Mitigation losses are used to describe third parties that help homeowners, divisions in banks that reduce bank losses, or companies that handle negotiating processes between homeowners and homeowner lenders. Loss mitigation serves to negotiate mortgage provisions for homeowners that will prevent foreclosures. These new terms are usually obtained through loan modifications, short sale negotiations, short financing negotiations, deeds in place of foreclosures, cash negotiations for keys, partial claims loans, payment plans, patience, or other loans. All options serve the same purpose, to stabilize the risk of losing the creditor (investor) in danger of realizing../
Video Loss mitigation
Kinds of loss mitigation
- Loan modification: This is the process by which homeowner mortgages are altered and lenders and homeowners are bound by the new provisions. The most common modification is to lower interest rates and extend the period of up to 40 years. However, the decline in principal balances was so rare that the Federal Reserve wrote in a report that they could find no evidence that lenders reduce the principal balance on the mortgage.
- Short sales: This is the process by which the lender receives a smaller payment of the principal mortgage balance of the homeowner, to allow homeowners to sell the house for the true market value of the home. This specifically applies to homeowners who are more indebted to their mortgage than the value of the property. Without a fundamental reduction, homeowners will not be able to sell the house.
- Short refinancing: This is the process by which the lender reduces the principal balance of a homeowner's mortgage to allow the homeowner to refinance with the new lender. The reduction in principal is designed to meet Loan-to-value guidance from new lenders (which allows refinancing).
- The surrogate deed: Deed instead of foreclosure (DIL) is the disposition option in which a mortgagor voluntarily undertakes a collateral property in exchange for waiver of all obligations under the mortgage. DIL foreclosures may not be received from borrowers who can financially make their mortgage payments.
- Cash-to-lock negotiations: The lender will pay the homeowner or lessee to vacate the house in a timely manner without damaging the property after foreclosure. The lender does this to avoid incurring the additional costs involved in evicting the occupants.
- Special Forbearance - Here you will not make monthly payments or reduced monthly payments. Sometimes, the lender will ask you to put in the payment plan when the patience has been completed to pay back what you miss, while at other times they just change your loan.
- Partial Claim - Under the Partial Claim option, a mortgagee will forward the funds in the name of the mortgage in the amount necessary to recover the bad debts (not exceeding the equivalent of 12 months of PITI). The mortgagor will execute a promissory note and subordinate mortgage payable to the US Department of Housing and Urban Development (HUD). Currently, the promissory notes or claims of this "Partial Claim" do not estimate interest and are not due and must be paid until the mortgage either pays the first mortgage or no longer owns the property.
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Benefits
The most common benefit for homeowners is the prevention of foreclosures because loss mitigation works well to free homeowners from debt or create a financially sustainable mortgage resolution for homeowners. Lenders make a profit by reducing the losses they will incur through seizure of homeowners. Foreclosure immediately creates a tremendous financial burden on creditors.
History and causes
Mitigation losses have been a tool used by lenders for decades, but experienced tremendous growth since late 2006. This rapid expansion in response to a dramatic increase in national foreclosures. Before the end of 2006, early 2007; Loss Mitigation is a small department in most lending institutions. In fact, before the collapse of the entire financial system showed Loss Mitigation is almost non-existent. The ten-year period prior to 2007 pushed the year-to-year rapid rise of house prices caused by low interest rates and low underwriting standards. Mitigation Losses are only required for extreme cases because of the ability of homeowners to repeatedly refinance and avoid default.
Early 2007 mortgage industry almost collapsed. A large number of lenders are out of business and the rest are forced to eliminate all loan programs that are most vulnerable to foreclosures. The foreclosure is largely due to the packaging and sale of subprime and other risky mortgages. The transfer of ownership from mortgage lenders to third party investors proves to be a disaster. Lenders write risky loans and sell them without being directly affected by borrowers who can not afford to pay. This practice encourages mortgage lenders to lower the terms of mortgage approval to the lowest level in history. The lender sells this mortgage lending pool to the investment company that is packaged and resold on the market in the form of bonds. Investment companies are not naive about mortgage quality, so they buy credit default swaps for inevitable default protection. In fact, credit default swaps were created during this time and did not exist before the housing boom. This results in millions of unqualified people getting a mortgage. Another major factor of the "mortgage crisis" is caused by the Bond Rating Agency. The agency rated the subprime mortgage pools as an "investment grade" that opens up almost unlimited supply for large investors (mutual funds, pension funds, and even countries) to buy these bonds (rating ratings deceive money managers to think bonds are less risky then they actually are). When homeowners start failing to pay on their mortgage payments, bonds prove to be too risky for investment. This causes investment companies to stop buying new mortgage pools. In addition, investment companies see that credit default swaps are not the real protection and are basically worthless. The lender can no longer sell the newly-derived mortgage. This stops the regeneration of capital needed for mortgage banks to lend money. In fact, more than 200 mortgage banks were forced to close or go bankrupt. The crisis was dubbed the "Credit Crunch" and the subprime mortgage crisis.
The surviving lenders are faced with increasing losses from foreclosures. In addition, they must rely entirely on capital loans derived from deposits. This environment forces drastic lending guidelines.
This resulted in millions of people being ineligible to refinance from their subprime risk, adjustment rate, and negative amortization loans. Many people experience dramatic increases in payouts. At the same time, housing prices fell because of "housing correction" driven by confiscation of records. Based on RealtyTrac data, since December 2007 and until June 2010 there has been a total of 2.36 million US properties taken over by the foreclosure lender (REO). In addition there are 3.48 million default notifications and 3.46 million scheduled foreclosure auctions. The large increase in property in this market lowers the value of homes that create markets with fewer qualified borrowers than homes for sale. When there is reduced demand, the price will drop. The value of homes is at a very high rate prior to this because of historically low interest rates and a steady decline in credit terms for homeowners to qualify for a mortgage. Many homeowners find themselves with negative equity which means the mortgage balance is much higher than the market value of the house which is also known as "underwater". Many homeowners choose to voluntarily fail with their mortgage. Being "under water" means their home is no longer an asset to them. With all this stacked against them and very few options, the result for many is default and foreclosure or mitigation reduction .
Mitigation Losses can be negotiated directly by the homeowner or a lawyer. Beware of fraudulent claims by third parties, a 2008 study by Professor Alan M White found that of the 4,342 modifications he studied, only 62 received the principal reductions.
Still feeling the blow, this has led to a loss of equity (from inflation rate) to every homeowner in the country. With few home equity owners likely to be ineligible for loans that would finance them out of risky loans; with less equity the homeowner can qualify for a home equity line of credit or a second mortgage to pay for financial emergencies.
References
External links
- HUD.gov - Loan Modification FreqULTSORT: Loss Mitigation
Source of the article : Wikipedia
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