Using Loss Mitigation To Avoid Foreclosure

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Using Loss Mitigation To Avoid Foreclosure

The most common benefit to the homeowner is the prevention of foreclosure because loss mitigation works to either relieve the homeowner of the mortgage obligation or create a mortgage resolution that is financially sustainable for the homeowner.

Lenders benefit by mitigating the losses they would incur through foreclosing on the homeowner. Immediate foreclosure creates a tremendous financial burden on the lender. Loss mitigation allows the lender to take a lesser loss right now in order to avoid the much greater losses caused by such foreclosures

History and causes

Loss mitigation has been around for decades, but has experienced a renaissance since 2007. This rebirth has been a response to the dramatic increase in foreclosures nationwide. These foreclosures have been caused primarily by a stagnant economy, a decrease in home values, the credit crunch and the subprime mortgage crisis.

Beginning in 2007 the mortgage industry nearly collapsed. Large numbers of lenders went out of business and the rest were forced to eliminate all of the loan programs that were most prone to foreclosure. The elimination of these programs produced what is now referred to as the "credit crunch".

Faced with mounting losses from foreclosures lenders were forced to tighten lending guidelines. This means people that were able to previously qualify for loans are now unable to do so.

Many of these people are in risky subprime, adjustable rate and negative amortization loans that prone to dramatic payment increases; without the ability to refinance out of these loans the only answer for many is foreclosure or loss mitigation.

The decrease in home values created a market with fewer qualified borrowers than homes for sale. When there is less demand the prices drop. This has lead to a real loss of equity for every homeowner in the country.

With less equity homeowners are less likely to qualify for a loan that will refinance them out of a risky loan; with less equity less homeowners are able to qualify for home equity line of credits or a second mortgage in order to pay for financial emergencies.

For many homeowners the loss of equity has been extreme enough to cause negative equity. Negative equity is when the home is worth less than the amount owed by the homeowner.

This has created a situation for homeowners wherein their home, which was previously their most valuable asset, is no longer an asset at all. Such homeowners are more and more frequently 'walking away' from their mortgage obligations and letting the home go into foreclosure.