In my conversations with bankers, the dreaded "second wave" of foreclosures comes up regularly.

They know what they know about the collapse of their subprime loans. What they do not know is what lurks below the surface: a growing number of homeowners who once had decent credit but are giving off subtle but unmistakable signs of financial distress.

This second wave is where bankers are best able to prevent foreclosures and generate a high return on the high cost of loan modifications.

Most modification programs are focused squarely on loans that are already delinquent. But what do we know about the mortgage payment? It is typically the highest priority payment for most people and the last one they let become delinquent.

By the time most homeowners are two months behind on the mortgage, they might be four to six months behind on credit card and utility payments, in fresh debt to family and friends and no longer answering the phone. At that point any reduction in rate, payment or principal is a very small drop in a very empty bucket. It is almost impossible to conjure an offer that can keep them current and still meet even the most lenient underwriting standards.

Banks can spend an enormous amount of time, money and other scarce resources trying to cure these loans, only to have them slip back into delinquency.

This is not new to the current crisis. Research done back in the days of high home prices and easy credit showed the same thing. It just happens faster now.

What if you could turn the calendar back six months? What if today's delinquent customers had appeared on your radar screen as being at risk before other missed payments had decimated their credit scores and desperate measures had consumed their resources? You would have been contacting customers who still had hope, still had resources and would still take your call.

Merely turning your focus from delinquent to at-risk loans is not a slam dunk, of course. You still have to execute many different activities expertly and efficiently. You have to know which homeowners are exhibiting new signs of risk but can still be turned around. Applying predictive analytics to your whole portfolio can tell you what channel offers the best chance of engaging each customer and which modifications — rate change, term change, principal change — will deliver the strongest net present value and work out best for both parties.

Then it takes specialized expertise to engage with the customers, encourage them to give you up-to-date data and present the customized offer. There is simply no substitute for individual focus here. Broad-swath offers created the problem; they cannot solve it.

It also takes a streamlined process that constantly updates your systems with new information, prompts for next steps and keeps things moving rapidly, so modifications can be made before circumstances deteriorate.

We are early in a modification program with one very large bank; 43% of the customers we selected have responded, and about a third of them will end up with modified loans that, according to a rich variety of proven, fresh analytics, are destined to remain current.

It may be tempting for beleaguered bankers to subscribe to the modification programs being urged on them — to gamely throw a rope to desperate homeowners drowning in debt. But you are probably throwing them both ends of the rope, and you are just delaying the inevitable write-off.

Lenders will want to keep in mind the new lessons of the new era.

  • Be wary of spending resources on enticing already delinquent borrowers with offers that are of no long-term good for them and you.
  • Let your entire portfolio yield its story, including the "second wave of foreclosures" — current but at-risk homeowners — and refresh your model regularly.
  • Be careful what you ask for in terms of data. If you ask for data going back a year ago, remember the rosy conclusions you were drawing from that data a year ago!
  • Don't look for one happy answer for all customers just because they all look like part of the second wave.
  • Operationalize the process for speed and efficiency. Make it work as systematically and seamlessly as possible. If that second wave of foreclosures is coming, you want to be very, very good at this process before it arrives.