The optimal form of a particular successful loss mitigation workout is highly dependent on the circumstances of both the borrower and the lender. Initial questions should typically include whether the problem is short or long-term in nature, caused by an inability to clear arrears fast enough to prevent foreclosure, and whether there are means available to the borrower to resolve the foreclosure after suit has been filed.
The following are examples of some of the methods used to successfully allow the borrowers to once again bring their loan current:
When the borrower has a temporary problem:
- Reinstatement: accepting the back payments, default fees, and costs if received by an agreed date.
- Forbearance: reducing or suspending payments for a set period. This is often used in tandem with reinstatement to enable the borrower to overcome a temporary problem.
- Repayment Plans: effectively adding past due amounts to future repayments over a set period of time. This assists borrowers who suffered a past temporary financial setback, but there are insufficient funds to fully reinstate immediately.
When the cause is likely of indefinite duration:
- Mortgage Modification: the terms of the mortgage are adapted to reflect the realistic payment potential of the borrower. Common changes include the length of the term, adding past due amounts to the outstanding principal, and revising the interest rate.
- Short Refinance: forgiving some of the debt while rolling the remainder and the original loan into a new loan on sustainable terms. While this involves some loss to the lender, it is considerably less than what would likely have occurred from foreclosure.
- Claim Advance: if the mortgage is insured, the insurer may advance the default amount as a loan to be used to render the loan current. Such loans may defer repayment for several years.
- Reverse Mortgage: it may be appropriate for an older mortgagee with substantial equity to liquidate cash by effectively allowing another party to purchase equity in the property in installments while allowing the borrower to remain in the property.
If the circumstances suggest that the borrower cannot sustain refinancing, usually a foreclosure sale becomes inevitable. However, methods are available to ensure foreclosure costs are avoided or minimized:
- Assumption: once common, but now precluded by non-assumption clauses in most mortgages, the lender waives this clause enabling a suitable buyer to replace the original borrower as the mortgagee.
- Sale: the lender grants the borrower a specific amount of time to find a purchaser and repays sums outstanding using proceeds from a sale on the open market to clear the outstanding balance.
- Short Sale: in some cases, the expected sale will not cover the outstanding balance. An open market sale may still be less costly than foreclosure and bank sale.
- Deed-in-Lieu: where there are no other liens, the borrower surrenders the property voluntarily in return for the debt being forgiven, depending on the loan type. This moves the property to bank-owned status without the additional cost or delay of foreclosure.