As more and more homeowners are facing foreclosure in these depressing times, loss mitigation departments in banks have become more useful then they’ve ever been before. In this department, the reps are trained to work with homeowners to assist them in avoiding foreclosure.
When the banks use loss mitigation, they're trying to reduce their loss as much as possible from a homeowner defaulting on their payments. A foreclosure resembles a huge loss for lenders, and so they use loss mitigation to try and resolve the issues before the gigantic loss occurs.
Every mortgage servicer has some form of loss mitigation department, especially during these economically hard times. Those who work in the department are trained to negotiate with the homeowners who have mortgages with that servicer, to come up with an alternative to foreclosure. The most typical alternatives to foreclosure are loan modifications, short sales, and at times, deed in lieus.
For homeowners who can no longer afford their current mortgage payments, loan modifications are the number one solution to help homeowners lower their payments and avoid foreclosure. You can apply for a loan modification by yourself without the help of a for-profit company, or with the assistance of a non-profit counseling agency.
Before applying for a loan modification you need to be aware that last year the government came out with the Home Affordable Modification Program (HAMP) to help stabilize the already damaged housing market. HAMP is taxpayer funded through the Troubled Asset Relief Program (TARP). This programs main goal is to help homeowners achieve an affordable loan by lowering their monthly payment to 31% of their gross monthly income.
Short sales are another loss mitigation route. This is a more direct alternative to foreclosure in a case where the borrower can truly no longer afford their property. A short sale is an under appreciated home being sold for less then the amount owed on the mortgage. This method of loss mitigation does have negative effects on your credit score, but not as bad as a foreclosure would. And if you’re denied a loan modification and start to default on your payments, a short sale is probably the next best option. If you continue paying off other lines of credit and debt after a short sale, then the short sale will be taken off your record in as little as 3 years, while a foreclosure will be listed for seven years.
The selling price is ultimately decided by the mortgage servicer, and during the entire process the lender will hold all rights to the sale of the property. Short sales can take anywhere from 3-6 months to complete, and in many cases could be much longer.
Be aware that each state has it's own set of foreclosure/short sale laws, so you will want to do your research before pursuing this option and/or consult with a local real estate attorney to find out the legal consequences of this action. For those of you out there with lines of credit and mortgage(s) that were not obtained to finance the property, may be help liable for the deficiency after the sale is complete. That is why it is important to make sure are well aware of everything involved in the transaction.
Loss mitigation has been used for a long time by lenders, but has become much more popular these last couple years because of the countries housing crisis. The start of the recession brought a dramatic increase in foreclosure rates. Different lenders have various loss mitigation programs besides the government sponsored programs like HAMP. So if you’re at risk of foreclosure or are defaulting on your payments, make contact with your lender immediately. You do NOT want to wait and avoid your lender when you are in this situation, time is of the essence!