Because Congress cut federal funds for housing counselors (the National Foreclosure Mitigation Counseling Program), people who might have been able to work out a deal with a lender are ending up in foreclosure instead.

Launched by the Bush administration in December 2007, the National Foreclosure Mitigation Counseling Program had $475 million to provide professional counseling for families facing foreclosure. And the program worked — the Mortgage Bankers Association found that homeowners who had a counselor were more likely to have their loans modified than those who didn’t.

For a relatively small government program, it did a lot for the economy — reducing the glut of foreclosed homes on the market helps everyone. People get to stay in their homes, Housing counselors may or may not look like thisbanks don’t have to add yet another REO to their already overburdened portfolio, having professionals help borrowers makes the process easier for lenders working out loan modifications, and neighborhoods don’t have to deal with empty homes… or worse.

When it comes to underwater borrowers, said James Perry, executive director of the non-profit Greater New Orleans Fair Housing Action Center, “The media is full of what sounds like impossible stories, but housing counselors deal with these circumstances all the time. This is where housing counselors really make a difference.”

But funding for the program was eliminated, and when the existing money runs out those counselors won’t be available — and that will mean foreclosures will start to rise again.

They’re already pretty high. Last week the Daily Press reported that “Peninsula-area foreclosure filings jumped 34 percent between June and July and were up 17 percent over July 2010.”

HOME (Housing Opportunities Made Equal of Virginia) is a non-profit HUD-approved housing counselor. “Slashing housing counseling funding in the middle of housing crisis is bad public policy,” it said on its blog. “This is clearly going to make our economy worse.”

“A lot of the mortgage companies really appreciate the work we do because we help them,” said Abigail George, one of HOME’s counselors. “When they go through a housing counselor, they know they are going to get the complete package they need, so it helps them, as well, to be more expedient.”

Click here to read more about the issue.

And if you have a client who needs help, here’s HUD’s page about finding a counselor.