Archive for the ‘bank’ Category

4 Strategies banks use to mitigate loss

Saturday, February 20th, 2010


We defined loss mitigation in the previous post  , now let’s see what are the main strategies banks use to mitigate loss, in other words to reduce loss. They are loan modification, forbearance, short sale, and deed in lieu. Note that the homeowner benefits as well, but banks follow these strategies for their own benefit. Did you think they agree to do all this for the purpose of helping the homeowner? Who cares about the homeowner?! They do it because they mitigate their own loss; because it is advantageous to themselves to follow these procedures, instead of letting the property go into foreclosure.

1. Loan Modification. It happens when the bank agrees to modify the terms of the loan, resulting in a reduction of the monthly payment. These modifications usually refer to lowering the interest rate, fixing an adjustable rate, waiving some late fees and penalties, increasing the term of the loan. You might think they also reduce the principal, but no they don’t.

2. Forbearance. It happens when the bank allows the homeowner to skip a few payments, or to make some reduced payments. This is a short term option, and it usually occurs as an intermediary step before other forms of loss mitigation.

3. Short Sale. It happens when loan modification fails, or when a homeowner simply wants to sell the property. If the value of the home is less than what is owed to the bank, the bank may agree to accept a short payoff. In other words, they allow the homeowner to sell the property for less than the principal balance.

4. Deed in Lieu of Foreclosure. This is also called voluntary foreclosure. It happens when the homeowner relinquishes possession of the property in a voluntary fashion. The bank takes the house, and releases the homeowner of the contractual obligations. It works when there is just one lender involved.

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