A deed in lieu of foreclosure is the process by which a homeowner and its lender mutually agree to transfer title to the home in order to avoid a foreclosure sale. If the homeowner is in default of the mortgage and a modification agreement is neither desirable nor possible, a deed in lieu of foreclosure transfer may be a better alternative than a foreclosure sale.
There are several factors to consider in determining whether the lender prefers a deed in lieu of foreclosure. Ultimately, it is the lender’s decision because the homeowner has little bargaining power once the mortgage is in default. The lender’s remedy of foreclosure contained in the mortgage empowers the lender to act unilaterally, although not without strict adherence to the applicable foreclosure statute and laws. Compliance with the foreclosure statute adds delays and costs to the procedure, while the deed in lieu of foreclosure transfer is relatively simple.
The first factor requires that there be no junior mortgages, home equity loan mortgages, or real estate attachments recorded after the date of the mortgage in question held by the lender. These are called intervening or junior liens and, unlike the foreclosure sale procedure that extinguishes or wipes out junior liens, the recipient or grantee of a deed in lieu of foreclosure would take title to the property subject to the intervening liens because this procedure does not extinguish intervening liens.
The second factor involves a determination on the part of the lender as to the marketability of the property. If the property is in good condition and is generally believed to be appealing, a lender may prefer to conduct a foreclosure sale. This decision is based on the reasonable expectation that the sale will attract bidders who may purchase at the sale, thereby generating sale proceeds to apply against the homeowner’s mortgage debt balance and relieving the lender of buying the property at its own sale and taking it into inventory.
The third factor requires an agreement between the lender and the homeowner regarding the value of the property on the date of the deed in lieu of foreclosure transfer. This is not always possible because the parties tend to have different perceptions of value. A current appraisal is often not available since neither party wants to spend the money for it. The value question is important because the lender, by accepting the deed in lieu, will be applying the value of the home as of that date to the outstanding indebtedness under the mortgage loan.
If the value of the home is less than the amount due under the loan, the difference is known as the deficiency balance. Unless the lender specifically waives the deficiency balance in writing or returns the original promissory note from the homeowner to the lender marked “Paid In Full”, the homeowner is still liable to the lender for the deficiency.
Beth H. Davis is a director at Hamblett & Kerrigan, P.A. Her present practice focuses on real estate and business transactions. You can reach Attorney Davis by e-mail at [email protected].