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No one enters into a mortgage agreement with the intent of not paying. Economic conditions, family loss, illness, loss of job, or other financial hardship can put borrowers in a challenging place with the inability to maintain their loan payments. Loss mitigation is a foreclosure alternative used in the mortgage industry to help borrowers who may be struggling to pay their mortgage loan. Right now, with millions of Americans out of work as a result of the coronavirus pandemic, loss mitigation can be a viable solution that helps lenders and borrowers find a temporary or long-term resolution while avoiding foreclosure.
What is loss mitigation?
Loss mitigation is a general term used to describe a number of different foreclosure alternatives options which can include:
|Loss Mitigation Strategy||Loan Forbearance||Loan Modification||Deed in Lieu of Foreclosure||Short Sale|
|How the Strategy Works||Loan payments are reduced or temporarily deferred for a period of time while interest continues to accrue, being added to the total unpaid balance during the forbearance period.||Modification that amends or modifies one or more terms of the mortgage loan, which could include the total unpaid balance (UPB), interest rate, maturity date, or interest type. Most lenders attempt a trial modification prior to executing a formal loan modification.||A deed in lieu (DIL) transfers ownership from the borrower/property owner to the lender. In exchange, the lender releases the mortgage loan and relinquishes the remaining balance due. This can sometimes be called "cash for keys," and the borrower is compensated for relocation costs in exchange for the deed.||The property is sold for less than the balance owed on the mortgage for an amount designated or approved by the lender.|
|Who It's Right For||Borrowers 90 days or less delinquent who temporarily need to suspend, defer, or reduce their monthly payments but believe they will be able to make normal payments again in the future.||Borrowers who are 90 days or more delinquent and can no longer can afford the original loan terms but can begin paying a lesser amount immediately.||Borrowers who are willing to move out of the home and relinquish their interest in the property and the property has no liens or encumbrances that hinder transfer of title.||Borrowers who are willing to move out of their home and relinquish their interest in a property that has negative equity or is underwater.|
Foreclosures can be lengthy and costly for lenders or servicers, which is why it's in everyone's best interest to avoid foreclosure and find an alternative solution to satisfy the debt obligation.
Forbearance plans are one of the most widely known loss mitigation strategies largely thanks to the CARES Act, which made loan forbearance available to any FHA-insured mortgage in response to the Covid-19 national emergency.
But loss mitigation reaches far beyond that and includes any strategy that helps the borrower find a positive resolution outside of foreclosure action, whether that be developing a temporary repayment plan, deferring loan payments for a period of time, modifying one or more terms of the loan to help get the borrower paying again, or helping the borrower sell or move on from the property.
How loss mitigation works
If a borrower, whether that be a homeowner or investor, is unable to make their mortgage payment, they can submit a loss mitigation request by contacting the lender or mortgage servicer for the loan. The borrower will complete a loss mitigation application that the loan servicer or lender will then review in order to gain a better understanding of the current financial hardship and assess the borrower's ability to repay the loan.
The lender or servicer will look at things like recent pay stubs, tax statements, credit score, household income, and monthly expenses to determine the likelihood to repay or if they should explore other alternative solutions like a deed in lieu or short sale. Depending on the borrower's unique scenario, the lender or servicer will then determine the best loss mitigation option for their situation. While most servicers and lenders try to find the best solution that gets the borrower paying again, there are times in which the best solution is the sale or release of the property.
Depending on the lender or servicer and the number of applications or loans being managed, it can take several weeks to hear back in response to a loss mitigation application, and the lender or servicer is not required to provide a loss mitigation offer. For this reason, it's a good idea for borrowers to reach out to lenders before the foreclosure proceedings have begun. Borrowers must keep in mind that lenders receiving a high volume of loss mitigation requests may not be able to grant them all because of servicing requirements, particularly for insured loans.
Loss mitigation can work, but not always
Loss mitigation can be a great option for those who want to avoid foreclosure, but it won't always be a viable solution for every person. The goal of loss mitigation is to get the borrower paying again or recoup the money owed to the lender through the sale of the home. If the borrower is unable to repay the loan because they simply lack the income, particularly due to long-term loss of job or significant decrease in income, forbearance plans or modifications won't be of much help to either party.
Borrowers seeking relief need to be realistic about their situation and available options. If there is equity in the property, selling the property and moving on may be the best option for all to avoid foreclosure sale and repay the debt obligations.
Government role in loss mitigation
Prior to the 2008 housing crisis, the government had a very small role in loss mitigation efforts, but that all changed after the Great Recession when The Federal Housing Finance Agency (FHFA) was established to help oversee and regulate mortgage servicers and lenders, including Fannie Mae and Freddie Mac. Federal mortgage servicing laws were established to create standardized rules for all servicers and debt collectors in the Federal Banking system to follow, including notifying all borrowers who are delinquent about their loss mitigation options in writing and by phone if possible.
In times of extreme crisis, such as the Great Recession or the current global pandemic, the government may extend special funding specifically for a loss mitigation. A popular loss mitigation program from the 2008 housing crisis was the Home Affordable Modification Program (HAMP), which offered special modified loan terms for homeowners in need. It's important that investors who purchase or create mortgage loans understand the current laws and regulations and work with a licensed mortgage servicer for help keeping compliant.
Loss mitigation in summary
Loss mitigation can be a positive outcome for both lenders and borrowers during times of financial strife, but both parties need to understand the options available and that the type of relief will depend on the situation. What initially worked may not be a long-term solution if the financial situation doesn't improve. It may be helpful to seek the professional advice of an attorney or housing advisor to help you understand the various options as well as the fine print and terms of the agreement before entering into a formal loss mitigation program.
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