Loss Mitigation and Foreclosure: What You Should Know

Lenders and borrowers both look to loss mitigation in a foreclosure. Lenders used to pursue foreclosure swiftly and without mitigation. However, lenders discovered they were netting losses on most foreclosures. Now, they approach each foreclosure in an attempt to mitigate these losses, which is favorable to the borrower as well. If your lender is looking to minimize total losses in your foreclosure, you may be able to stay in your home and restore your loan to a good status.

Why a Lender Negotiates

After a lender forecloses on your property, the lender has to liquidate the property in order to recover any degree of funds. If the home is not immediately sold, the lender will be paying taxes and maintenance fees. In addition, if the home is sold for a value less than the value remaining on the loan plus these fees, the lender will lose money on the loan arrangement. This is most likely to occur when the housing market is depressed and foreclosures are high. If the housing market provides a profitable ability for your lender to liquidate the property, the chances are the lender will not negotiate with you to provide for loss mitigation.

How You Benefit

When a lender does not want to liquidate your asset, you have the change to remain in your home. The equity you have paid into the home so far will be saved, and you and your family will avoid the stress of finding a place to live immediately after a foreclosure. Additionally, the foreclosure will never hit your credit score, allowing you to preserve future financial opportunities. If your lender wants to work with you to mitigate their losses, you will find your losses are also mitigated in the process. 

When to Pursue Forbearance Arrangements

Forbearance allows you to stay in the home and bring your mortgage payments current. The lender agrees to stop foreclosure proceedings. You then work with the lender to modify the loan so you can afford it in the coming months and years. Once your loan is brought to current, you will no longer be at risk of foreclosure. Forbearance typically occurs in one of two scenarios: one, the lender sees no chance at recovering the lost debt; two, the lender realizes you can continue to make payments if the loan is simply readjusted. 

When to Permit Foreclosure and Bankruptcy

Forbearance or modification is not always the best solution. In fact, there are times you will be better off by simply allowing the lender to foreclose on your property. This is the case if you will not be able to make payments even after they are modified. While you will delay the foreclosure somewhat, you will not truly be able to prevent the occurrence. Instead, it is better to gain the legal protections of bankruptcy as soon as possible. Only after you have gone through the process can you truly begin rebuilding your financial health. While you are under the stress of a mortgage you simply cannot afford, it is impossible to plan for your financial future.