California Loss Mitigation and Foreclosure Realities

Although in the past investors would push servicers to foreclose on those who couldn't make their payments on their mortgages, today investors are all about loss mitigation. Foreclosure, it turns out, is a costly hassle, leading to thousands and thousands of dollars of loss. Extrapolating these losses over entire portfolios, or even over the entire country, they add up to billions of wasted dollars.

Obviously, investors and government agencies don't like that, and they have begun convincing/enticing/forcing the servicing community to help discover new methods of loss mitigation, create special departments for their execution, and generally to pursue less wasteful alternatives to foreclosure. These new plans include tactics such as delicate loan modification negotiations, forbearance plans, deed-in-lieu of foreclosure, and real estate short sales. Now, every single operation features such programs, it is assumed. And even better, it works.

The huge losses of sudden foreclosures and defaults are largely a thing of the past, replaced by the smaller losses of loan mods, short sales, and other mitigating actions.

Sadly, this improvement is not without its drawbacks. Loan servicers, especially the ones in residential situations, have become bogged down in layers of litigation that come with loss mitigation, because trying to reach a workout of loss mitigation while simultaneously, and often secretly, pursuing the channels of foreclosure created a lot of angry people claiming that they were engaging in deceptive practices.

There is a court case that set a strong precedence in these matters. Richter v. Bank of America (1991) led to a court awarding Richter about three million in damages against a lender who had 'breached it's duty' to deal in good faith towards the goal of restructuring a loan, and had engaged in negligent misrepresentation by going for foreclosure while 'taunting' the borrower with promises of a loan modification. It was a landmark case, demonstrating the power of expectations for genuine loss mitigation efforts over the old foreclosure practices or unscrupulous fraud. It also made servicers nervous and hesitant to engage in loss mitigation efforts if foreclosure might be legally simpler.

However, most lenders have come to the conclusion that the risk to their interest is worth the prevention of major loss during foreclosure or short sale. And there are some pretty simple and effective steps lenders can take to protect themselves from potential risk.

The most self-explanatory, but often hardest to execute plan is to simply "be a straight shooter". Lenders who suggest that they plan to pursue loss mitigation avenues instead of foreclosure need to admit that, actually, they will be proceeding with foreclosure procedures until a document executed by both parties is produced that sets out specific, agreed-upon loss mitigation alternatives. They need to straight out document the fact that they are in danger of foreclosure, and that they should not definitely rely on loss mitigation results, and be aware that they are in very real danger of losing their homes. Lenders cannot be in the business of giving out false hope, because it can lead to more loss, and sometimes lawsuits.