As the name itself suggests loss mitigation is the reduction of losses due to foreclosure and a way to avoid foreclosure. Loss mitigation is usually done by a third party which is a part of a financial institution or a bank. Such companies negotiate with the lender and all the parties to the contract avoid losses due to default or non payment by the mortgagor. Loss mitigation can take many forms and can ease the burden of the mortgagor in cases where there is genuine reason for defaulting on the mortgage.

• There are seven types of loss mitigation plans and some completely write off part of the loan and some help in postponement of the repayment schedule. Loan modification is a loss mitigation process where both the lender and the mortgagor are bound by the new terms and conditions. In such cases the interest can be lowered, the length of the loan extended, adjustable rate mortgages can be “fixed”, and any fees may be reduced or written off.
• In a short sale, the lender accepts a payoff that is lesser than what the mortgagor owes on the contract. This is especially true when there is negative equity in the home which means that the worth of the home is much less than the amount of the mortgage. In such cases the homeowner can then sell the house at the actual market value instead of paying the unwarranted mortgage amount.
• Another type of loss mitigation is short refinancing in which the lender reduces the principal in order to permit the mortgagor to refinance. Since refinance is possible with a proper loan to value ratio the principal must be reduced in order to satisfy the second or new lender. However refinancing may prove disastrous if default on the second loan is made since the new lender can buy the first lien and foreclose.
• A deed in lieu foreclosure is an instrument which transfers the title of the property to the lender or the mortgagee. In such types of loss mitigation all the payments may be waived off; however, such type of mitigation is available to those who genuinely cannot make any payments and not in the case of a strategic default.
• In a cash-for-keys negotiation, the lender or mortgagee actually pays cash to the mortgagor. This is because the mortgagor may damage the property or steal in-built equipment. Such cases come forth when the value of the house has significantly reduced and there is strategic default present.
• In a special forbearance plan, the monthly payments may be reduced or the loan modified to meet the capability of the mortgagor. Sometimes the mortgagee or lender will waive off the complete amount of monthly payment. However complete waiver rarely happens and usually the payments are reduced.
• In a partial claim loss mitigation plan, the lender will actually pay the amount needed to restore an aberrant mortgage (not to surpass the equivalent of 12 months PITI). The mortgagor will execute a promissory note and subordinate mortgage to be paid to United States Department of Housing and Urban Development (HUD).
• Unfortunately such loss mitigation plans have become common after the sub-prime mortgage crisis and the deflation of the housing bubble. These not only help the mortgagor but also the lender since a foreclosure is an outcome that can financially damage all the parties involved in a mortgage. Loss mitigation was something that was probably unheard of but has now emerged as a grim reminder of the situation of housing sector, especially in the United States.

If you have any other points or facts about loss mitigation, please feel free to leave a comment.