Some Americans are a crisis away from being unable to make their mortgage payments. From losing a job to medical emergencies to accidents that lead to disabilities, there are plenty of events that could cause financial hardship. If you can’t cover this event as well as your mortgage payments, you may face the possibility of foreclosing on your home. No one benefits from a foreclosure. It’s an expensive process for lenders or investors and a catastrophic event for families.
Due to the government’s concern of rising foreclosure rates, a series of initiatives were developed to prevent a repeat of the housing market collapse that ensued in the early 2000s. These prevention initiatives included loss mitigation.
Loss mitigation is the process of trying to protect homeowners and mortgage owners from foreclosure. It might refer to any one of several strategies that could be employed to get and keep homeowners current on their mortgage payments and in their homes. In the worst-case scenario where a borrower can’t afford their mortgage, loss mitigation can lessen the negative impact of foreclosure.
So, if you’re ever concerned about making your mortgage payments, here’s what you need to know about loss mitigation and how it might be able to help you keep your home.
The Government’s Role In The Housing Market
The housing market plays a large role in the financial stability or instability of economies and may draw on or face heavy government intervention. Since there’s a correlation between financial crises and difficulties in the real estate sector, the government has a strong interest in promoting and preserving homeownership. The federal government is involved in the housing market in myriad ways, including homeownership incentives and housing finance.
In recent years, the 2008 financial crisis showed that the mortgage servicing industry was ill-equipped to sufficiently respond to the needs of homeowners who were financially struggling. Therefore, the federal government took the initiative to create stronger guidelines for mortgage servicers as well as regulations for protecting all parties involved in the housing market.
After the 2008 Recession, the Federal Housing Finance Agency (FHFA) was established by the Housing and Economic Recovery Act of 2008. The FHFA became responsible for the supervision, regulations and the housing mission oversight of the Federal Home Loan Bank system as well as Fannie Mae and Freddie Mac. FHFA studied ways to avoid resolving delinquencies with a goal of keeping struggling homeowners in their homes whenever possible while also minimizing losses for lenders and investors, who often purchase mortgages after inception.
In early 2009, the Making Home Affordable (MHA) plan was established. This plan provided foreclosure alternatives to homeowners who were affected by the 2008 crisis. Under the MHA was the HAMP, the Home Affordable Modification Program. This program allowed for standard mortgage modifications. The goal of the program was to reduce the monthly mortgage payments of people who were struggling to make their payments. The reductions varied but were intended to reduce payments to a manageable amount for homeowners.
In 2016, U.S. Department of the Treasury, the FHFA, and the U.S. Department of Housing and Urban Development (HUD) released a white paper titled “Guiding Principles for the Future of Loss Mitigation: How The Lessons Learned From The Financial Crisis Can Influence The Path Forward.” This paper was created to continue the stabilization of the housing market and help struggling homeowners recover from the financial crisis.
To accomplish this initiative, the white paper outlined its loss mitigation guidelines and best practices, with a focus on the five pillars identified as key principles for the future of loss mitigation. These pillars included:
- Accessibility: Provides a simple process for homeowners in need of assistance.
- Affordability: Provides modifications to loan terms to provide repayment relief.
- Sustainability: Offers long-term delinquency solutions.
- Transparency: Ensure the process is clear and easy to understand.
- Accountability: Ensure there is an adequate amount of oversight.
With these principles in mind, the loss mitigation strategies were developed.
What Are Current Loss Mitigation Strategies?
Loss mitigation strategies are available to help homeowners who are struggling to keep up with their mortgage payments and investors who rely on the income these mortgages provide. Working together, homeowners and mortgage servicers can alter loan provisions, work out a refinance plan, extend the length of payment, or undertake a variety of different methods to keep the mortgage intact.
It’s important to note that if it becomes apparent that you will have a problem keeping or catching up on your mortgage payments, speak with your mortgage servicer. Your mortgage servicer may connect you with a loss mitigation specialist. A loss mitigation specialist can help you determine a set of options available to meet your needs. They will analyze your debt and liabilities to determine a plan you can reasonably manage.
During this time, you may also be required to submit a loss mitigation application. This application may include personal information, property information, and so on. You may also need to include pay stubs, tax returns, financial statements and a hardship statement.
Some of the options you could qualify for include:
You may be able to work with your lender to modify your current loan. If your loan payments were missed due to a temporary and now ended crisis like illness or job loss, you can discuss plans that add extra payments to make up for the ones you missed.
Forbearance plans allow the homeowner to miss or make reduced payments for a specific period of time. During this time, the homeowner can work to resolve a temporary hardship. Once the difficulty is resolved, homeowners might enter a repayment plan as well as make up any missed payments. This is generally achieved with a new repayment plan or modifications. In other words, this plan allows you to take the time you need to get your finances in order, then continue paying on your mortgage.
Flex Modification is designed to assist homeowners in getting the payment relief they need by modifying their current payment schedule. It requires the mortgage servicer to reduce the homeowner’s payments on the loan. They can do this by adjusting the interest rate, adding overdue payments to the remaining loan balance, extending the term of the loan, or setting aside part of the remaining principal.
The results of Flex Modification are different for each homeowner. Ultimately, the lower payments are meant to help homeowners avoid foreclosure and stay in their homes.
In 2016, the FHFA required mortgage servicers to develop an aligned post-crisis loan modification program. These programs would be built on the lessons learned from the crisis-era modification strategies. Flex Modification plans allow homeowners to alter the terms of their mortgages without going through a new documentation process.
Flex Modification is an option to resolve the delinquency and sustain homeownership. You must consult with your lender to make sure that you meet the eligibility requirements and terms for a Flex Modification.
Flex Modification terms may include:
- Reduction of an interest rate to current rate for borrowers who have mark-to-market loan-to-value (MTMLTV) above or equal to 80%
- Capitalize arrearages like a missed payment
- Term length extension, sometimes to 40 years from modification date
- Forbearance of the principal amount if the borrower needs to reduce the MTMLTV to 100%
- For borrowers who are less than 90 days past due, if the borrower doesn’t achieve a 20% payment reduction and a 40% Housing expense-to-Income ratio (HTI), the servicer can forbear the principal until those targets are achieved (up to limits)
- For borrowers who are over 90 days past due, Flex Modifications can provide additional forbearance if you must meet a 20% payment reduction
You can find more information regarding Flex Modification, your eligibility, and other information by contacting your lender. They will be able to provide you with details regarding what your payments would be if you choose this option and help you decide what loss mitigation strategy is best for you.
When Loss Mitigation Fails
Unfortunately, even if you put a plan in place such as Flex Modification, forbearance or a new repayment plan, there is still a chance that the loss mitigation strategy may fail. Rather than let you stop paying your mortgage indefinitely and risk never getting their money, there are a few ways that a lender will try to recoup their losses.
A short sale is when a homeowner sells their property for equal to or less than the amount due on the mortgage. The proceeds from the sale go to the lender. If there is an outstanding balance on the mortgage after the sale of the home, the lender either forgives the difference or the borrower gets a deficiency judgment. A deficiency judgment means that the borrower will have to pay the difference between the sale price and the original value of the mortgage to the lender.
While not ideal, a short sale can help borrowers protect their credit history by avoiding foreclosure. In a short sale, the borrower finds a buyer, and the buyer purchases the home. The sale is subject to lender approval.
A short sale benefits both the lender and the borrower. The borrower has an avenue out of their mortgage, and the lender is able to recoup some or all of their potential losses. Additionally, the expensive process of foreclosure and eviction is avoided.
It’s important to note that the homeowner can’t pay off the mortgage with the proceeds from the sale, they may still be responsible for paying the remainder of the mortgage balance. In some cases, relocation assistance might be available for the homeowner.
A deed-in-lieu of foreclosure is a document that voluntarily transfers the title of the property from the homeowner to the mortgage lender in exchange for any further mortgage obligation. The borrower simply signs the deed over to the lender in return for a release from the provisions of the mortgage.
The advantages to a deed-in-lieu are that it helps all parties avoid the time-consuming and costly process of foreclosure. A deed-in-lieu offers borrowers the change to negotiate with their lenders to reduce or eliminate the outstanding mortgage balance.
In some cases, the borrower is able to reach an agreement with the lender that allows them to lease the property for a set period of time while they find alternate housing. Borrowers typically need to apply for a deed-in-lieu.
The acceptance of a deed-in-lieu by a lender depends on several factors, including the fair market value of the home and the amount due on the principal.
Summary: There Is Help When You Need It
If you are unable to make your mortgage payments due to a temporary hardship, there are options available to help you mitigate the risk of having to foreclose on your home. You should speak with your lender immediately if you won’t be able to make payments. You can work together to explore the options available to you. These conversations will protect you from losing your home and will protect your lender from losing money on your loan.
If you have further questions about repaying your mortgage and other mortgage-related issues, be sure to check out the Learning Center. There, you will find informational articles, calculators, and more to help you make educated decisions regarding your mortgage.