Loss mitigation is the process by which a bank tries to minimize its loss in a loan the borrower isn't repaying according to terms. In real estate, this applies mostly to the bank working with homeowners who have been unable to make their mortgage payments. In a nutshell, this means the bank isn't receiving the return on its investment that it needs to make the loan profitable. So, third-party loss mitigation negotiators work with the bank and the homeowner to find a solution or liquidate assets for the smallest possible loss of money.
As mentioned, homeowners not paying their mortgages timely prompts the loss mitigation process. Typically a person has a 10- to 30-year mortgage and makes monthly payments based on their income, but loss of a job, demotion, illness or other unforeseen circumstance can cause a person to fall behind. Most often when mortgage payments have not been received in full for several months, the bank begins foreclosure proceedings. The longer the bank holds on to a delinquent loan, the more money the bank loses.
Loss Mitigation Negotiation
Once the bank files a lawsuit to begin the foreclosure proceedings, experienced negotiators will typically then come in as a third party to work with both parties to mitigate the loss in a way that both parties can agree upon. Often this involves determining a fair market value for the home, which is typically going to be less than the debt owed. The delinquent borrower may also try to come up with the funds or find a way to keep the property. Because each situation varies with the circumstances of the home owner, skilled negotiators are needed to address all concerns.
Most Common Types of Loss Mitigation
Throughout the loss mitigation procedure, the negotiator can put forth many different types of solutions for the borrower and lender to agree upon. Probably most commonly known, a short sale often takes place where the lender will agree and settle on the sale and lump sum of a smaller amount than the debt owed. The negotiator may also help both parties adjust the terms of the loan through a loan modification process that typically either lowers the interest rate or extends the loan's time period for lower monthly mortgage payments. The homeowner may also try to refinance the mortgage with another lender.
Other Types of Loss Mitigation
Other loss mitigation solutions that are less common include: giving the bank collateral to be released from the mortgage obligations, the bank paying the homeowner to vacate the property quickly without damaging it, entering into a forbearance agreement by which no mortgage payments are needed for a set time period to get back on track, or using governmental assistance programs through the U.S. Department of Housing and Urban Development (HUD).
- Modern Real Estate Practice: Galaty, F., et. al: 2006.
- HUD.gov: FHA NSC Loan Servicing and Loss Mitigation Frequently Asked Questions
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