Types Of Loss Mitigation

By Author: Groshan Fabiola
Total Articles: 2671
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With the housing market in a frenzy, many homeowners are fearful of losing their homes and are tying desperately to avoid foreclosure. The number of homeowners facing or going through foreclosure has surged as filings rose 55% from July 2007 to July this year; however with the help of loan modification, stop foreclosure companies, thousands of homeowners have been able to save their home through loan modifications and other loss mitigation options. These companies not only benefit the borrowers by negotiating ways for them to avoid foreclosure and keep their homes, but also benefit the lenders as immediate mortgage foreclosure creates a tremendous financial burden on the lender. Loss mitigation allows the lender to take a smaller hit today in order to avoid the much greater loss caused by such foreclosures.

While every borrower's situation is unique, below is an outline of potential loss mitigation options and outcomes for the distressed homeowner:

Loan Modification - This is a process whereby a homeowner's mortgage is modified and both the lender and homeowner are bound by the new terms. The most common ...
... modifications include: tacking delinquent payments onto the end of the mortgage, lowering the interest rate, reducing the principal balance, fixing adjustable rates, and forgiveness of payment defaults and fees. It is important for borrowers to realize that a loan modifiation is not a refinance, so credit scores are not considered.

Short Sale - This is a process whereby a lender reduces the principal balance of a homeowner's mortgage in order to permit the homeowner to sell the home for the actual market value of the home. This specifically applies to homeowners that owe more on their mortgage than the property is worth. Without such a principal reduction, the homeowner would not be able to sell the home. Usually the lender will accept the short sale to avoid the time and expense of a foreclosure. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property, such as: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. In addition, foreclosing on a property can also take up to two years in some states. As a result, it is often in the best interest of the lender to accept the short sale. The short sale also benefits borrowers as their credit may not be as adversely affected as it would with a foreclosure, not to mention the stress and embarrassment that can accompany a foreclosure.

Short Refinance - This is a process whereby the a lender reduces the principal balance of a homeowner's mortgage in order to permit the homeowner to refinance with a new lender. The reduction in principal is designed to meet the Loan-to-Value guidelines of the new lender.

Deed in Lieu of Foreclosure - This is a process whereby the lender releases the homeowner from the obligations of the mortgage in exchange for the deed to the home. As with the short sale, a deed in lieu of foreclosure benefits both the lender and the borrower when considering the ramifications of a foreclosure. In addition, a deed in lieu is a faster solution than a short sale, which makes it more likely to be accepted by the lender. However, if the lender eventually sells the home for a price that does not pay off the original mortgage amount, he can get a deficiency judgment and to try to collect.

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