The Various Scenarios Of Loss Mitigation | Propertylogy

The Various Scenarios Of Loss Mitigation

By on May 23, 2019

Loss mitigation is the term used by lenders to describe the process of working with delinquent borrowers to find a solution to the debt without having to go through the legal process of foreclosure.

This is because foreclosure is a tedious legal process that is costly and time consuming. And at the end of it, the expenses of one would inevitably eat into the sales proceeds from an auction as well.

The objective of the lender is always to minimize their losses or have the debt satisfied.

While the goal of the homeowner is usually to avoid financial catastrophe and keep his home.

In most states, the law requires a lender to appoint a representative loss mitigator for the prospect of loss mitigation as soon as a home loan has been in delinquency for 45 days.

Borrowers can also voluntarily trigger one by submitting a request before 45 days of delinquency.

The process of loss mitigation is supposed to be for the benefit of the borrower as the lender has the legal right to foreclose and make his life hell.

However, any proposed solution has to be agreed by both parties for a new structured settlement to take effect.

Therefore, even though a lender has leverage, going too forceful can render the negotiation fruitless.

Here are some of the common outcomes of lost mitigation options.

Loan modification

A loan modification is a mutually agreed restructuring of a mortgage loan.

The borrower usually presents an overview of his financial situation to seek understanding and empathy.

And from the intricate financial details that a borrower provides, a deal is made that accounts for the borrower’s income and cash flow.

The changes of terms on the loan contract might be a temporary measure or a permanent change.

For temporary changes, the loan would revert back to it’s original terms after the time period agreed upon by both parties have expired.

Sometimes a total restructure of the loan is not necessary when the borrower actually has cash stashed in a savings account for emergencies like this.

The borrower basically pays a lump sum as a partial claim to reinstate the loan facility in delinquency.

After which, all is forgiven and things revert to normal as before.

Forbearance agreement

A special forbearance agreement is somewhat similar to loan modification.

The difference being that the loss mitigation department would give assurances that there will be no foreclosure proceedings as long as the borrower commits to a payment plan which will resolve the delinquency.

This can be a good proposal when the borrower is encountering some short term cash flow problems that would eventually correct itself.

In the mean time, while there is a shortage of cash, the borrower would fulfill the terms of the agreement.

After which, the home loan would revert back to normal.

Short sale

A short sale refers to a deal being struck whereby the bank agrees to accept a lower amount than the amount outstanding as full repayment of debt.

This money will come from sales proceeds that come from the sale of the property at a low discounted price.

This solution might be ideal for real estate residing in markets where property value is depreciating at an alarming pace.

With a depressed market in mind, agreeing a short sale could be a good move for a lender as even a foreclosure might result in very low sales proceeds.

On top of that, by the time the house reaches the auction house, it might have depreciated further.

Short refinance

A short refinance is a lending term that refers to the refinance of a loan which is currently in default.

The loan balance in this new loan would be reduced from the original loan amount.

This means that not only will the borrower have a smaller principal to pay off, the interest rates would be lower if the current market rates are lower than the original loan.

While short refinance is generally advertised as a way to help homeowners avoid foreclosure, a big reason why lenders might choose this route is that losses from such deals would be better off than losses on foreclosure or any loss litigation.

Deed in lieu of foreclosure

This is getting uncomfortably close to foreclosure.

When every solution explored in loss mitigation assistance cannot be agreed upon, a final play by the lender to go through the process of foreclosure is to propose a deed in lieu of foreclosure.

This is basically a fancy jargon for giving up the title to the property to the lender as full settlement of the debt.

Should a lender wish to avoid this, a cash-for-keys agreement might be concluded with all parties which is basically an agreement for owners or tenants to vacate the dwelling in a civil and timely manner.

Finally, something to take note is that even though the various possibilities of resolution would put a borrower in the clear, he can still expect his credit to take a beating.

And don’t forget that there are service providers who are experts in these matters which borrowers can hire.

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