So far, 2008 has not been a good year for the housing market. The impact of the credit crunch and falling house prices are dominating the headlines. This trend looks set to continue and the term negative equity is once again rearing its ugly head. Although there is no cure, other than economic recovery, there are steps that can be taken to deal with this unwelcome situation.

Negative equity means that your house is worth less than your mortgage. This happens when the value of your home falls. Problems can be exacerbated if you do not meet all your mortgage payments, or if you have borrowed money against your home increasing the size or your mortgage in anyway when prices were higher.

Thousands of people lost their homes as a result of negative equity in the early 1990s and experts are warning we could face the same problem again. According to the latest figures from Nationwide, house prices hit their lowest annual rate of increase since 1996 in March this year, with prices falling for the fifth month in a row.

For many first time buyers that purchased properties with 100% or more mortgages, negative equity is a real threat. According to Fool.co.uk 23% of 24 to 34 year old homeowners alone, are worried about experiencing negative equity as a result of falling property values.

The Liberal Democrats estimate around 3 million UK homeowners could experience negative equity this year and up to 60,000 families are at a high risk of repossession. This is double the number of repossessions during 2007. “As house prices continue to fall and mortgage costs rise, we are in real danger of returning to the woes of the Tory recession with large numbers of families suffering negative equity and repossession,” says Vince Cable Liberal Democrat Shadow Chancellor.

According to the Council for Mortgage Lenders (CML) and housing charity Shelter, 27,100 properties were taken into possession by lenders in 2007. This represents a 20% increase from 2006. More than 80,000 people sought help with mortgage problems from Shelter last year, up 10,000 from 2006.

If you are facing the threat of negative equity one of the first things you should do is talk to your lender. The sooner you start communicating, the more likely you are to find a way to address the problem. For example, if you are able, you could switch from interest only to repayment and maybe pay off a little bit more each month.

Of course this is not possible for many people. But as Shelter says: “Don’t think losing your home is inevitable. There are a variety of options available before you reach the last resort of repossession, including converting to an interest-only loan, or negotiating an alternative repayment schedule. Your lender should be able to give you the best advice.” Some lenders may have packages for dealing with negative equity available for their existing borrowers, although usually only if you have a good payment record.

Shelter advises budgeting – drawing up a list of the money you have coming in each week or month, and what you spend over the same period. It recommends showing this to your lender to help you explain how you can manage your finances and address any debt you may have. Whatever you do, it warns, do not turn to debt management companies as they will probably charge large fees for their advice. Also do not be tempted by extra borrowing as it will probably make matters worse and lead you further into debt.

If you are suffering from negative equity it can be very difficult to sell. Your lender may not let you. However if it is necessary to to sell your home the Insolvency Helpline says you may have to prove to your lender that sale is the last resort and the sale is in everyone’s financial interest. It is vital you provide your lender with full information about your financial circumstances, as well as evidence from several independent estate agents that you have found the best sale price for your home. The lender may ask you to sign an extra agreement saying how you will repay the shortfall debt.

Another option is to rent out your home with your lender’s permission. According to the insolvency helpline some lenders add an extra percentage on to the mortgage interest rate for allowing you to do this. But you can ask them to waive this if it will cause you hardship.

These are just a few of the options available if you are threatened with negative equity or repossession. Further advice is available from a number of sources including Shelter, the Insolvency Helpline, the Citizens Advice Bureaux, the Consumer Credit Counselling Service and National Debtline, to name just a few.

Shelter is also calling on the Government and mortgage lenders to urgently set up a special repossession advice service to provide struggling homeowners with free, independent help, which is universally available. In addition it wants the establishment of a national mortgage rescue scheme to allow homeowners in difficulty to remain in their home, without the drawbacks of privately run schemes. The CML is calling for deeper and longer term repossession facilities, extending beyond the three-month facility currently offered to 12 months, or perhaps even 24 months.

So the message is don’t panic. If possible stay put, but don’t bury your head in the sand, look at your finances and deal with the problem.