Nothing is more financially devastating to a bank than foreclosure. When a bank says that they don't want your home to go into foreclosure, that actually mean it. Financially, bank owned foreclosures hurt banks more than homeowners.
Foreclosures also don't happen right away-even if a homeowner is up to 90 days past due on his mortgage. First, he/she will receive a "default letter". Default letters are not foreclosure letters. They are strongly worded letters meant to scare the homeowner into catching up their late mortgage payments. Often times the letters will ask the homeowner to call the bank to discuss options.
According to the bank foreclosed homes guide, if there are still no payments made and and more time passes (the amount of time allowed to pass depends on the bank), eventually the homeowner receives a letter that foreclosure procedings have begun. This letter often names the legal entity the bank is using to begin the legal process. At that point, the homeowner may still call and arrange to make payments and stop everything. This legal process is long, and very expensive for the bank. The have to pay attorneys and court cost.
For those reasons banks may offer repayment plans. This plan combines total amount past due (including all late fees). The total amount due is then pread out over several months. The homeowner would choose to pay an agreed upon monthly payment to avoid foreclosure procedings. However, these monthly payments must be made in addition to their regular monthly payment.
The other option is a Loan modification. That means the bank completely re-writes the terms of the loan, giving the homeowner a new monthly payment which is often substantially lower than what they paid before. The rest of the late amount is pushed back into the loan-with balloon payment that needs to be paid years later.
Keep in mind that each homeowner has to qualify for the aforementioned options. They are not guaranteed to receive them. Be assured, that even though the idea of bank owned foreclosures is frightening to every homeowner, but even more frightening to your bank.