Deed in Lieu of Foreclosure
Reprint from Had Enough (soon to be published)
with permission of Ken Gross Copyright 2009
When a homeowner is facing foreclosure proceedings, a consensual closure to the process can be obtained if the homeowner is willing to surrender its interest in the property to the foreclosing lender and the lender is willing to accept such deed in satisfaction of any further obligation from the owner. This is known as giving a deed in lieu of foreclosure. The lender avoids the costs and risks akin to the foreclosure process by accepting the property from the owner. In virtually all circumstances, the lender, in accepting the deed in lieu of foreclosure is doing so with the understanding that the tender of the deed will satisfy any further obligation that the owner owes the lender. Caution is still needed here, however, because what people say to each other does not govern – it is what the written documents state. The only way to be certain that the lender, in accepting the deed in lieu of foreclosure, is releasing the homeowner from any further obligation on the debt is to make sure the lender’s obligation is reduced to writing in a binding agreement. The last person you can trust is the lender and worse yet, the statements made by the lender’s representative that is pushing the paperwork for your deal along with 1,000 other pending matters. Common sense dictates that you should have this agreement reviewed by an attorney so that you are certain your obligations on the mortgage loan are being extinguished. These are short form agreements and the cost of obtaining this confirmation should be nominal.
The deed in lieu accomplishes the “shed the debt” goal of the first mortgage. It also provides certainty. As discussed, if the foreclosure process goes forward to sake, you have some risk that the lender will bid less than the outstanding balance of the unpaid mortgage loan which presents the potential that you could be sued down the road by the lender for a deficiency claim. The Deed in Lieu puts this issue to bed as between you and the first lender. On the flip side, you will most likely have to surrender possession of the property at an earlier date and the release of any claims by the lender against you will be conditioned upon your surrender of the premises without unduly causing damage to the property.
Just like in a short sale, you cannot conclude a deed in lieu unless the junior mortgage holders discharge their mortgage liens. Keep in mind – a “discharge of the lien or mortgage” eliminates the impediment to concluding the short sale or the deed in lieu. The “discharge of the mortgage lien” is NOT a release of the claim of indebtedness on the Mortgage Note to the junior lender. There is NO RELEASE unless that is specifically provided for. If, at the time you are concluding a short sale or deed in lieu, you are dealing with a junior mortgage holder to obtain its discharge, you should certainly ask for a release of the underlying indebtedness as well. There is no law against asking! More likely than not they will not grant the release to you, but you should request it. The junior mortgage lender may be willing to accept a small payment in full satisfaction of the debt. We always ask for the release on behalf of our clients and also do our utmost to convince the lender that a bankruptcy filing is inevitable for the client. Once the lender realizes that the future holds virtually no possible hope of recovery, it is much easier to negotiate a small dollar settlement to do away with the junior liens.
At the time you conclude a short sale or deed in lieu you may have not been able to obtain a release of the money obligation owed to the junior lienholder. Don’t panic. You will have numerous additional opportunities to deal with the obligation. The claim of the junior lenders is not going to be a surprise to you. Financial Crisis Management is about handing and managing issues and following a strategy. The existence of the claim of the junior lenders is not going to appear as a surprise that derails your plan. When the opportunities best present themselves you seek to address them.
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