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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.
@Moldova - I know what you mean, I had a friend that was trying to buy a short sale from one of the largest banks in the United States and after waiting seven months he withdrew his offer.
I think that a lot of these banks are trying to hire more people to fill these loss mitigation jobs but they have so many cases that when they do hire people it seems like a drop in the bucket.
I think that this is why a very small percentage of homeowners get their loans reworked so that they could manage the mortgage payments. I think that this is the first time that so many banks are facing these types of
problems so I can imagine that the workload must be overwhelming.
If anyone is looking for a home, they should consider a foreclosure over a short sale, because a foreclosure already went through this process and since the banks would have held the property for a longer amount of time, they are in more of a position to negotiate.
@Latte31 - I think that short sales are really tricky when there is a second mortgage involved because often in these situations the second mortgage holder does not get paid because they are in an inferior position with respect to debt repayment.
I think that if you get involved with a short sale as a buyer it is important to make sure that the seller has an attorney familiar with loss mitigation services because a bank will take the call of an attorney a lot faster than they would a real estate agent.
I think that in the future I will skip short sales because it is more trouble than they are worth and they only close about 50% of the time.
I think that a lot of banks are overwhelmed with all of these foreclosures and potential short sale requests. There are so many cases that it takes weeks to hear back from a loss mitigation specialist.
I remember a few years ago, I was in the market for a vacation property and was interested in an oceanfront condo that was in a pre-foreclosure situation. The sellers had two mortgages on the property a first and second mortgage. They purchased the property for $425,000 in the height of the real estate market and were trying to sell the condo for $200,000.
Since we had the same bank as the sellers we thought that it would be an easy
deal. We offered the $200,000, but after four weeks we heard back that the bank wanted an additional $70,000 from either party. I refused and the sellers had to put the condo back on the market. It worked out better for me because I found a foreclosure that was even nicer and I did not have to deal with the same hassle.