Using a "deed in Lieu Of" to Stop a Foreclosure

By: Dave Dinkel

Recently lenders have been taking deeds in lieu of foreclosure from homeowners to resolve foreclosures. The lender simply accepts a deed in exchange for forgiving the homeowner of his mortgage or deed of trust loan.

Let's look more closely and see the ramifications of this legal transaction. It usually starts after the homeowner has fallen behind on his loan payments and is considering foreclosure, or he has already been served with a "default notice". Time is against the homeowner because the lender will or already has started foreclosure proceedings. The homeowner is being bombarded by outside information sources because his foreclosure has become a part of the public record or he is getting information from well-meaning but uninformed people.

As soon as the homeowner notifies the lender of his impending problem or
his loan is delinquent, the lender orders an appraisal or BPO (Broker's Price Opinion) to determine its market value. The lender now knows if he can make money on the property if he takes it back at a foreclosure auction. The lender's decision will be strictly financially motivated from this point forward. The risk of taking the property by foreclosure includes the higher legal costs, an extended loss of interest on the loan, real estate market risk, realtors®' commissions, and any other open liens on the property that can't be extinguished at the auction. The lender now factors in the minimal cost and shorter time required to get the home by taking a deed from the homeowner but in lieu of continuing the foreclosure. If the appraisal comes back with a value of 80% or less of the loan balance due, the lender would be irresponsible to take the deed and would continue the foreclosure. The other determining factor is whether there are other liens against the property such as a second mortgage or mechanics liens. Sometimes these liens can be larger than the first mortgage and the lender will not accept the property with these liens still attached to it.

If the lender agrees to accept a deed in lieu of foreclosure, it is not completely over for the homeowner. The lender will submit an Acceptance Agreement that the homeowner must sign as well as a new deed. The terms of this agreement may stipulate that if the lender sells or transfers the property for less than what is owed on the loan (including all penalties, interest, and attorneys' fees), the guarantor of the loan will owe the lender this difference. This deficiency amount can then be granted by the courts as a deficiency judgment against the loan guarantor.

So is the "Deed in Lieu of" an ideal solution for a homeowner in foreclosure? Not unless the terms of the Acceptance Agreement release the guarantor from future liability (deficiency judgment). Another option is to sell the property at a break-even point and repay the loan then his credit report won't be negatively impacted by the lender's reporting a loan write-off as with the deed exchange.

Foreclosures
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