What Is the Definition of Loss Mitigation?

Banks routinely help individuals become homeowners by offering loans to purchase property. To protect banks from losing significant money in the event that the home buyer gets behind on his mortgage payments, these companies utilize a process known as loss mitigation. Banks use this process to work with homeowners to create a workable solution, typically resulting in either a loan modification or sale of the home.

When a person buys a piece of property, he typically takes out a mortgage, usually for 30 years, for which he is expected to make monthly payments. The bank charges interest and the homeowner gets to build equity in his home as he pays down what he owes. Eventually his mortgage is paid off and the bank or the investor who owns the loan makes a significant profit.

However, in some cases things don't go as smoothly. The homeowner may experience some hardship such as loss of a job, sickness, divorce or death in the family that causes him to get behind on his mortgage payments. He is then said to have become delinquent. The longer his delinquency lasts, the more the bank loses.

When the homeowner is several months behind on his mortgage payments the bank then begins foreclosure proceedings by filing a lawsuit or lis pendens against the homeowner. This happens in states with judicial foreclosures. In non-judicial states, the process involves some kind of public notice stating the homeowner's non-payment and the bank's intent to foreclose.

At some point the homeowner either directly or through a representative decides to either forgo the property by negotiating a sale price for what the property is currently worth and less than the amount owed, or find a way to keep the property. The loan is then transferred to the bank's loss mitigation department, where experienced negotiators work to come up with a solution that is acceptable to all parties involved.

The process of doing this is often called a loan workout, which could involve a loan modification or a short sale. As described above, a short sale occurs when a bank agrees to accept a payoff amount that is often less than what is owed but more in line with the current value of the property. A loan modification involves adjusting the terms of the loan, either in terms of the interest rate or the length of the loan in order to come up with a more affordable payment for the homeowner.