The many faces of loss mitigation
Loss mitigation isn't just one thing. It's an umbrella term used to describe a variety of strategies for managing financial risks and preserving assets.
Whether you're a homeowner facing mortgage troubles, a lender seeking to protect your investments, or a financial institution aiming to assist borrowers in times of economic uncertainty, it’s important to understand the range of loss mitigation solutions available to you.
This article explores five of the most common loss mitigation solutions for effectively navigating financial challenges.
Forbearance
Forbearance is an agreement between a borrower and lender or servicer that allows the borrower to temporarily pause or reduce their monthly mortgage payments (hence “forbear”, which means “refrain from doing something”).
This temporary relief is typically granted in situations where the borrower is facing financial hardship due to circumstances such as job loss, illness, natural disasters, or other unexpected financial challenges. The key feature of forbearance is that it provides breathing room for the borrower without the immediate threat of foreclosure.
Repayment Plans
Repayment plans are structured arrangements that help borrowers gradually catch up on missed or reduced mortgage payments. These plans are designed to be manageable for the borrower while allowing them to bring their mortgage account back to a current and fully paid status.
Repayment plans are often utilized after a period of forbearance. When a borrower enters into a repayment plan, they agree to make additional payments on top of their regular monthly mortgage payment in order to cover the missed or reduced payments from the forbearance period.
Refinancing
Refinancing is the process by which an existing mortgage loan is replaced with a new one. Typically refinancing takes place to achieve one or more common objectives:
Lower interest rates
Modified loan terms (e.g., swtiching from an adjustable-rate mortgage to a fixed-rate mortgage)
Debt consolidation
Adjusting loan servicers (e.g., transfering mortgage from one lender to another)
Government Programs
There is a plethora of government-sponsored programs that offer loss mitigation assistance.
Borrowers may be eligible for programs like the Home Affordable Modification Program, which supports servicers' efforts to modify mortgages, or the various programs issued by the Federal Housing Administration.
Some of these programs have been created in response to extraordinary events. For example, The Hardest Hit Fund (2010-2022) provided funding to states that were most affected by the housing crisis. There’s also loss mitigation measures in the government’s COVID-19 relief programs. The Homeowner Assistance Fund, for example, has been an extremely successful program helping to keep borrowers affected by COVID in their homes.
Loan Modification
Loan modification is when changes are made to the terms of an existing mortgage loan. This is usually to help borrowers who are struggling to make their regular monthly mortgage payments.
To be eligible for a loan modification, borrowers typically need to demonstrate financial hardship or a significant change in their financial situation that makes it difficult to meet their existing mortgage payments. Lenders often require borrowers to provide documentation of their financial circumstances, such as income statements, expenses, and a hardship letter explaining the reasons for seeking modification.
If you’re in need of loss mitigation support, our team of experts are here to help. Contact us today for a free consultation.