The whole process between the lender and the homeowner is called loss mitigation. As foreclosure is time-consuming and costly, it should be prevented.

Lender’s strategy: minimize its loss.

Homeowner’s negotiation strategy: save his or her house from foreclosure. Is it possible to cure the default? Is there any alternative or solution that the lender may accept?

Principles set forth by U.S. government agencies for loss mitigation

In general, lenders are not encouraged to foreclose on properties that are in default immediately. They are encouraged to find ways for the homeowners to continue to make their mortgage payments.

U.S. Department of Veterans Administration (VA) rule: VA encourages holders to extend every reasonable indulgence to worthy borrowers who are in temporary difficulty. However, when it is evident that the default is insoluble, every effort should be made to see that the security [house] is liquidated promptly to minimize the loss to the Government.
Federal Housing Administration (FHA) rule: fulfill the goal of helping borrowers in default retain home ownership while reducing, or mitigating the economic impact on the insurance fund.

Minimizing loss in bank and government foreclosures

Government agencies encourage lenders to modify their loans to accommodate borrowers and introduce several avoidance procedures and forbearances. U.S. Government hopes to implement cost-saving foreclosure avoidance procedures.

It was proven that giving homeowners an additional one or two months could prevent more than two-thirds of foreclosures.

Bottom line: cost of preventing foreclosure is less than the cost of foreclosure.

Two typical reasons for default

Homeowner buys a home that he or she cannot afford. He or she is over-extended.
Unexpected events occur and they are beyond homeowner’s control. Lender must cooperate if such events can be eliminated by cooperative action.