What are the types of mortgage loss mitigation?

When a homeowner defaults on a mortgage loan, the lender has the right to foreclose.  In most cases, however, the lender will engage in mortgage loss mitigation strategies in an effort to avoid foreclosing.  Successful loss mitigation may allow the homeowner to remain in the home, to sell the home, or to return the home to the lender. 

There are several types of mortgage loss mitigation which allow a homeowner to remain in his home.  The most common is loan modification.  A loan modification involves changing one or more terms of the mortgage loan in order to make it more affordable for the homeowner.  Other loss mitigation strategies which enable a borrower to retain his home include: 

• Forbearance;
• Temporary indulgence; and
• Recasting. 

If the homeowner has decided that he no longer wishes to retain the property, he may be allowed to short sell it.  A short sale is a negotiated remedy between the homeowner and the lender whereby the lender agrees to accept less than what is owed on the property in order to facilitate its sale.  Unless the lender waives its right to payment of the short fall by the homeowner or state anti-deficiency laws prohibit a lender from seeking repayment of the short fall, he will remain liable for it. 

If a homeowner is unable to sell the property, he may seek approval from the lender to execute a deed in lieu of foreclosure.  A deed in lieu of foreclosure is a document or a series of documents executed by the homeowner to convey title to the property to the lender. 

These loss mitigation strategies may impact a borrower’s credit, have certain tax consequences, or expose him to the possibility of a deficiency judgment.  Therefore, it’s best to speak with a qualified real estate attorney before entering into any loss mitigation agreement with a lender.