Experts at HousingWire.com say there is a wave of foreclosures on the way that could dwarf the current mess. Record numbers of pay option ARMs are due for reset, and according to the Mortgage Bankers Association 80% of borrowers make the minimum payment every month.

This may create a perfect storm of upside down homes and payments resetting to several times the original values. What can a homeowner who can’t refinance or sell do? Get ready to negotiate with your lender. Experts say that borrowers have the greatest chance for successfully keeping their homes and saving their credit if they get a loan modification rather than a repayment plan. So, prepare to show your lender how much you can reasonably be expected to pay each month under new loan terms. Document your income, assets, and debts, just as though you were applying for a new mortgage (which in effect your are), and prepare to wallow in a lot of red tape. The one thing you have on your side is the fact that you are upside down–the less equity involved, the more incentive the lender has to help you out and refrain from foreclosing.

While many lenders won’t even talk to borrowers about workouts unless they are seriously delinquent, option ARMs present a special case in that you will be able to easily prove that once the loan resets repayment is impossible–you shouldn’t have to miss months of payments to prove that, the numbers will speak for themselves. So if you have some advance notice that you will be in hot water in the future, start working to solve the problem now. Check with HUD for a list of low cost housing counselors and be as proactive as you can.

It was enough to make any mortgage observer recall the old joke about the light at the end of the tunnel turning out to be a train. A steady drip of positive news lately was overshadowed by the news that lender GMAC Financial Services was closing 200 retail offices and laying off 5,000 employees. The move was designed to scale back the firm’s mortgage lending presence in reaction to losses in that sector.

Still, while this story grabbed the headlines, home buyers and mortgage shoppers should not lose sight of some of the more positive news:

• Mortgage rates have settled into a gentle, downward trend
• Lower oil prices are taking some of the heat off of inflation, and thus interest rates
• Mortgage application volume showed signs of life

While the GMAC story was a reminder of why economic recoveries can take so long to develop, the underlying fundamentals suggest that conditions may be getting better for the housing market.

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These days you are more likely than ever to get bad news from your lender when you try for mortgage financing. Even borrowers with great credit and good jobs are jumping through hoops, paying surcharges for certain property types, and getting higher rates because they don’t have enough equity.

So what do you do when your lender takes a page from Nancy Reagan and “just says no?”  Well, Investopedia has a couple of ideas. If you’re new at the mortgage game and trying to buy your first home, you probably face a few obstacles–a short or spotty credit history, a small down payment, and maybe less time on the job than the underwriters would like to see. Investopedia says to find a co-signer to boost your income and credit. However, very few people who understand what’s involved with co-signing will want to do it. For one thing, your house payment will often be added to your co-signer’s debts when he or she tries to qualify for financing. Second, any missed or late payments will go on both your credit histories. And finally, if you default or file bankruptcy, the lender will go after your co-signer for the whole enchilada. So unless you are sure you will be perfect with your loan or you place no value on your relationship with your co-signer you probably don’t want to go that route.

Try other lenders. Go to FHA’s Web site and take a look at the underwriting requirements. FHA doesn’t have hard and fast requirements for time on the job and it will consider the reasons behind credit glitches when evaluating your application. FHAs’ qualifying ratios are higher than traditional lenders at 31% for housing divided by income and 43% for debt-to-income. Additionally, you can push the ratios even higher if you have two or more “compensating factors” such as “demonstrating the ability to accumulate savings and a conservative attitude toward the use of credit,” or having a job with “potential for increased earnings, as indicated by job training or education in the borrower’s profession.” Other ways to get around the income requirements are to have at least three months’ worth of expenses saved (called “reserves”) or to make a larger down payment. Similarly, FHA has more lenient credit and assets requirements. A good loan pro can tell you what they are and how you can qualify.

 Make some changes. You may have just missed getting approved for your loan. If that’s the case, find out what you need to do and take care of it. You most recent credit history is the most critical, and that’s probably the easiest and fastest way to improve your package. But if it’s income or assets that’s the problem, try a cheaper house. Or get your seller to pay to buy your rate down to a manageable level so you can qualify. Or ask a seller to pay your closing costs so that you can have more reserves after the loan closes–an extra two months of savings could make the difference. Or pay your debts down–once an account balance will be paid off in less than 10 months, many lenders won’t count it in your ratios–that can make a huge difference in your file.

The bottom line is that your loan professional should do more than smile and tell you you didn’t get your loan. He or she should  tell you what would make the biggest difference in your application and what you need to do to get approved.

Today’s Riverside Press-Enterprise ran a story that should concern all of us. Homeowner Fraud Exacerbates the Mortgage Crisis hit it right on the head. The article detailed numerous ways that homeowners defraud mortgage lenders and run down their own neighborhoods by dumping their homes. These people aren’t down on their luck; they just see a chance for a quick buck and don’t have a problem with everyone else bearing the brunt of their investment choices.

But what is most alarming is the fact that state and local governments in California and Oregon make it very difficult for lenders to get their money back, even if the homeowner committed fraud or could afford to honor his / her obligations.

According to writer Leslie Berkman, “wrongdoers are further insulated by California law, which greatly restricts a lender’s ability to sue borrowers to collect the money they’ve lost in a foreclosure or short sale.”

And those who are supposed to protect us from fraudsters are apparently more interested in playing politics. Despite the fact that according to the FBI the vast majority of home loan fraud is perpetrated by homeowners against lenders, local district attorneys are more interested in appeasing voters and “protecting” them from big bad banks. For example, Larry Roberts, who heads the real estate fraud unit of the San Bernardino DA’s office, indicated they have little interest in prosecuting homeowners who lie to their lenders to get loans. His office is more interested in prosecuting “scammers who profit by deceiving consumers…than it is in catching consumers who defraud a lender with the intention of buying or keeping a home.” Makes a nice commercial but what is really affecting real estate and the economy is the big fraud, the one no one wants to be seen going after, the rip-off engineered by “regular folks.”

So the fraudsters can trash our neighborhoods and make it more expensive and difficult to get home financing–as long as they continue to vote. We need to put the pressure on officials to force the deadbeats who are not insolvent to make good on their mortgages. And we need to bring back the stigma of foreclosure–blowing off your mortgage isn’t cool or cute or clever. It’s as much stealing from the little old lady down the street as if you held a gun to her head and emptied her purse.