Mortgage Loss Mitigation

Mortgage Loss Mitigation

Mortgage insurance companies collect a premium on mortgages that require either the borrower or the lender to pay for private mortgage insurance (PMI). Private mortgage insurance ensures that, in the event of default, the lender recovers the dues from the mortgage insurance company. In other words, mortgage insurance companies gain by helping the borrowers ensure that they meet their financial commitments. Hence, they may go the extra mile to help borrowers work out a suitable system of payments.

A mortgage loss mitigation specialist may avert a foreclosure by negotiating with the borrower, and encouraging him/her to work out a solution that is acceptable to the lender. The mitigation is not only helpful to the borrower, but also to the lender, since the latter’s losses may be reduced on account of the homeowner being able to adhere to a feasible repayment solution.

It’s important to note that only borrowers who have private mortgage insurance attached to their mortgage can work with specialists employed by the mortgage insurer. People with piggyback loans will be forced to negotiate with lenders who provided the primary and the second mortgage.

Loan Modification
Conforming Loans: People with conforming mortgages have a number of beneficial mortgage loss mitigation options. Conforming mortgages refer to the loans that are owned or insured by Freddie Mac or Fannie Mae. These are eligible for loan modification under the Home Affordable Modification Program (HAMP). This program is a part of the Making Home Affordable Program, which in turn is an offshoot of the Financial Stability Plan that was launched on February 10, 2009.

The Home Affordable Modification Program (HAMP) aims at modifying the first mortgage for borrowers whose loans are insured or guaranteed by Freddie Mac or Fannie Mae. Lenders are encouraged to reduce the interest rate on these loans to as low as 2%, and keep it fixed at this level for a period of 5 years from the date of loan modification. At the end of the 5th year, the interest rate on these loans is increased at the rate of 1% annually, so that eventually, the rate of interest on the loans measures up to the market rate of interest that existed prior to loan modification.

Non-Conforming Loans: The ‘Second Look Program’ is meant to facilitate loan modification for borrowers whose loans cannot be modified under HAMP. Loan Modification may include reducing the rate of interest on loans, extending or reducing the term of the loan, and forgiving or canceling a portion of the mortgage debt.

Forbearance is an option that can be considered when the mortgage lender has provided a loan to a borrower, who has used the same to purchase a primary residence. This facility allows the borrower to suspend monthly mortgage payments for a limited period of time. At the end of this period, the borrower resumes regular repayments, and pays an additional lump sum amount till the loan becomes current. This facility is usually provided to borrowers who have suffered significant loss in income and have become delinquent. However, this option is only available to people who have been delinquent for over 3 months, but not more than 12 months.

Short Sale
The government is providing assistance to homeowners and giving incentives to lenders to help stop foreclosure. A short sale results in selling off the house at a price that is insufficient to meet the mortgage payments that are due. However, the lender can at least hope to recover a portion of the dues and avoid unnecessary hassles associated with the foreclosure process.

Hence, the lender may consider short sale as a mortgage loss mitigation option. Both short sales and foreclosures result in the credit score of the borrower declining by 200 to 300 points. However, there are other advantages, like reduced waiting time to avail mortgage loans at a later date. The lender is also eligible to receive incentives by the government to the tune of $1,000, by allowing a short sale.

Deed-in-lieu of Foreclosure
This process involves the borrower having to sign legal documents that result in the property being handed over to the lender, so that the latter can sell off the property and recover the dues. The lender cancels the borrower’s debt by marking it as paid and waives the right to a deficiency judgment. Hence, this is highly advantageous to a borrower who is completely absolved from repaying the mortgage.

Partial Claim
This involves availing a second mortgage for the amount remaining on the primary mortgage for a period of less than 12 months. The second mortgage repayments begin once the first mortgage claims have been settled, thus giving the borrower sufficient time to repay the mortgage loans.

The aforementioned options can help the borrower avoid an impending foreclosure. The borrower is allowed to retain the home, while the lender is saved from having to spend considerable time and money on initiating foreclosure proceedings.