With potential deregulation in the housing industry, servicers and investors need efficient loss mitigation strategies. While loan modifications remain the first line of defense, deed-in-lieu (DIL) and short sales can offer viable alternatives when modifications fail, protecting both financial interests and borrower credit.

Why DIL and short sales matter

The mortgage servicing industry faces increasing financial hardship cases. According to the MBA,  64.1% of borrowers are in forbearance due to job loss, death, divorce, or disability while natural disasters account for 32.9%, and COVID-19 make up the remaining 3.0%. Foreclosures are not only costly, but time-consuming, especially in judicial states, making DIL and short sales critical alternatives.

“In this industry, we’re used to dealing with these transactions daily, but for homeowners, terms like ‘foreclosure,’ or ‘default,’ can bring up a lot of negative emotions,” says Amy Daniel, senior vice president of title and close at ServiceLink. “That’s why it’s so important to help borrowers see that there are other good options available—whether it's assisting heirs in handling assets on the reverse mortgage side or working with borrowers who need a way out of homeownership. Short sales are especially exciting right now because they give motivated sellers new opportunities. Lenders are considering these options more and actively discussing alternatives with borrowers, making the process more transparent and supportive."

The path to avoiding foreclosure

When a borrower becomes delinquent, servicers first attempt loan modifications. If this is unsuccessful, a short sale allows borrowers to sell their homes, often recovering a significant portion of the loan balance. If a short sale isn’t feasible, a DIL can provide a last resort exit for the homeowner before foreclosure.

Key benefits of DIL and short sales

For servicers and lenders:  

• Cost and time savings: Avoiding foreclosure cuts legal fees and holding costs, expediting resolution for servicers.

• Reduced property management: Along with cost and time savings, a short sale or DIL can reduce the need for property management for servicers. Foreclosed properties often require constant maintenance, including grass cuts and winterization.

• Borrower and servicer/lender relations: An attempt to work with the borrower in a time of hardship shows willingness to help during a usually stressful process. This can lead to a reputational advantage and potential repeat business for the lender down the road.

For borrowers:

• Market viability: Short sales are increasing, as homeowners leverage equity in their homes to avoid foreclosure.

• Lesser credit impact: Both DIL and short sale options are generally less damaging to credit than foreclosure, which can stay on credit reports for up to seven years.

• Potential future homebuying: Once a borrower has completed a short sale as an alternative to foreclosure, they may be able to qualify for a new mortgage sooner than if they had gone through a foreclosure.

An experienced, holistic partner

ServiceLink simplifies both deed-in-lieu and short sale transactions through comprehensive property and lien assessments, specialized training for servicers, and industry-leading expertise that accelerates these resolutions efficiently.

"We have been in the default servicing space for a long time - and we’re definitely seeing an increase in short sale and DIL activity,” says Jody Walshe, assistant vice president of ServiceLink’s deed-in lieu team. “Our deep industry expertise, highly tenured team, and streamlined processes allow us to execute transactions with precision, ensuring faster resolutions that benefit both servicers and borrowers.”

Deed-in-lieu and short sales are on the rise, particularly in reverse mortgages, where heirs often return properties. With economic shifts and potential regulatory changes ahead, proactive loss mitigation remains essential. ServiceLink provides servicers with end-to-end solutions to minimize losses and helps them support their borrowers.

To learn more about these solutions, visit here.

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