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What is Loss Mitigation Department?

Medha Godbole Jan 9, 2019
A loss mitigation department in a bank mitigates or tries to control losses incurred by a bank or other financial institutions. Read ahead to know more...
Banks are always looking for profit (who doesn't?) and in that endeavor they employ a lot of gimmicks and tricks. But there are times when a bank faces loss, and the circumstances are such that even the best of the financial wizards cannot do anything.
For example, there are people who sometimes pay the loan earlier than expected and the bank incurs losses, there are foreclosures and the like.
To deal with losses incurred on account of these dealings, banks and other financial institutions have a loss mitigation department. In case you are into 'fiscal' affair, and are interested in knowing how this department works, you may be in for some useful information.

What is Loss Mitigation?

Loss mitigation refers to the work done by a third party, wherein the third party helps a homeowner financially and eventually mitigates the loss of the bank. It can also be done by a separate firm which intervenes and acts as an intermediary between a homeowner and the financial institutions, bringing about negotiations between the two.
It leads to negotiation and settlement of mortgage terms for a homeowner to prevent foreclosure. Kinds of loss mitigation are:
  • Short sale
  • Cash for keys negotiation
  • Loan modification
  • Short refinance
  • Deed in lieu
  • Special forbearance
  • Partial claim
Primary objective of these procedures is to stabilize the potential risk to the lender because of the investment.

Modus Operandi of Loss Mitigation Department

The description mentioned previously is the foundation of what a department for loss mitigation does. Simply put, the working of this department is to prevent the financial loss of the bank or any other financial institution. The task of keeping the financial loss to the least is mostly in the context of foreclosures.
A loss mitigation administrative office looks for methods to prevent a loan, which has been defaulted, to reach and escalate to the level of foreclosure on the mortgage debt or loan. That way it prevents the extra burden of expenses to the bank or the concerned financial institution.
The methods of mitigation mentioned earlier, like the short sale or short refinance are the means through which the department brings about the deal between the person who has taken the loan and the financial institution. Either of these two processes or the others makes sure that the optimum of the outstanding indebtedness of the loan is settled.
All this is done because the procedures related to the foreclosure are unwieldy and lengthy, and there are a lot of legalities involved in it, which takes up a lot of money of the financial institution or a bank.
Moreover, loss mitigation becomes even more important because since the time the process of foreclosure begins, till the time the process is over, there will be no payments on the property for an extended period of time.
So the lender pays for the expenses on the loan, without getting anything in return to offset these expenses. The lender also does not get the balance on the original home loan.

Loss Mitigation Specialist

A loss mitigation specialist works more towards non-valuable and non-performing assets as compared to the performing ones. Also called loss mitigators, these look after the short sales, foreclosures, loan repayments and the like.
Although most of the time, these professionals are attached to the loss mitigation department of banks or financial institutions, these can work independently, too, towards mortgage loss mitigation.
In summation, it can be said that this department tries to create a win-win situation for the money lender and the borrower. This department tries to save the borrower from a foreclosure or bankruptcy, because it is a huge blot not only on an individual's credit report, but the financial institution also has to experience a huge burden of the whole process.