Foreclosure Loss Mitigation Overview

When a borrower defaults on a loan or a foreclosure sale takes place, nobody benefits - not the bank, not the loan servicer, not the government, and certainly not the borrower.  The lender loses its interest payment, the borrower's credit is negatively affected and ultimately the borrower can lose his or her property.  If no one buys the property at a foreclosure sale, the lender will take the property back and the property becomes "REO" (or real estate owned) by the bank.  Any loan that is not being paid or property that becomes REO has negative consequences and costs for the bank.  Additionally, foreclosure is an expensive undertaking for the bank.  For these and several other reasons, loss mitigation programs were established by the federal government and the mortgage industry in order to limit or prevent foreclosures in certain circumstances. 

The term "mitigate" means to lessen in force or intensity or to make less severe.  Because so many parties are negatively affected by a foreclosure or defaulted loan, the government and lenders felt it was necessary to implement loss mitigation programs to lessen the effect of a foreclosure.  Loss mitigation programs assist borrowers who have defaulted on their loan by providing alternatives to home foreclosure that will have less of a burden on the borrower in the future and, at the same time, will be less burdensome to the bank considering the time, cost and utilization of resources brought on by a foreclosure.  Each lender has its own policies regarding the use of these programs to stop foreclosure.  Our breadth of experience and knowledge and relationships with lenders gives us an advantage in trying to negotiate the best solution for you after taking into account the loss mitigation policies of the lender.

After analyzing your personal objectives with regard to your property, as well as your financial situation, we will deal directly with your lender to negotiate the best possible solution for your situation.  In today's market, lenders are inundated with requests for loss mitigation alternatives and it is nearly impossible for lenders to deal with the amount of requests that they are currently receiving.  Because of this, it is more important than ever to gather all of the information that the lender will need to analyze your situation and submit the request correctly.  The lenders simply do not have the time or resources to deal with an incomplete file or unfair requests from the borrowers.  We feel that our experience increases the chances that your lender will accept your loss mitigation goal so that you can put the foreclosure experience behind you for good and begin to look forward to the future.

There are a variety of loss mitigation options, some of which are explained in greater detail below:

1.  Loan Modification:  Simply put, a loan modification is a change in the terms of your loan.  This could either be lowering the interest rate on your loan, freezing the interest on your loan (for an adjustable rate mortgage), extending the term of your loan to reduce the monthly payments, and/or adding the past due amount to the principal balance of your loan to start anew.  There are normally costs and fees associated with a modification, but nowhere near the costs associated with a refinancing of the loan.  All requests are subject to your lender's approval.

2.  Short Mortgage Payoff (aka Short Sale):  If you have suffered a long term hardship and are unable to maintain your loan, it is possible that the lender may be able to accommodate you with a short payoff.  A "short payoff" is one in which the sales price is not high enough to pay back the lender in full.  Because the lender is not being paid back in full, the approval of the lender is required to complete the sale.  Often times, when the lender approves a "short sale," they will also forgive the amount of the deficiency due from the borrower.  Some states, including Florida, permit lenders to seek a deficiency judgment for the amount the payoff was discounted.  For example, if the lender is owed $100,000, but is only paid back $75,000 from the short sale, the borrower still owes the lender $25,000, unless the lender agrees to forgive this amount.  Under the forgiveness of debt provisions of the Internal Revenue Code, there may be tax ramifications for the lender forgiving the deficiency amount by treating the amount forgiven as taxable income to you.  We, therefore, recommend you contact your tax advisor for details, or we can put you in touch with the appropriate attorney or accountant.  As stated above, if the lender does not forgive the remaining debt and obtains a judgment against you, the judgment can have lasting affects on your credit and ability to buy or sell real estate in the future.

3.  Deed-in-Lieu of Foreclosure:  If you have incurred a long term financial hardship, you may be eligible for a deed-in lieu of foreclosure.  Just like it sounds, this option entails giving (or deeding) the property back to the lender, in exchange for the lender giving up its right to foreclose.  To be considered for this option, you must complete a financial package and may have to provide a copy of your recent active listing agreement showing that your house has been on the market at fair market value for a certain amount of time.  Also, there cannot be any additional claims or liens (other the mortgage) against the property.  If you are approved for a deed-in-lieu of foreclosure, you will be giving up all rights to the property and the property will be conveyed to your lender.  The benefit to you is that the lender will often waive all rights to a deficiency judgment which would otherwise affect you for several years.  The benefit of not having a deficiency judgment against you and a foreclosure on your record should not be underestimated.

4.  Repayment Plan:  If you have incurred a short term financial hardship and your loan is past due, your lender may consider a request for a payment plan.  Only after reviewing your financial situation will this option be considered.  In order to be eligible for a repayment plan, you must be able to show that you can afford the payments outlined in the plan.

5.  Forbearance:  If you have incurred a short term financial hardship and your loan is several months past due, the lender may consider your request for forbearance, which temporarily relieves your obligation to make payments on the loan.  Although forbearance requests are rarely granted, they may be utilized in an unemployment situation whereby the promise of future employment is present.

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