important reasons to customize the hardship letter as much as possible is to iron out any remaining weaknesses in the homeowners' financial position after the hardship. A change of job in the past few months or a substantial decrease in one income can be explained away in the letter, with the possibility that the lender will take these deficiencies into account but emphasize the more positive aspects of the owners' economic conditions. the hardship letter is too valuable of a tool to rely on just a homogenized template that ignores these kinds of specifics.

Many third party loss mitigation companies who work extensively with lenders will not even recommend using a hardship letter template because of the possibility of it being ignored by mortgage company. They are more likely to advise homeowners write their own hardship letter, explaining what needs to be included in it, rather than giving them an example to plagiarize from.

Frequently, it is the more detailed and individual hardship letters than grab the attention of the bank's workout specialists and persuade them to see the situation from the homeowners' point of view. Thus, the hardship letter can be a powerful tool to convince banks to consider a mortgage modification, repayment plan, or other solution. Relying on someone else's generic hardship letter template can only mean the chances the bank will approve such a plan will decrease.

It should be obvious to every homeowner that their situation leading to foreclosure is vastly different from every other person's. When attempting to work with the bank for a solution, it is necessary to explain the specific circumstances that led to the default, and a customized hardship letter is absolutely required. Using online examples is a good start, but homeowners need to convince the bank that they deserve a second chance -- not that they have great skill at using search engines and their computer's copy and paste features.

Even if you are in good financial condition right now and have no worries about losing your home or filing bankruptcy, there are many reasons to be concerned about the current state of the economy. The fallout in the housing market is quickly turning even prime mortgages into loans that are far underwater, and the coming economic recession will contribute to even higher foreclosure rates.

If the recession turns into a particularly bad one and the credit crisis continues to squeeze consumers and businesses alike, all bets may be off for the economy. Oil prices and food costs have soared in the past year and have only accelerated in the first five months of 2008, while homeowners are being cut out of the lending industry by tightening loan policies and a cutoff of access to some lines of credit.

Many homeowners, no matter what their current financial condition, have saved far too little in the recent past to weather a personal or widespread financial storm. Living paycheck to paycheck just to make the increased mortgage payment can only end badly, and homeowners who invested their resources in larger mortgages and personal assets may find themselves wishing they had saved far more of their income.

In such an economic environment, cutting expenses and saving as much as possible become mandatory. During the boom years when credit was freely available to anyone who could operate a pen successfully enough to sign their name, consumption was the name of the game. Now that money is disappearing from the hands of consumers, the government has been printing more of it by the hundreds of billions of dollars.

The problem with this approach is that those who get to use the money first, like the banks and financial institutions, will get the money when it is at its most valuable. As this newly printed money expands throughout the economy, the people at the bottom will get a smaller share of it, but will experience higher costs anyway due to the inflation of the money supply.

So, for most of us, money will be increasingly scarce, but everything will cost more anyway. This makes cutting expenses and saving for a rainy day better than any other financial insurance policy. When a job loss or personal emergency results in a loss of income, any amount of savings can help get you through the initial months of a hardship.

However, this is not to say that you should cut out every little expense, never go out to eat, and live like a pauper. For most people, that is simply impossible to do, as they have been steeped in the consumer culture for far too long to break the habit of overspending. But any little step to cut an expense, go without a luxury more often, or cancel inessential services can ease up the strain on the monthly budget.

While every homeowner should try and save at least a few hundred dollars a month, depending on their income level, it is also important to eliminate potentially the largest drain on your monthly budget: paying off your debt. Even though it may seem like it will take forever to pay off the car loan and those high interest credit cards, just sending an extra $20 a month on one bill can decrease the principal balance significantly over time.

High debt and credit card balances will be one of the main reasons people are unable to recover from financial hardships, so it is in your best interest to pay down these balances as much as possible before running into a crisis. With the coming recession, it is likely that all of us will face some sort of economic breakdown in the coming months, whether an employer goes belly-up or the car breaks down. Making sure to get even a few extra dollars out of the credit trap may help facilitate a recovery.

The government and the banks seem to be pursuing policies that will cause nothing but severe financial harm to the vast majority of Americans. A credit crisis at the consumer level combined with massive levels of inflation to bail out the banks may lead the country far past a recession and into a panic or inflationary depression. It is in all of our best interests to reduce our exposure to the slow collapse of the financial system any way we can.

If you own more than one home and are facing foreclosure, you are probably worried about the bank going after your second home if you are unable to save the first. Bank representatives and armchair foreclosure experts will threaten you with being sued again and losing your other home, having your other assets repossessed, and maybe even having your bank or retirement accounts stolen or wages garnished. Fortunately, however, many of these predictions will never turn into reality.

The issue of foreclosure does need to be taken seriously, though, and finding out your options should be the first consideration. The first thing you should do is consider various other solutions instead of just letting a house go through the foreclosure process. Try and get as much time as you can from the bank, even if a sheriff sale is coming up; the bank can postpone any foreclosure proceedings in the local courts or cancel an auction to give you more time to work on a solution.

You might want to consider trying to list your house for sale, even if you have to do it with a short sale and convince the bank to take less than the total amount you owe on the loan. Otherwise, if there is really no way to save the home and the lender is unwilling to do a short sale, you can offer the bank a deed in lieu of foreclosure, which will, upon the bank's acceptance of the offer, stop foreclosure and allow you to give the house back to the bank instead of going through the entire legal process and seeing your house auctioned off by the county.

But if the house does go into foreclosure and you do lose it to a sheriff sale, this does not mean the bank can go after your other house or any other assets you still possess. A number of different requirements must be met for a bank to try and sue you again after the foreclosure. Most of these requirements are easy to meet, but the last one usually guarantees that the bank will not take the time to pursue another lawsuit to go after your other personal items or additional homes.

First, the house has to sell at the county auction for less than the total amount owed on the loan at the time of the sheriff sale. This is usually pretty easy to meet, since the bank will have added thousands of dollars in fees so that no one in their right mind (not even the bank) would pay that much for the house. Usually, it is the foreclosing bank that places the only bid on the property, and they bid the minimum amount, so the house is likely to sell for far less than the total amount owed. The bank will end up with the property and a convenient write-off for the lost portion of the debt.

Second, your state has to allow deficiency judgments in the case of foreclosure. Not all states allow this in their foreclosure laws, so make sure you look up your law and find out if they can sue you and under what circumstances. Even if the lender is allowed to pursue another lawsuit, the type of foreclosure used, whether judicial or nonjudicial, can also be a determining factor in how difficult it will be to start the lawsuit and how it must be pursued.

Finally, you actually have to have something of value that the bank would want, usually some highly liquid asset the bank can easily seize. That does not mean having another home, to be clear. If the bank got nothing back from you on this foreclosure, what makes you think it would be worth their time to go after your other home? Would they get anything for their time and money, or would they most likely just get stuck with losing even more money when the home sells for too little at an auction to pay off even the existing mortgages, let alone a deficiency judgment?

So, maybe the bank could go after your other house after you lose one. But, in practical terms, banks almost never do this, since it just is not worth their time. It costs them more to hire attorneys to sue you for the original foreclosure, then sue again after that for a deficiency judgment, then sue you again for foreclosure on your other home because of nonpayment of the deficiency judgment. And in the end, they will probably still end up with nothing to compensate them for their total expenses.

One of the most frustrating experiences homeowners can have is dealing with a mortgage company who seems to make numerous mistakes. Especially if the homeowners fall behind on the mortgage or start making partial payments, the mistakes may seem to increase in number and severity. This may be due to the bureaucratic inefficiency of lenders, but they may also indicate a far more serious problem.

The first question homeowners should ask once they suspect foul play from a bank is if they are dealing with a mortgage servicing company, rather than a direct lending institution. This may help explain why homeowners would be getting letters demanding payment from a different company than the one they originally thought was handling the mortgage. Mortgage companies sell loans back and forth to each other all of the time, and they will transfer the rights to collect the payments to a servicing company.

Mortgage servicing companies are notorious for making mistakes, not having payments right, not crediting payments to accounts, and charging or forcing other expenses on homeowners to push them into foreclosure. This is termed "mortgage servicing fraud," and is quite common in the mortgage industry. These lenders may just wait for an opportunity to go after a particular loan, and homeowners in financial hardships may give them one by sending in a partial payment, which the company will now use as an excuse to begin moving towards foreclosure.

Homeowners in any situation need to be careful with any partial payments, though, as the amount not paid will continue to accrue interest until they pay it back. The owners' monthly payments may not be enough to cover the entire amount that they owe once the bank adds in the interest from the partially-missed payment. Over time, this will ensure that the homeowners fall behind on their mortgages even if they think they have made up all of the payments -- they never made up the interest on the missed portion, which continues to build up and pushes the owners further and further behind.

Alternatively, the bank may just put the homeowners' partial payment on hold completely. They have it in their offices, they may even have cashed the check, but they are not crediting the account with the payment. Mortgage companies do not like accepting partial payments, since it decreases their ability to foreclose on a house. These lenders would rather consider a partial payment as having missed a payment entirely and not credit it to the account until the homeowners make up the missed part. In the meantime, interest and late fees will begin to add up.

Of course, if the mortgage company is already threatening to foreclose on the house because of one partially missed payment, the homeowners may suspect foul play and a hasty move towards taking the home. The fact that they are threatening foreclosure so quickly should indicate to homeowners that the bank is considering them to be behind on the loan. The house probably is not in the actual legal foreclosure process yet, but the bank is having their collections agents call and threaten the clients to scare them into paying back all of the missed payments plus related junk fees, as if threats would help at all.

Sending in a partial payment is always a somewhat tricky situation for homeowners, whether they are experiencing a financial hardship or simply had trouble for one month. Banks do not like partial payments, and unethical servicing companies may use them as an excuse to start adding in as many fees as they can and pushing the house towards a foreclosure lawsuit. Probably the best idea for homeowners who can not make a complete payment is to call their lender and find out their policy on partials and whether the payment will be segregated until the rest comes in or whether it will be applied to the account, as well as what other fees need to be paid back.

Most financial hardships are especially troublesome from the perspective of the homeowners' psychological stability. Couple the initial event like a job loss or medical disability with all of the potential effects like foreclosure or repossession, and it is no surprise that money troubles are at the top of the list of stress-inducing thoughts. With rising foreclosure rates and the stealing away of the American Dream by subprime mortgage companies and psychopathic financial institutions, the housing crisis has been creating various instances of self-destructive behavior in former homeowners.

First there were reports of "jingle mail," homeowners who fell behind on their homes and, instead of attempting to work out the problem, simply mailed the keys to their properties back to the lenders. Worse than that were reports of foreclosure victims who set fire to their homes in a desperate effort to collect the insurance money and pay off their mortgages. The most disturbing possibility, however, is that homeowners will lose all hope and take their own lives to avoid the humiliation of being publicly evicted with no other place to live.

Rising foreclosure rates and rising incidences of exhibited mental health disorders will go hand in hand, to a certain extent. The financial hardships that often lead to foreclosure, and the realization by homeowners that they have no other options than to give up their homes, generate enormous amounts of stress. To be sure, many of these problems are little more than irrational fears, and the loss of a home is certainly not the end of the world for people. Unfortunately, the problems feel all to real and the threats of lawsuits and being homeless can seem very real to homeowners who know they have missed several mortgage payments.

The worst possibility is when these fears cause a sense of complete paralysis on the part of foreclosure victims, who retreat into their own heads to avoid dealing with the problem, hoping that a solution will magically present itself. In this case, the owners simply refuse to pick up their phone when the mortgage company calls, do not call the lender to see if they can qualify for a repayment plan or other option, and are even too frightened to request assistance from a third party foreclosure help company. This is obviously the wrong response to a financial crisis, but it is a common and understandable response.

It is, however, up to the owners of the property themselves to break out of this sense of despair; no one can help them until they take the first step and request assistance. The great thing about requesting help, though, is that the homeowners have now stated the problem and have taken the first step in solving the foreclosure -- they have accepted they can not fix things by hiding from themselves. Many homeowners who have shaken off the chains of their own fears realize that change and doing something about the situation are far less stressful than wallowing in a state of depression and fear of the unknown.

Of course, the problem is how long the owners wait to begin solving their problems. The further behind in the mortgage they fall, and the longer they wait to ask for help, the more difficult it will be to stop foreclosure. This is for two reasons. First of all, the more payments they miss, the more it will cost to refinance, qualify for a mortgage modification, or sell the house. The lender has no trouble adding late fees, court costs, legal fees, and other penalties to the mortgage balance, and interest accrues on these extra charges every month, pushing the homeowners further and further behind.

But more importantly, the second reason that waiting is a mistake is that the very act of avoiding the problem becomes self-reinforcing. The homeowners procrastinate waiting for help to avoid facing the fear of being turned down for a workout or being threatened with eviction. In turn, this procrastination reinforces the irrational fears, which reinforce the act of waiting until nothing but a true psychological shock will convince the owners to wake up and ask for help. This moment of realization may come too late, possibly in the form of a three-day eviction notice.

Unfortunately, few mainstream articles or books are available that discuss the psychology of homeowners facing the possibility of losing a home to foreclosure and what they can do to overcome irrational fears and get to work saving their homes. Our own psychology of foreclosure section is a modest contribution, and more articles are appearing in the mainstream media about how to cope with financial stress, but much more can be done. Ultimately, though, it is usually the homeowners who have not even taken the step of reading about foreclosure that are in the worst danger of causing themselves or others damage because of high anxiety caused by money problems.

Months ago, the federal government put into place a series of programs, voluntary for the small number of banks participating in them, that were designed to help homeowners behind in their mortgages work with their lenders to modify the terms of their loans. While never being optimistic about these plans, I conjectured that if the publicity surrounding them helped make more homeowners aware about such alternatives to foreclosure, one of the main problems would have been addressed.

Well, after months of these programs being in place, foreclosure rates have continued to increase. It seems few people are taking advantage of the government's guidance through these programs and use them to lower their monthly payments. Even on a month-to-month basis, foreclosures are increasing, with April 2008 numbers four percent higher than March, according to a recent report by Bloomberg.

For a little bit of perspective on how big the housing crisis is becoming, compare 2007 foreclosure rates to this year. Foreclosure rates have risen 65% from a year ago and are still increasing by the month. California has seen the worst increase at 327% year over year. More than three times as many homeowners are facing the possibility of eviction this year than they were last year, and no relief is in sight yet.

What is not surprising, though, is the failure of the government's highly touted loan modification programs. The same problems that homeowners have always had in such situations have not even been addressed, let alone solved. Homeowners sit on hold for hours, the lenders take months to make a decision on the workout program, and no voicemail is ever returned. This chain of events simply continues until the day before the county sheriff sale, when the owners are sadly turned down by the mortgage company.

The same excuse is given to the owners time after time: "We're sorry, but you do not make enough income to qualify for a modification at this time." This ignores the fact that it is the mortgage companies themselves who are often responsible for homeowners not being able to qualify for a loan workout. They wait so long that several more payment due dates are missed, which increases interest, adds late fees, penalties, and attorney fees and court costs.

Thus, because the banks wait so long to make a decision on whether or not their clients qualify for a mortgage modification, a several hundred or thousand dollar deficiency turns into tens of thousands of dollars of accrued interest and various junk fees. And the banks call this a "proactive" effort to offer homeowners a second chance to get back on top of their mortgages!

Again, the banks and government have been proven to be working together to spew out more propaganda at the people. Rising foreclosure rates and continuing problems with qualifying for a mortgage modification give lie to these voluntary programs that were set up to help homeowners stop foreclosure and work with their lenders through the medium of government assistance programs.

What is this results in, though, is a consolidation of assets and financial power in the hands of the banks. Homeowner will lose their homes in large numbers and local governments will face insolvency and budget crises as property tax revenues fall. Small and medium size banks will also face collapse due to the mortgage fallout, while large banks gobble up the smaller ones or government takes them over through the FDIC. The machine of the corporatocracy continues to roll over the American people.

Homeowners who decide to leave their home when facing foreclosure are faced with a difficult set of choices to make. Although their monthly mortgage payment may have gone up substantially or even doubled due to an adjustable rate loan, an expensive housing payment can seem like quite a deal to some of the alternatives.

Obviously, becoming homeless or living in the car is the least desirable option for most families losing their home; thankfully it is also the least common result. Although a tragic number of homeowners will have nowhere else to go, many will end up with friends or family, living in hotels, or moving their personal items, and sometimes themselves, into storage containers. For these newly homeless families, communities can come together to provide assistance.

But each of the alternatives to finding a way to stop foreclosure provides more difficulties than they solve, in most cases. Families are hurting all over the country right now, with rising food and gas prices, not to mention ever more people seeing their mortgage payments increase. Taking in another person who has lost a home can create a significant drag on a household's budget, especially if the foreclosure was caused by a permanent loss of income or medical disability.

But living in hotels while a long-term solution to foreclosure is sought is also a poor choice. Homeowners who have difficulty affording their mortgage will find it nearly impossible to keep up with the daily room rate of many hotels, which have been increasing prices along with the rest of the economy. Rooms in brand name hotels can now cost $120-$200 a night, depending on the area. Furthermore, it is impossible to maintain a normal life while living in hotels, with housekeeping every morning and daily checkout times to interfere with the functions of everyday life.

There have been recent stories of people who lost a home to foreclosure moving many of their large personal items into storage units. A small number of families have also moved in right along with their furniture, appliances, and other belongings, creating makeshift homes. While this may present a short-term solution for people with nowhere else to go, missing a payment for the monthly storage unit rental will result in the family's items being auctioned off.

Unfortunately, it seems as if most of the options for homeowners after foreclosure are somewhat poor alternatives to living in a home or apartment. The larger than usual foreclosure rates are pushing more people into apartments, which are helping push up monthly lease payments. This is another factor to be weighed when deciding to leave a home in foreclosure, as the cost of a rental may not be substantially lower than paying the mortgage, even considering an ARM increase.

Obviously, it is too bad that every homeowner does not utilize all of their options to stop foreclosure, or they have experienced such a destructive financial hardship that there is no choice but to leave the house or face eviction. As the demand for alternatives to houses increases, so will the prices for these alternatives, despite recession. In fact, the current downturn in the economy and the actions of the government and the Federal Reserve have all but guaranteed this will be an inflationary recession, with rising prices regardless of lower or higher demand.

Homeowners, therefore, need to consider attempting every solution available to them to save their homes. Even if they are sure they can not stay in the house for the long term, they should bargain with the bank for more time to move out and save up money to cover future housing costs. Banks are often willing to cut homeowners some slack if they are pursuing alternatives to foreclosure, and families may come across some solution that will allow them to avoid eviction. Giving up too soon is a mistake, and the alternatives to paying an expensive mortgage may be even more expensive and result in further loss of life and property.

This post is not going to be about foreclosure, per se, but as many homeowners also fall behind on other bills during a financial hardship, collections and foreclosure seem to go hand in hand. While taking care of the housing situation should come as the first priority, homeowners can be hounded by collection agency debt for years after the fact.

Most states, however, require collection agencies to be licensed [Word Document] in every state in which they attempt to collect debts. As this would cost potentially tens of thousands of dollars a year in renewal fees and bond postings, many collection agencies conveniently fail to become licensed in more than a few states. Some agencies may also believe that they only need to be licensed in their state to be able to collect everywhere else -- this is not true!

Debts and collection agencies are licensed just like real estate and agents/brokers: on a state-by-state basis. Just because a real estate agent is licensed in Wyoming to buy and sell properties in Wyoming does not mean that he is able to to buy and sell in New Hampshire. The agent may be able to become licensed in New Hampshire, but a Wyoming license is not sufficient to practice real estate in any other state.

Thus, collection agencies need to be licensed in every state in which they attempt to pursue debtors. For homeowners, this means that it is in their best interests to find out if any collection agency is licensed to contact them about the debt. Many times, it will be the Secretary of State in the individual state that oversees this type of licensing. People who have accounts in collections are often very surprised to find out that the company calling them and sending threatening letters is acting in a criminal, illegal manner.

What is even more surprising is that so many of these collection agencies are able to sue people in court and are awarded default judgments against debtors without the judge blinking an eye. The corruption is enormously widespread, with not one collection agency I have ever come across being legally licensed to collect in any state besides the one their business is registered in. But out of state lawyers will take illegal cases and judges will rule on them, just to get their legal fees and filing fees.

Homeowners in foreclosure have enough to worry about during a financial hardship to have to deal with unlicensed collection agencies attempting to hound them at work and home. There is no protection in the courts since they make enormous profits from some of these collection agencies, and corrupt judges would rather not be informed of such matters as a prime customer breaking the law hundreds of times a year to pursue debts illegally.

For this reason, people dealing with collection attempts should find out if their state requires licensing, and request the agencies' license numbers. If the collection agency is unlicensed in the state in which they are trying to pursue a debt, their victims should get in touch with the appropriate regulatory agency as quickly as possible. There is no telling how many people they have criminally targeted with illegal collection attempts in various states, but it is up to all of us to reveal these criminals for what they are and not take their attempts to steal money lightly.

Although selling a home at a short sale to avoid foreclosure can be a mutually beneficial solution for both homeowners and banks, many lenders are quite reluctant to allow this method. More common than simply turning down an offer is when a bank delays the process for so long that the original sales contract expires and the buyers and sellers decide to give up on the process.

One reason for this may be that lenders believe there are better alternatives to foreclosure that would allow them to keep more of the balance they are owed on the mortgage. While some homeowners are unsure of which options they may qualify for, it should be the responsibility of the bank to propose other solutions if they believe the owners to be rushing into a short sale without all the facts. Simply delaying the process, giving no answers and no advice, is extremely unproductive and will only further damage the owners' financial position as they accumulate more missed payments.

Another problem, of course, is the large number of homeowners facing foreclosure. Not only the subprime market, but also the prime mortgage market, are facing larger than expected foreclosure rates. The effects of the suprime market going bad have created a drag on housing prices, which are effecting even homeowners with good credit who run into a financial hardship and are unable to sell or refinance due to the high balance they owe own the mortgage compared to the shrinking value of the property.

With the proliferation of second mortgages and home equity lines of credit, negotiating a short sale can become quite complicated. These types of loans were pushed on nearly every homeowner as a way to tap into their increasing equity and treat their properties as if they were credit cards or ATMs. Now that access to these lines of credit are being restricted, homeowners who relied on them to finance large expenses or businesses have an even more difficult time working out solutions to foreclosure.

Unfortunately, it seems that there are far more problems in working out short sales now, despite the fact that they could benefit both buyers, sellers, and lenders. The reluctance by mortgage companies to consider these deals, though, means that no one wins in the end, if the home is taken all the way through foreclosure and sold at county auction. In these cases, it is not uncommon for banks to relist the properties for sale on the market for even less than the amount they were offered for the short sale.

(updated below)

One of the casualties of the collapse of the subprime mortgage industry that has not been talked about to any significant degree is that of the pension funds. Pension fund managers were convinced by Wall Street investment firms to put retirement money into supposedly safe mortgage securities. With the fallout from the record default rates, though, these funds have lost much of the retirement funds of workers.

Both public and private workers have been affected by this, and every person now facing foreclosure should check with their employer that their pension fund is relatively secure. No one wants to face both a current financial hardship and have to work on repairing a retirement account that has been destroyed by the poor financial returns generated by betting on poor people paying mortgages they could never afford in the first place.

One question that remains to be answered, however, is what public workers will do once they find out their retirement money has disappeared. Bureaucrats at all levels are often highly dependent on the fruits of other people's labor and live parasitically off of the productive of society, with their sense of entitlement growing as they exercise more coercive power over the people they are supposed to be serving. How will they react to the possibility of having to work longer than they expected or retire on less than would be necessary to maintain a wealthy lifestyle at the expense of the lower and middle classes?

There are several possible targets for local governments, which have been hit hardest by the subprime pension fallout, to attempt to hold accountable. The first, and least likely, will be that these governments try and go after the banks and investment companies that originally sold them on the safety of investing in mortgage-backed securities. These are the same banks that are responsible for putting many of the bureaucrats in power (through campaign contributions) and funding government salaries (through filing fees in the courts, providing loans to government, and property taxes ), so it is unlikely local governments will target their most concentrated source of power directly.

Thus, the local governments will most likely avoid going after predatory banks, even if they operate branches in the community. Going after these lenders by proxy is much more likely, starting with the replacement or prosecution of the pension fund managers. Although the fund managers made enormously bad decisions with how to invest people's retirement money, many of them may have been just as taken in by the shady promises of security that tricked individual investors. While the largest state or big city pension fund managers may have worked with the banks to bilk people out of money, smaller governments were probably taken completely by surprise. This will not protect them from the self-preserving wrath of government, however, and there will likely be more unemployed fund managers after the fallout is more widely known.

The final target of governments to stop the bleeding of their pension funds due to the foreclosure crisis will be the people themselves. It may become much more difficult or costly for homeowners to stop foreclosure, with governments coming up with all sorts of mandatory programs to force people to keep paying their mortgages. Unfortunately, many of these programs will be self-destructive for the governments, either increasing the burden placed upon homeowners or unduly prolonging the foreclosure process to put off the inevitable. As local governments feel the squeeze of decreasing property taxes, they will try and raise funds other ways (more speeding tickets, county income taxes to reach former homeowners now renting, and so on), which will just push more homeowners into foreclosure.

With more county and city governments facing budget shortfalls, the pressure will be on to find more sources of funding and simultaneously reducing the burden on homeowners so that they can keep up with their mortgage payments (and property taxes, more importantly). Governments will have little option other than to reduce spending on services or raise taxes and fines. When the disaster in public pension funds becomes more widely-known, however, the bureaucrats, with inflated senses of entitlement, may be set off into a panic of grabbing revenue wherever they can. The end result will be a deepening spiral of foreclosures, tax increases, more foreclosures, and more tax increases, until there are far fewer homeowners and government services in communities.

Update: Less than a year after the original blog was posted here, pension across the country are running out of money already. In Chicago, the Chicago Transit Authority has been paying out more in bonds (designed to close a gap) than it has brought in (furthering the gap). CALPERS in California, the largest pension fund in the country, lost 27% of its value last year.

"The banks deserve to fail for all the bad loans they made." "The government needs to step in and protect homeowners from fraudulent loans and greedy mortgage companies." "Homeowners should not get a bailout from the government because they were just gambling on rising property values."

In all of the debate over what should or should not be done to alleviate the rising foreclosure rate, and who deserves a bailout or deserves to fail, it seems as if one aspect of the housing crisis has been forgotten. There are people behind this.

It is not "the mortgage company" that begins the foreclosure proceedings on a house, but people who work for that bank. They have been told by other people that their bank owns the mortgage, and so they get to work attempting to get the home. These people hire other people working for local law firms who spent tens of thousands of dollars at laws school and can hide behind legal language in order to justify stealing homes and kicking homeowners out of their properties. Other people represent these same banks when houses are auctioned off, placing bids on properties on behalf of other people on behalf of "the bank."

"The government" does facilitate the entire foreclosure process, but people who call themselves "government employees" participate every step of the way. People in the clerk's office stamp the lawsuit that people calling themselves attorneys bring in. These people then send up the lawsuit to another person called the judge who issues an opinion on the case which is backed by force because he is able to hide behind the name "government."

Then more people calling themselves "law enforcement," even though they do not understand the laws, follow the orders of the person calling himself a judge. These people auction off homes to people from the bank, homes they may never have seen and have no interest in besides the fact that they will not be able to pick up their paycheck if they do not auction off these properties. The same people, after the people from the bank have bought the home and asked the person calling himself a judge for an eviction order, then follow the orders in the eviction notice and put homeowners out of their homes by force, if necessary.

This system would be tragic if it were not completely devoid of morals and conscience, using aggression and banality to carry out the removal of people from their homes because they have been caught in a trap. This psychopathic aspect of the entire foreclosure process is also conveniently glossed over, as the people from "the bank" and "the government" "only follow orders" to steal homes.

A monetary system such as the one that creates principal out of thin air as debt, but does not create enough money for interest to be paid back on the loan is easily seen as fraudulent. Only the psychopathic personality could come up with such a system, knowing that people who borrowed money would never be able to pay back all of their debts and that they would end up with the productive assets of homeowners, consumers, and businesses who fell too far into the scam.

But such a psychopathic ideology needs more than just an idea designed to impoverish people; without a system to implement the plan and remove any dissent, the idea will be little more than a laughable attempt at outright theft. Thus, a vast number of people simply carrying out their compartmentalized portion of the system is required. These people do their assigned task in the psychopathic system without ever being given the opportunity to take a step back and view their part in a fraudulent transfer of wealth from poor to rich. Psychopaths at the top rely on the banality of evil carried out by people against each other to perpetuate the fraud.

All of the names and fancy titles given to people when bilking homeowners out of their properties is merely an attempt to dress up a system of money creation and debt slavery which has no conscience. The idea of calling outright thefts "laws" and "regulations" carried out by "sheriffs," "judges," or "bank client service representatives" is nothing but propaganda designed to make people feel better (or feel nothing) about their complicity. It is important for homeowners to realize that the people carrying out the attempt to steal their homes are just people following orders from psychopaths.

When short sales work, they can provide homeowners with an extremely efficient solution to foreclosure. After all, everyone is relatively happy in the end: the bank gets the foreclosure off their books, the homeowners get to avoid sheriff sale and eviction, and the new buyer gets a house for a deal. Often, though, banks have the most to lose from from a specific short sale but are the very party that sabotages the process.

With houses falling into default in such large numbers due to the subprime crisis and decline in property values, banks seem to have become paralyzed about attempting short sales. They turn down reasonable offers only to be forced to foreclose on the house and then list it on the open market for a price even lower than what they were offered for the short sale.

Mortgage companies are turning down deals that would get them some money to pay off these foreclosed loans and help their clients who can no longer afford the payments. Instead of jumping on such offers, the banks spend more money on their local attorneys to foreclose and then on local real estate agents to sell the property. In the end, they lose even more when property values decline and homeowners damage the houses, so they have to list the properties for even less than they were originally offered.

Banks are shooting themselves in the foot in order to avoid helping any of their clients stop foreclosure through the use of a short sale. They know all of the risks of homeowners going into foreclosure: property values decline due to a glut of homes on the market, homeowners may take revenge on the house, court costs and attorneys fees will be paid out of pocket by the banks, and so on. These banks were so responsive to the housing market when creative loans were all the rage, yet they are unable to respond to the fallout of these flimsy excuses to give anyone who could operate a pen a mortgage.

Simple incompetence does not explain this failure by the banks; corruption, criminal activity, and a wealth transfer are far more likely. First of all, the banks would have no reason to request bailout after bailout from the federal government if they were actually helping to alleviate the mortgage crisis. By turning down short sales, banks do not have to take a 15% or 25% or higher loss on the loan -- they can let it go into foreclosure, then trade that mortgage debt at face value for US Treasury securities.

Even with the homes being offered for less than the bank could have gotten from a sheriff sale, the lack of available credit will make purchasing a home more difficult. With so many properties on the market, buyers will not have to settle for damaged, abandoned homes in suburban ghost towns, and they will not be able to get a mortgage to finance the purchase anyway. Property values will have to decline even further and banks will take less on these houses if they ever sell.

One thing is almost guaranteed: the banks are setting up for another criminal leveraged buyout, such as the one used in the Bear Stearns deal, but on a much larger scale. Foreclosures are piling up while money is being directed into the Government-Sponsored Enterprises like Fannie Mae and Freddie Mac, which are also in serious trouble due to the foreclosure crisis. Is the unwillingness to help homeowners use short sales a part of the plan to pump and dump the GSE's and transfer even more public and private wealth to prop up the increasingly insolvent banking system?

One of the most serious decisions homeowners facing foreclosure may be asked to make is to sign over the deed to their home. Transferring ownership of the property diminishes their ability to keep control over the house, and may just reward a scammer with an easy target. Just as serious and potentially dangerous, though, is the decision to sign over a power of attorney to a third party to represent the homeowners.

Homeowners in financial hardships who are being sued for foreclosure need to be cautious when anyone says they can help them if the owners just sign over a power of attorney to the third party. Oftentimes, this will be in the context of selling the property to a Realtor or investor through a short sale. The question the homeowners should ask is what the third party will do to "take care" of the foreclosure lawsuit and other matters, and if they can help the owners do these tasks on their own without giving them the power to represent them as attorney in regards to the foreclosed house.

Anyone requesting the power of attorney to take care of the legal issues surrounding the foreclosure may be especially suspect. The summons is simply a legal document that the court sends foreclosure victims to inform them that they are being sued. The bank is suing for foreclosure of the house, and the people responsible for paying the mortgage are being "summoned" to court to make an answer to the lawsuit. Either the homeowners or their attorney can file an answer with the court or request more time to sell the home.

For this reason, it may be a better idea to hire an actual real estate attorney or contract attorney to help in dealing with the courts and the Realtor or investor who wants the short sale. That way, the homeowners will know who they are hiring and that the attorney is competent to deal with the legal process of the foreclosure. Just giving any third party power over the home is usually not a good idea, and is something that will be taken advantage of.

In fact, the vast majority short sales set up by real estate agents or private investors do not involve the owners signing a power of attorney. A power of attorney would be used if the owners were disabled or otherwise unable to get to court to represent themselves and they wanted someone else to represent them just in that one instance of the foreclosure lawsuit. These types of limited powers of attorney are more common between family members or trusted friends, rather than third parties trying to put together a deal in their own best interests.

Unless there are a lot of other protections for the owners in the deal, it might not be a good idea at all to sign over power over the house. Maybe if they can revoke any decisions made by the representative, they will be able to retain enough power to rescind any bad decisions made by the limited attorney. However, even in this case, it is more likely the third party who will benefit the most from having near-complete control over the fate of the house.

Thus, it would probably be best if the foreclosure victims found a Realtor or investor who guided them in what to do about the summons on their own, and was just there to facilitate the short sale or other deal to stop foreclosure. Realtors already represent the homeowners if they are listing the house for sale or attempting to locate buyers -- owners do not need to give them even more power to represent them in court, as well.

One very real danger is that they will use the power of attorney to sign over the deed to the house into their names. Then the owners will have no way of defending themselves in court on their own because of the power of attorney, and will not even have control of the property anymore because ownership was transferred into someone else's name. Homeowners need to be careful of what powers they are signing away and how they will be used.

Giving away any power during the foreclosure process is a decision that homeowners can not make lightly. Simple promises from a third party of "help to save the home" and assurances to "trust me" are just plays upon the emotions of desperate homeowners and should be viewed with extreme skepticism. Foreclosure is a situation when homeowners should try to keep as much control over their property as they possibly can, and signing a power of attorney can have just as destructive consequences as signing over the deed to the house.

One of the main causes of the current foreclosure crisis and economic recession is the insidious power of debt in all its forms. Homeowners took on mortgages for houses they could never afford, while auto loans facilitated people's own inflated perceptions of themselves and credit card and consumer goods advertisements worked hand in hand to persuade people to buy now and think about how they would pay later.

Now, with the number of foreclosures and bankruptcies rising to record levels, the greatest fear many people have is that their credit scores will drop and they will not be able to borrow as much in the future. Thinking of this sort, though, is still giving in to the false perception that homeowners or consumers should be judged by how much banks will lend to them and how many Chinese-made plastic pumpkins they can purchase compared to their neighbors.

In other words, judging oneself by one's borrowing capacity results in nothing more then empty human beings who feel they need struggle to buy more just to keep up with other people who are struggling to buy more. When the facade collapses, due to an inevitable job loss, medical crisis, or other financial emergency, far too many people believe that maintaining their credit rating will allow them to solve problems that resulted from their over-reliance on borrowing their way through life.

Even worse, though, is that the credit trap has so ensnared some people that it is almost impossible to get off the track leading them to financial disaster. Making too little money and having too many expenses to begin with, in addition to servicing a large debt burden, is a situation where families are almost guaranteed to end up in bankruptcy or worse. The people who have little choice but to take their borrowing habit to its logical conclusion are relatively smaller than the ones who have a choice, however.

Even the homeowners who have a choice of what purchases to make and how to pay for them, though, are severely disadvantaged. From an early age, every American is exposed to constant advertising and subtle messages that self-worth is dependent on the amount of things they have and size of those items. The pursuit of happiness is defined as the pursuit of machines which are slightly bigger than the machines owned by the neighbors.

In fact, it is the multinational corporations that market these machines that drive people into the willing arms of the multinational banks, which will help people finance their machine purchases. Both institutions work together to chain Americans to perpetual debt servicing payments, or embarrass them financially for nearly a decade through low credit scores or banking blacklists.

With the current recession affecting so many average Americans, hopefully many of them will begin to wake up to this system of credit traps and lifelong debt enslavement. Many homeowners will face foreclosure and families will have to file bankruptcy to escape debt payments they can not meet, but this may only have negative consequences for the banks who create money out of thin air and expect people to pay back interest that never existed in the first place.

People unable to stop foreclosure or avoid discharging their debts through bankruptcy will be given a chance to start their financial lives over and either repair their credit rating or begin to avoid the whole system of debt. With some experience of how destructive this system has been in their own lives, more people may make the right decision and live within their means and only purchase items that they can pay for without becoming the slave of a bank or other creditor.

One of the most important decisions homeowners will make when facing foreclosure is whether or not to hire a third party company to help them save the home. There are hundreds of news stories and complaints online about disastrous experiences people have had with foreclosure scam companies, but many homeowners do not feel competent enough to deal with the mortgage company on their own. In this case, it may be a good idea for the foreclosure victims to consider hiring outside assistance, but they must exercise a good deal of caution before trusting anyone to help them stop foreclosure.

Like with most industries, there will be a vast number of foreclosure help companies that do well by their clients, some that are incompetent and will fail to provide useful services, and a small number that are downright criminal and see their customers as targets rather than as sympathetic homeowners in need of assistance. It will be up to the homeowners, though, to make sure they choose to deal with one of the companies that acts honestly and provides a good service. This takes a good amount of homework in interviewing several companies and looking up any complaints or testimonials.

Foreclosure assistance companies can provide useful help to homeowners, but the extent of their services and their effects will depend largely on how much the homeowners are willing to do on their own. If the owners would rather negotiate with the bank themselves, and try and work out a mortgage modification or other payment arrangements, then there is a good chance they can probably do just as good a job at this as any foreclosure assistance company. There is no real "best way" to stop foreclosure; any plan that is affordable for the owners and agreeable to the banks will get the job done.

On the other hand, if the homeowners have outside lives and are not able to spend several hours a day on hold while waiting for the lender to pick up the phone, and they do not really know what to ask for and do not have the time to do all of the research about how foreclosure works, then it might be a good idea to hire a company to perform these tasks. If the company offers their services for a reasonable price and there are some guarantees the owners can get a refund if the company is unable to stop foreclosure, then it might be worth offloading the work.

Homeowners absolutely need to be prepared, though, to do some of the work to qualify for a plan to save the house. There is almost always a lot of paperwork to fill out and the owners might have to prove stable enough income to qualify for a plan. No foreclosure help company can work magic and make it appear as if people can afford a mortgage payment that is obviously out of their income range. While a high-quality assistance company will do everything they can to negotiate for better terms, they can not completely do away with the mortgage payment altogether forever; eventually, the owners will need to make the effort to get the payments caught back up, and this usually requires a higher monthly outlay, for a time.

The best thing for homeowners facing foreclosure to do might be evaluate their current financial situation, figure out where they can get more income or cut expenses, then decide if they will be able to do the negotiation work with the mortgage company on their own. If they do not have the resources to do this, they may want to consider calling a number of different foreclosure help companies, find out what they offer for how much, and what their refund policies are if they can not help save the home. Assistance to help save a home is available from any number of companies, but homeowners need to decide if there is a chance they can save the home to begin with, and then need to find a reputable company to guide them through the process.

All of the voluntary programs put forward by the government to help homeowners in foreclosure have simply given banks an excuse to state that they are working with people while taking homeowners in record numbers. More meetings to discuss these voluntary programs will simply be a waste of public money and a further indication of just power much more powerful the banks are than the people or the politicians.

Now, the US Treasury Department, after providing all of those securities to the Federal Reserve so they could bail out mortgage lenders and servicers, has called for more voluntary guidelines. The Wall Street Journal reports that, "Officials have called a six-hour meeting Tuesday with banking officials to discuss adopting a uniform, but voluntary, set of criteria to speed the time it takes qualified borrowers to modify mortgages they can't afford." As anyone who has ever been in foreclosure or worked with people losing their homes can attest to, uniform measures are nearly useless in dealing with the highly individual financial situations people find themselves in that lead to foreclosure.

This meeting is part of the government's Hope Now program, which is a voluntary effort by about a dozen of the nation's largest mortgage companies to work with homeowners on loan modification programs. The results of this program, though, have been less than stellar: "Lenders reworked 502,500 loans through Hope Now in the first three months of the year, according to industry data. Of those, the terms were modified on 179,500." This is far worse than the average loss mitigation company's track record of renegotiating mortgages.

This voluntary program that has a success rate just over 35% should be compared to similar efforts that had been made by mortgage lenders before the Hope Now alliance was started. Mortgage companies have always been able to offer modifications with or without the institution of the Hope Now program, and a 35% success rate means that 65% of the people seeking help are left to find other solutions to stop foreclosure. It is inconceivable that banks would turn down such a large percentage of their clients, and certainly does not reflect our experiences of negotiating for modification or repayment plans.

The absurd aspects of this new set of guidelines, though, are almost too numerous to count. Take for example, the fact that "The new industry guidelines, if adopted, wouldn't be binding and couldn't be enforced by the government." Then why, it may be asked, is the government doing anything at all? And will their attempts to negotiate with the largest banks be any more successful than the average homeowner's attempts at qualifying for a mortgage modification?

And a further attempt to quiet down the people while the banks steal their homes can be found in the new form letter requirement. "One possible industry 'best practice' would have lenders acknowledge the receipt of any request for a modification within five days of a request by homeowners." This is in response to the complaint by people in foreclosure that it can take the bank several months to report having received a request for help at all. Of course, banks are experts at sending out form letters, and it is the actual decision of whether or not the plan has been approved that is often delayed for months, many times until a few days before the home is sold at a county sheriff sale.

Thus, the banks will be setting up a new step in the process of stealing a home through foreclosure that will leave them off the hook even for informing homeowners of the results of their modification application. The mortgage company can simply send out a form letter acknowledging receipt of the workout package, and then continue to delay making any decision for months while interest, late fees, and court costs continue to accrue. Another "unintended" consequence of these government guidelines will be the further enrichment of banks and attorneys under a veneer of legitimacy because the lender has followed the industry "best practices."

Any history of the inflation and collapse of the housing market will necessarily leave out many important aspects. The housing bubble had been set up in the regulatory agencies in the 1980's and 1990's, but capital had not yet gone into these sectors at such high levels during these decades. In the late 1990's, the dotcom bubble was all the rage, as well as "emerging markets," like Southeast Asia, and Russia and former Soviet Union nations.

Also, partly as a result of the collapse of the Savings & Loan industry, and the resulting wave of foreclosures from the fallout, real estate was a steadily-appreciating, but not inflated, market. Investments were going elsewhere and returns were better in other market sectors than could be had on real estate or mortgages, two seemingly somewhat boring markets.

But then, around 1997, the markets in Southeast Asia and other developing nations became super-inflated, with many of them pegging their currencies to the US dollar. Speculators could then inflate the markets, driving capital into them and inflating stock values, and then create a flight out of the currency, taking their profits. Many of these countries saw their currencies collapse relative to the dollar as capital fled. As a result, they were forced to impoverish themselves and take loans from the International Monetary Fund.

The same currency destruction happened most notably in Russia in 1998, where the government actually defaulted on its debt, which was quite unexpected. The most powerful nation in the USSR that competed with the United States for decades during the Cold War defaulting on its bond payments was a surprise for many investors. A large hedge fund at the time, Long-Term Capital Management, had bet heavily in favor of the Russian bond market, and was in danger of collapse. The Fed and other large banks stepped in to make sure this did not happen, thereby setting the precedent of bailing out hedge funds.

In 2000-2001, the dotcom bubble burst, as investors realized internet companies could not make money without business plans. Many of them folded, and the market began to sink. It sank even further as a result of the 9/11 attacks on the Pentagon and New York City. As a result, the large energy-trading company Enron faced collapse as a result of its aggressive accounting fraud. But Enron had engaged in the somewhat novel idea of selling off its debt to other investors, a plot the largest banks in the country had helped the company put together.

After the collapse of the dotcoms and the disclosure of Enron's accounting shenanigans, two things happened to work together to create the housing bubble. Without both, the bubble would not have inflated so much, most likely.

First of all, the banks and mortgage companies realized what a great idea Enron had in selling off its debt. The banks could originate mortgages and package them up and sell off the rights to collect the payments. The profits they got from selling mortgages would help them originate new mortgages, and the scam would continue forever, or at least as long as the real estate market was increasing in value. Because they did not have to worry about collecting the payments themselves, these origination companies did not have to worry about borrowers being financially able to pay their debts.

Second, because the Federal Reserve lowered interest rates to below 1%, huge amounts of capital flowed into the US market, and anyone who could successful operate a pen could sign for a mortgage. Interest rates were so low that lending guidelines became nonexistent. If the homeowners defaulted, it did not matter in the least, since the bank could just re-sell the house on the open market and make a profit.

This was the environment until early 2007 or so, when investors started to sober up and realize that maybe giving loans to deadbeats was not such a great idea, because if the market declined, there would be a lot of foreclosures. Banks started tightening up lending guidelines and the Fed was busy raising interest rates to "cool off" the artificially "heated up" housing market.

Then, the inevitable happened: with money becoming more expensive, the real estate bubble burst, taking a few Bear Stearns hedge funds with it. But it was alright for them, since they were bailed out anyway. Homeowners who were actually facing foreclosure, though, were still dealing with higher interest rates and were unable to sell their homes for as much as they paid for them. They either failed to stop foreclosure and lost their properties or the banks had to help them take a loss on the houses through a short sale.

Either way, when the loans went into foreclosure or were paid off for less, the money lost just disappeared. Even worse, no bank wanted to own these bad mortgages anymore, but no bank was quite sure who owned them at all. They were not even absolutely sure they did not own a lot of bad debt themselves, because these loans had been sliced up, packaged, and sold off to dozens of different investors.

So because banks did not want to do business with each other, credit dried up. The Fed started providing loans to banks and dropped interest rates in efforts to stimulate the economy. When that failed to work, the Fed decided to trade bad mortgage debt for US Treasury Securities, which means that the US dollar is now backed by foreclosed loans that no one is quite sure who owns.

Since the rest of the world uses the dollar as its reserve currency, it was none too happy to see that their money was paying less interest and was backed by defaulting mortgage loans. Currencies not backed by foreclosures were assumed to be safer, and nations moved to invest in European Union Euros or Japanese Yen.

Nations still accepted dollars, but wanted more of them for what they were selling. Stuff like gas (refined from oil), food (fertilizer made from natural gas), precious metals, and consumer goods (made in China) went up in price as the value of the dollar went down.

And here we are today, with the US economy facing a recession and politicians providing foreclosure relief which rewards the banks and homebuilding companies with tax breaks. No one is yet sure who owns all of the foreclosed loans, but with the Federal Reserve taking them in return for Treasury Securities, it is becoming clear that all Americans will own these bad debts. The banks will be able to lend money to each other again, while they foreclose on houses, raise interest rate fees, and collapse the economy.

There is a lot of talk among blogs, news media, and even just people in general of a bailout coming from the federal government to help homeowners in foreclosure. The problem with this kind of talk is that many of the debaters seem to believe that they will be given a choice or any kind of input into the decision to reward certain groups with any federal money. In fact, amidst all of the debate, the real bailout is already being distributed.

But one thing is certain: everyone will definitely not get a bailout from the central government. The politicians will delay for as long as possible to prevent this; that is, they will spend so long talking about who to bail out and how much to give them and what kind of bailout to provide, that they will never get around to actually doing anything. Already, nearly 20,000 new homes go into foreclosure every day and nothing will be done to help any of their owners.

Homeowners who own more than one property and have fallen behind on their second vacation home will probably be completely out of luck, as well. These are usually individuals or families, and they are only a constituency, not a special interest, so they will receive no help to stop foreclosure before losing these properties. Constituencies are on the receiving end of propaganda to convince them to vote one way or another, while special interests are on the receiving end of beneficial legislation, tax breaks, and government welfare.

Investment flippers who were small businesses or individuals will lose everything, while being demonized as one of the real causes of the housing market crash. Investment flippers who originated mortgages, sliced them up and packaged them, and sold them to hedge funds while betting on the continuing appreciation of the real estate in order to pay off any defaults are called "banks." They will receive as many bailouts as it necessary to keep any of the largest of them from failing completely.

Low wage McMansion buyers, also known as the suburban middle class, will pay for the bailing out of the banks, which will push many more of them into facing foreclosure on their own homes. As the US currency's backing of nothing is quickly replaced by backing of bad mortgage debt, the dollar's value will fall, pushing up energy and food prices even higher. This will be difficult to keep up with when the middle class will also be responsible for bailing out large banks to the tune of hundreds of billions of dollars.

"No Money Down" ARM buyers will probably be the ones who walk away, caring nothing for bailouts. They thought they were sophisticated enough to buy a home with nothing down and leverage it up to 100% or more and they would just sell when the market went up another 20%. Now that the market is down, they are not going to be able to make that profit, and they are not going to pay $400,000 on a house that's worth $215,000. These homeowners will not get a bailout, but they could not care less since they will not be in the house to receive any federal money, and any bailout would not be enough to convince them to stay and keep making the inflated payments.

Genetically stupid, delusional people, also known as mortgage brokers and real estate agents, will have to suffer the consequences of the housing market crash. They most certainly will not get a bailout; on the contrary, they are the ones who will be scapegoated as having caused the mortgage mess by inflating home values and assisting greedy homeowners in lying on credit applications. This transfer of blame will ensure that real estate brokers and mortgage originators will take the blame when it was the politicians and the big banks who created the environment of the easy credit and loose lending guidelines.

Honest people who are getting screwed by all of the corruption and market manipulation will also not receive a bailout. However, these people will be used by politicians as the motivation for providing a bailout package that is said to "help homeowners," but will instead provide tax breaks and assistance to corporations. People are losing their homes, so the government will reward GM, Ford, the airlines, and home building companies and call it "foreclosure prevention."

It seems that many homeowners are expecting some saving grace to be passed down from the federal government to stop the crisis of defaulting mortgages. Based on the track record of government programs so far, however, it may be far better for people in financial hardships to rely on their own resources than hope for a bailout.

In fact, the government programs that have already been put into place or are being proposed are almost entirely useless for homeowners and may be even more destructive to the weak economy. Too many of them are nothing but voluntary programs that involve only a handful of lenders not offering any new solutions.

But even programs of this nature are not as outright destructive as the ones calling for tax breaks to airline companies, automakers, banks, and homebuilders, at the expense of foreclosure victims. Taking money from homeowners to give to banks in the form of tax rebates and then labeling it "Foreclosure Prevention" is hypocrisy at its most blatant.

If homeowners, due to any of the irrational fears previously discussed, can not make themselves pick up the phone and call their lender, they may want to consider hiring some private assistance that they trust. This may be a loss mitigation company, foreclosure loan provider, bankruptcy attorney, or any other source. Otherwise, the chances are high that they will procrastinate too long and the mortgage company will work hand-in-hand with the government to push the house closer towards a sheriff sale.

Government is force; the foreclosure process is a classic example of this fact. Of course, that force is not used against government's funding source, the banks, which explains why the banking industry will continue to get bailouts and voluntary programs while people are involuntarily forced out of their homes by banks, judges, and county sheriffs.

Therefore, it would be a mistake for any homeowner to hope too much for a bailout from the central government to stop foreclosure. Not only is it not coming, it is being actively planned against by the corporations and industries that profited most from the housing boom and will use their political influence to profit from the crash.

Unfortunately, government representatives are not our leaders. They are our employees. And they are like the employee who steals from the business owner and then demands a raise for proposing unique solutions to theft he is actively engaged in.

The initiating factor for the slowdown in the economy has been the fallout from the subprime mortgage industry and the resulting credit crunch due to higher than expected foreclosure rates. But it would seem that more homeowners facing foreclosure should not cause such widespread repercussions throughout the banking industry; in other words, the effects seem to be greater than the cause.

The reasons for the credit crunch, though, are far more numerous just people falling behind on their mortgages. Money is created primarily through the issuance of credit in the forms of mortgages, credit cards, business loans, and so on. Banks are able to create this money out of thin air, based on how much other money they have on deposit which has also been created out of nothing.

As long as loans are being paid back over time, this money creation scheme can continue for long periods of time. But the problem comes in when the principal for loans are created but not the interest. Banks make money from collecting interest, but they only create the principal amount of the loans.

This leaves the entire economy with a vast shortfall between the money created through debt and the money needed to pay back the interest on all of this debt. People who take out loans are forced to compete with each other to obtain as much money as they can in order to pay back the interest on the money they have previously borrowed but which had never been created.

The results of such a system are easy to predict: some homeowners will be able to gather enough money through production and pay off their debts in full. Others, though, may engage in successive cycles of borrowing, refinancing their homes and taking out new loans to pay back old interest but never coming out ahead.

Eventually, some people who borrow money will find that they have not gathered enough of principal money from other borrowers and they will have no choice but to default on their debt. Defaults are eventually written off by banks or the loans are discharged through bankruptcy proceedings, but the debts are eventually destroyed.

Banks, of course, plan for a certain amount of their loans to go bad or their borrowers to fall into bankruptcy. It is a necessary cost of creating principal out of thin air but never issuing enough money for all of the interest to be paid back. These loans, which the bank counts as assets because they were expecting to be paid back, are simply written off and the money is counted as destroyed.

Larger than expected defaults, however, cause larger than expected destruction of the money supply. Following a huge increase in the money supply by giving loans to people who could not afford to pay them back on properties with inflated values, large destructions of the money supply can affect the lending industry as a whole.

The amount of money banks are able to lend depends on how much money they have in reserve. If a large number of loans goes into default or foreclosure, bank reserves will shrink and the amount that banks can lend to homeowners or individuals or businesses will also shrink.

Coupled with the loss of confidence in the previous loans that had been made, banks will no longer even be willing to lend money to each other, let alone individuals or small businesses. This is the resulting credit crunch as banks raise lending guidelines or refuse to create any new money as debt to circulate in the economy.

But without the creation of new money, a new threat is faced by both borrowers and lenders. That is, even fewer people will be able to obtain the remaining money necessary to pay off their loans, and more bankruptcies and foreclosures will result from the credit crunch caused by the destruction of debt money from previous bankruptcies and foreclosures.

This is one reason that the credit markets have begun to freeze up, regardless of the central bank interest rate or money supply manipulations. Banks created money for people who would never pay it back, and they have no choice now but to suffer the consequences of these decisions or hyperinflate the money supply by creating new loans in the hope that it will result in old loans being repaid.

In essence, the subprime mortgage experiment was a Ponzi scheme at its least thought out. But now that both the people and the banking industry have grown accustomed to federal government and central bank bailouts, without a fundamental change in the monetary system, little can be done to help homeowners ever pay off their debts to the banks.