What is Loss Mitigation?

loss-mitigation-house

Loss mitigation comes about when a homeowner is in danger of losing his property to foreclosure. When this happens, the bank or financial institute with whom the homeowner has the loan will sometimes bring in loss mitigation in order to modify the loan in such a way that both parties can continue working together and avoid foreclosure. Lending institutions are typically more willing to engage in loss mitigation the sooner the homeowner lets them know he is in danger of being unable to pay the mortgage.

Function
In engaging in loss mitigation, the lender is attempting to salvage the terms of the loan, in the hope that the homeowner will be able to return to the original terms of the deal in the near future. In the meantime, the loan may be modified in a variety of ways, including lowering the interest rates on the loan, reducing the balance or forgiving past fees and defaults.

Types
Loss mitigation does not always include simple readjustments of the terms of the loan agreement. Sometimes the lender and homeowner will agree to a short sale. This means the lender will accept a full payoff of the loan, even though it is not what the balance of the loan is truly worth. This way, the homeowner can turn around and sell the home for its full value. The bank may also engage in short refinance, where they knock a few thousand dollars off the balance so the homeowner can refinance with another institution.

Benefits
Loss mitigation typically benefits both the homeowner and the lending institution. The homeowner is able to avoid foreclosure and possibly bankruptcy, sparing himself an enormous black mark on his credit, as well as putting him in a difficult situation with his homestead. It benefits the lender by reducing the hit they would take if they went through with foreclosure, which can put a great deal of financial stress on a lending institution.

History
Loss mitigation is nothing new, but it’s only since 2006 that the field has experienced such growth. This, of course, is a product of the housing market decline, which saw many families being forced to the point of foreclosure when they lost their jobs, or simply because they misunderstood the terms of the original (often predatory) loan. Before that time, loss mitigation was used sparingly, and accounted for only a small section of a lending institution’s total workforce department.

Considerations
Loss mitigation is preferable to foreclosure (especially for the homeowner) in almost every situation, particularly in the housing crisis. With homes declining in value, and an uncertain future when it comes to a rebounding market, homeowners stand to lose tremendous amounts of equity in their mortgages. Without this equity, straight refinance is difficult to achieve, and negative equity can result. When this happens, we will see (and have seen) a situation where homeowners are willing to skip loss mitigation and allow the home to go into foreclosure.

Original article by Shawn Bryan.


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One response to this post.

  1. Ah!!! at last I found what I was looking for. Somtimes it takes so much effort to find even tiny useful piece of information.
    Nice post. Thanks

    Reply

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