When a homeowner goes into default on their mortgage and is facing foreclosure, the mortgage lender will try to reduce their loss as much as possible. Loss mitigation is the attempt by the lender to recoup as much of the loan value as they can, with the understanding that they will likely suffer some financial loss, but that the loss will be smaller than if the loan went into foreclosure.
Most major mortgage lenders have a loss mitigation department that works to negotiate terms with the homeowner so as to prevent foreclosure. There are several kinds of loss mitigation that can be used, and perhaps the best known kind is the short sale. A short sale means that the lender accepts less than what is owed on the property as full repayment of the loan. In other words, the payment is short of what is owed, hence a “short” sale.
Very often in the process of a short sale, a real estate investor will act on behalf of a homeowner who is facing foreclosure. The investor prepares all the information that the lender needs to consider the deal, and in a successful short sale, the lender accepts the investor’s terms for purchase of the property. This reduces the financial loss to the lender, prevents the homeowner from losing their home, and the investor profits from buying a property for less than its market value.
Other types of loss mitigation include loan modification, where the interest rate, principal balance, and other loan terms can be modified, and special forbearance, where the homeowner’s monthly payment is reduced or they are allowed to miss one or more payments. The main focus of any of the several available options is to keep the homeowner in their home, thereby minimizing losses to all involved.
Loss mitigation was originally introduced as a collaborative effort between the federal government and the mortgage industry. It has been used by mortgage lenders for many years, but has experienced rapid growth since late 2006, when the rate of foreclosures in the United States rose dramatically, and hundreds of mortgage companies were forced into bankruptcy or out of business. Despite this fact, and perhaps because of it, lenders are focused first on finding a way for the homeowner to keep their home. Most often, arrangements can be made toward this goal by a loss mitigation counselor, with foreclosure being a last resort.