What is the Loss Mitigation Program?

Published by Thomas Herold in Economics, Real Estate

'Loss Mitigation Program' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Loss Mitigation Program refers to a special vehicle which arose during the latter years of the global financial crisis and preceding subprime mortgage crisis. This happened because of the 2008 subprime mortgage crisis which the American economy suffered from at that time.

It started because of an enormous bursting of the housing prices bubble that caused a substantial rise in delinquencies and foreclosures of mortgages. Next a collapse in the value of all home-backed securities occurred, including in the now-infamous MBS mortgage backed securities.

The economy continued to struggle to recover even four years later in 2012. Banks had been bailed out of their poorly made loans by the United States Treasury and Federal Government. Homeowners received no real such help at first though. They had no recourse but to try to manage their higher interest rates at the same time as their home prices had declined substantially.

Fortunately for homeowners across the United States, one court intervened on behalf of consumers in the Western part of the state of Pennsylvania. It was this Bankruptcy Court for the Western District of Pennsylvania that took great initiative and developed the Loss Mitigation Program late in the year 2012. The program finally offered beaten down homeowners the ability to modify their mortgages in a court-overseen program which the banks administered directly.

This Loss Mitigation Program began in an effort to offer clarity on failing mortgages. The idea was to fast track the process of loan modification for both the lenders and the borrowers who were involved. It is true that many mortgage and finance companies had already developed their own internal programs for mortgage modification after the mortgage meltdown happened in 2008. Still the process for obtaining such a modification was overwhelming as homeowners dealt with tedious procedures and often saw little to no end results.

The Loss Mitigation Program became necessary because the HAMP Home Affordable Modification Program which the federal government had sponsored had not prevented defaults at what the Special Inspector General for the TARP called an “alarming rate.” HAMP had been created originally to assist homeowners who needed to modify their government FHA insured mortgages, to stay out of foreclosure, and to lower their high monthly payments.

Yet according to this watchdog group, by the conclusion of March in 2013, more than 312,000 participants in the program had realized default on their mortgages. The U.S. Treasury could not come up with any one reason to explain why these default rates had grown so egregiously. Some participants in the program revealed that they only benefited from a modification which was temporary in the initial trial period of the mortgage modification program.

This is why the Loss Mitigation Program began. It was an effort to help the homeowners obtain real and lasting relief so that they could stay in their homes. The program worked according to a simple process which involved four steps. First homeowners had to file for bankruptcy protection in order to safeguard all of their assets and reduce or eliminate their other debts. This allowed them to concentrate their available income on keeping the residential property.

Next the homeowner would engage a bankruptcy attorney to file motions that enrolled the individual into this Loss Mitigation Program. In other words, the modification program existed beneath the umbrella of the bankruptcy protection. Third, the court would approve the application then sign an order that laid out strict procedural guidelines for both lender and borrowers. Clear deadlines were spelled out for both borrowers and lender. It ensured the process became instantly transparent for borrowers since the mortgage modification package and mortgage status had to be treated in good faith by the mortgage company.

Finally, the program set up an electronic portal through which all relevant correspondence on the process had to pass. The court’s representatives would monitor the correspondence to be certain that the two parties were carrying out their responsibilities and roles in good faith.

Thanks to this portal, the Loss Mitigation Program process became streamlined, time saving, and cost reducing for all of the concerned parties. The entire process had to be completed in 60 days unless either the lender or borrower sought out and explained a valid reason for requiring extra time. Serious consequences were mandated for either party delaying the process unnecessarily.

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The term 'Loss Mitigation Program' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.