Loss mitigation is the practice of preventing default and/or foreclosure on a home or property loan. It has become an important field of expertise for banks and mortgage companies seeking to lessen the damage of the current housing slump.

Loan Modification

In this process, the interest rate or repayment terms of a mortgage are renegotiated. A loan modification also may include increased time for repayment (or term), a waiver of late fees and penalties, and a reduction in the principal balance.

Short Sale

In a short sale, the lender agrees to reduce the outstanding principal balance on a mortgage loan, allowing the owner to sell the property for less than its market value.

Deed In Lieu of Foreclosure

This practice allows someone with an outstanding mortgage amount to turn over property in lieu of repayment of the mortgage. If the borrower is unable to deed over property or make mortgage payments, the lender may offer "cash for keys" simply to avoid the extra costs of evicting the owner.

Partial Claim

With a partial claim, the lender makes a secondary loan to the borrower so that late payments and fees on the mortgage can be paid and a delinquent loan can be brought up to date. The new loan carries no interest and is not paid until the original mortgage is paid off or the property is sold.

Purpose of Loss Mitigation

Loss mitigation allows lenders to avoid the steep costs of foreclosing a loan. By modifying the terms of a mortgage, the borrower is also able to keep the property and ease the terms of a loan that may have become too burdensome.

Source:

HUD.gov: Loan Modification

LoanWorkout.org

General Loss Mitigation FAQs