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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.
Conclusion
Are you one
of the many that suffer from insurmountable
debt and wonder if bankruptcy is an option?
Give us a call at (203) 924-6700 or
contact us.
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