Loss mitigation is used to describe a third party helping a homeowner, a division within a bank that mitigates the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner's lender. Loss mitigation works to negotiate mortgage terms for the homeowner that will prevent foreclosure.

These new terms are typically obtained through loan modification, short sale negotiation, short refinance negotiation, deed in lieu of foreclosure, cash-for-keys negotiation, or a partial claim loan or other loan work-out. All of the options serve the same purpose, to stabilize the risk of loss the lender (investor) is in danger of realizing. The different options are available to homeowners to try getting the homeowner to "perform" (pay timely) and cure the potential loss the lender/investor projects incurring through the foreclosure process and auction sale of the property.

Loss mitigation has been a tool used by lenders for decades, but experienced tremendous growth since late 2006. This rapid expansion was in response to the dramatic increase in foreclosures nationwide. Prior to late 2006, early 2007; Loss Mitigation was a tiny department within most lending institutions. In fact, the run up prior to the near collapse of the entire mortgage industry shows Loss Mitigation was almost nonexistent. The ten year period prior to 2007 spurred rapid year over year increases in home prices caused by low interest rates and low underwriting standards. Loss Mitigation was only needed for extreme cases due to the homeowners ability to repeatedly refinance and avoid defaulting.