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Just as foreclosures are poised to take off again, housing counseling groups across the country are getting hammered by federal budget cuts, a deficit-reduction measure that may save a few dollars now but could further damage an already hobbled economy.

In April, $88 million was cut from the Department of Housing and Urban Development budget, a reduction that included all funding for foreclosure prevention, reverse mortgages and first-time and other home purchases, said Jesse Van Tol, spokesperson for the National Community Reinvestment Coalition.

Those cuts take effect Oct. 1, and it’s not clear yet whether other sources of foreclosure counseling funds can come close to making up for the lost money. In the meantime, securing any money for HUD counseling in 2012 will require a fight, given that proposals so far call for zero funding again next year.

“We won’t have much of a chance for a recovering housing market if people aren’t able to buy homes and avoid foreclosure,” Van Tol said. The housing counseling money “helps people to do both of those things. By stripping it away, we’re making the problem worse.”

In New Jersey, for example, “where lawyers are just waiting to push the button,” it’s been estimated that there are between 20,000 and 30,000 foreclosures pending, said Alan Mallach, a senior fellow at the National Housing Institute. Yet one New Jersey housing counseling agency already has shut its doors and more closings are expected. 

In Maryland, in March, more than 7,100 notices of intent to foreclose were filed in Prince George’s County alone, more than twice as many than in any month since the state began keeping records in 2008.

“This has become a major crisis around the country,” Mallach said. “It’s crazy. It’s totally crazy. No one believes foreclosures are going down in the long term. We’re totally cutting services to people who need them the most.”

Nationally, RealtyTrac said a backlog of pending foreclosures has cast “an ominous shadow” over the housing market.  As many as 1 million foreclosure actions that should have taken place in 2011 will now happen in 2012, or even later, the company reported in July. Even with delays in those foreclosures, some 2 million total foreclosure filings are expected this year, RealtyTrac said.

Advocates contend housing counselors have helped prevent some 900,000 foreclosures. In Maryland, HomeFree, a counseling agency, is already fielding far more requests for help than its staff can handle, thanks to a drumbeat of foreclosures and escalating unemployment. And that’s despite the herculean efforts of the agency’s staff.

“The reality is, counselors are carrying probably double (the workload of) what they should,” said Peyton Herbert, vice president of the organization.

In Maryland, one source of cash is the foreclosing lenders themselves. Under the state’s foreclosure mediation law, lenders must pay $300 each time they file a notice of intent to foreclose, a document alerting homeowners that a foreclosure action is around the corner. 

Those fees totaled $2 million for counseling groups between June 2010 and July 2011, said Carol Gilbert, assistant secretary for neighborhood stabilization at the Maryland Department of Housing and Community Development. 

But the state funds can’t make up for the lost HUD funding.

A major obstacle to preventing foreclosure is getting mortgage servicers to process loan applications, something housing counselors can assist with. The slow grind of foreclosure notices and modification limbo can make homeowners lose hope.

“People are ditching their homes,” said Lisa Butler McDougal, executive director of Sowing Empowerment and Economic Development, a Maryland counseling agency.

“It’s unemployment, a lack of wages, low wages, or any kind of reduction of wages in the home,” she said. “That’s what’s leading to the foreclosures.”

Kat Aaron is project editor of the Investigative Reporting Workshop’s What Went Wrong project. Mary Kane is a 2011 Alicia Patterson Fellow, writing about financial literacy and consumer finance. The Workshop is looking for stories of lost jobs, lost homes and city budget cuts, and wants to talk to people about how they are holding on. You can share your stories.