Loss mitigation is a tool that lenders have used for decades, with exponential growth since late 2006. This was a result of the huge increase in foreclosures across the US. While previously only a small department within the financial system, loss mitigation grew as a result of the near collapse of the mortgage industry due to poor underwriting standards and subprime adjustable rate mortgages. The transfer of ownership from mortgage lenders to third party investors was a financial mess. Lenders wrote a significant amount of unstable loans and sold them without any thought concerning the borrowers inability to pay. This practice continued, with mortgage lenders lowering the requirements of mortgage approval with many unqualified borrowers purchasing homes.
Loss mitigation is best defined as a third party helping a homeowner. It can be a division within a bank that mitigates the bank’s losses. It can also be a firm that deals with the negotiation process that occurs between a homeowner and the homeowner’s lender. Loss mitigation acts as a tool to negotiate mortgage terms for the homeowner that will prevent foreclosure. These new terms are generally gained through a variety of methods. Some of these methods are loan modification, short sale negotiation, short refinance negotiation, deed in lieu of foreclosure, cash-for-keys negotiation, a partial claim loan, repayment plan, forbearance, or other loan workout. All of these options exist to basicall or texty serve the same purpose, to minimize the risk of loss to the lender.
One of the types of loss mitigation is loan modification. This process is basicall or texty a modification of the homeowner’s mortgage and both the lender and homeowner are legally bound by the new terms. Commonly, the lowering of the interest rate and extension of the loan term to up to forty years are two of most utilized modifications. However, reduction of the principal balance is rare.
Another process is a short sale. This is a process whereby a lender accepts a payoff that is less than principal balance of the homeowner’s mortgage. This is done to permit the homeowner to sell the home at market value. This applies to homeowners that owe more than the property is worth. Without the reduction, the homeowner couldn’t sell the home.
Short refinancing is when a lender lowers the principal balance of a mortgage so that the homeowner can refinance with a new lender. This reduction specificall or texty is designed to meet the loan guidelines of the new lender. A deed in lieu in foreclosure is an option in which a homeowner deeds collateral property in exchange for a release from all obligations under the mortgage. If you can currently meet your mortgage payments a deed in lieu of foreclosure may not be accepted. Special forbearance is when no monthly payment or a reduced monthly payment is made. The lender may ask you to be put on a repayment plan when the forbearance is done to pay back missed payments; otherwise they may just modify the loan. The partial claim option gives advance funds on behalf of a homeowner to an amount necessary to reinstate a loan that is delinquent. The homeowner then executes a promissory note and subordinate mortgage payable to HUD (Housing and Urban Development). At this time period, these promissory notes assess no interest and are not due and payable until the mortgagor pays off the first mortgage or is no longer the owner.
If you are a homeowner facing foreclosure in Connecticut, contact a Connecticut foreclosure defense attorney to find out your full options and legal rights during the foreclosure process.