Foreclosure filings in North Carolina rose by 14 percent in 2009, to an estimated 61,514. But the state still ranks among the lowest for foreclosures nationwide, due in part to a foreclosure-prevention program that involves an extensive network of counseling and legal-services agencies.

The State Home Foreclosure Prevention Project (SHFPP) averted 2,620 foreclosures last year, according to North Carolina’s Office of Commissioner of Banks, and provided counseling to 8,060 households. By preventing these foreclosures, the Project avoided $183.6 million in investor losses and $43.6 million in property value declines.

However, with North Carolina’s budget deficit projected to fall somewhere between $3.5 billion and $4.6 billion in fiscal 2010, lawmakers might balk at renewing the Project’s funding, which could jeopardize some owners’ last chance for keeping their houses.

SHFPP is the result of emergency legislation passed in August 2008 to address the state’s high rate of foreclosures on subprime loans. In November of that year, the Commissioner of Banks launched the project with the support of 34 state agencies, HUD-certified counseling services, legal service providers, and nonprofit groups.

State law requires lenders to give 45 days advance notice before filing for foreclosure. The project uses the grace period to advise homeowners to seek counseling through a toll-free number and then in face-to-face meetings. (The state has found that in half of all foreclosures, North Carolina homeowners have had no contact with mortgage servicers.) The project’s seven-person staff troubleshoots problems to keep the process moving smoothly. “It’s frustrating when a document that’s been sent to a mortgage company isn’t in its files,” says Mark Pearce, the Commissioner of Banks’ chief deputy commissioner.

Counselors review the homeowner’s personal finances to figure out why the mortgage is delinquent. A counselor might contact the mortgage servicer to work out a loan modification. And for subprime loans, the Commissioner of Banks might delay foreclosure proceedings for as much as 30 days. At one time, subprime borrowers accounted for half of North Carolina’s foreclosures; now, they’re about one-third, says Pearce.

In November 2009, the Commissioner of Banks expanded the phone-counseling services to all North Carolina homeowners seeking help.

Offering this level of foreclosure prevention doesn’t come cheaply. When the state passed its Emergency Foreclosure Act in 2008, it funneled $600,000 in grants to nonprofits and counseling agencies. Bank of America put up another $2 million, and the North Carolina Housing Finance Agency secured $2.5 million in federal grants. The Commissioner of Banks pays the SHFPP staff with more than $1 million in fees it charges banks.

If these funds aren’t renewed, the project will need to tap other sources, such as national foundations, which Pearce thinks would be receptive to providing financing for this “fairly unique” effort.

Pearce acknowledges that any program has limitations and believes reducing foreclosures ultimately hinges on improving property loan-to-value ratios. The good news is that North Carolina has far fewer Alt-A or Option ARM mortgages than other states, and therefore should have fewer problems with foreclosures triggered by their interest-rate resets.