Loss Mitigation: Avoiding Foreclosure

The term "loss mitigation" means controlling or managing a potential loss amount. Today, it is commonly used to describe an intervention by a third party to help homeowners negotiate their existing mortgage terms with lenders in order to avoid foreclosure.

Prior to 2006 - early 2007, loss mitigation was a very, very small department located in a corner of most major lending institutions. That department didn't even exist for many lenders.

Today, an entire industry has mushroomed around the services of 'specialists' who are assisting lenders and homeowners in controlling the loss of an asset and avoiding foreclosure.

Foreclosure is not a cheap solution. By the time a house is sold at auction, hundreds of thousands of dollars could have been lost. Generally, by pursuing mortgage modification, the losses are mitigated and less financial damage is done to lenders, as well as to the homeowner's FICO and credit scores.

Loss Mitigation - Options

Loan modification is a change in one or more terms of the borrower's loan or mortgage. The mortgage is modified, with both lender and homeowner bound by the new agreed upon terms. These term changes could be:

• a lower interest rate on the mortgage
• a reduction of the principal balance owing
• changing from and an adjustable or variable interest rate mortgage to a fixed rate mortgage
• increasing the loan term (the amount of time to pay off the loan)
• waiving or forgiving payment defaults and penalties
• a combination of any of the above

More about loss mitigation and loan modification here.

Short Sale: When a homeowner wants to sell his property but is stuck with an upside down mortgage (more mortgage than the home is worth), he requires permission from the lender to do so. The lender accepts a payout of the mortgage that is less than the principal balance owed. This applies only to homeowners that owe more on their mortgage than the property is worth. More about how a short sale works here.

A Deed In Lieu of foreclosure (DIL) is an option where the homeowner voluntarily gives title to the propery to the lender in exchange for a release from all the obligations of the mortgage. If the homeowner/mortgagor is financially able to make the mortgage payments, a Deed In Lieu of foreclosure may not be accepted by the Lender.

Forbearance or Special Forbearance is an agreement made between the Lender and the borrower, that will allow either no monthly payment, or a reduced monthly payment for a specified and agreed upon period of time. The lender will often request that a repayment plan be put in place when the forbearance has been finished, to pay back the missed payments, or they may simply modify your loan (see above).

Benefits of Mitigating Loss

Avoiding foreclosure is usually the biggest benefit for the homeowner. Loss mitigation either relieves the homeowner of the mortgage obligations or modifies the mortgage in such a way as to make the mortgage more affordable.

The lender benefits by taking a smaller loss now to avoid the potential bigger losses they would likely incur by foreclosing.

Should you decide to hire a specialist, do your due diligence and investigate their experience in dealing with lenders, banks and other mortgage companies, their knowledge of the loss mitigation process, as well as the possible repayment plans.

It is also important that they know how to help the mortgage lenders reach resolutions, while keeping your best interest in mind.