The whole process between the lender
and the homeowner is called loss mitigation. As foreclosure is
time-consuming and costly, it should be prevented.Lender’s strategy:
minimize its loss
Homeowner’s strategy: save his or her house from foreclosure. Is it
possible to cure the default? Is there any alternative or solution that the
lender may accept?
Principles set forth by U.S. government agencies for loss mitigation
In general, lenders are not encouraged to foreclose on properties that
are in default immediately. They are encouraged to find ways for the
homeowners to continue to make their mortgage payments.
U.S. Department of Veterans Administration (VA) rule: VA
encourages holders to extend every reasonable indulgence to worthy
borrowers who are in temporary difficulty. However, when it is evident
that the default is insoluble, every effort should be made to see that
the security [house] is liquidated promptly to minimize the loss to the
Government.
Federal Housing Administration (FHA) rule: fulfill the goal of
helping borrowers in default retain home ownership while reducing, or
mitigating the economic impact on the insurance fund.
Minimizing bank and government foreclosures
Government agencies encourage lenders to modify their loans to
accommodate borrowers and introduce several avoidance procedures and
forbearances. U.S. Government hopes to implement cost-saving foreclosure
avoidance procedures. It was proven that giving homeowners an additional one
or two months could prevent more than two-thirds of foreclosures.
Bottom line: cost of preventing foreclosure is less than the cost
of foreclosure.
Two typical reasons for default
Homeowner buys a home that he or she cannot afford. He or she is
over-extended.
- Unexpected events occur and they are beyond homeowner’s control. Lender
must cooperate if such events can be eliminated by cooperative action