Dear Benny: My friend and I would appreciate knowing how to go about initiating a deed-in-lieu of foreclosure.
We both own homes, bought in late 2006 and early 2007. Each of us knows through appraisal that our home value is now less than what we owe, despite buying below market at the time. Each of us has asked our respective lenders to lower the payments and the mortgage amount, but both of us have been ignored or laughed at.
Neither of us can see owning/holding an asset that is upside down for long, and neither of us has confidence in a supposed short- or midterm rise in home values.
Both of us are heading for retirement shortly. My friend is already at that age but still works. Both of us have jobs. Neither of us can afford to quit our jobs but will eventually have to stop working, which will require my friend, at least, to sell his home.
Both of us are able to pay now, but my situation is more difficult: My property became a rental (I couldn’t commute two-plus hours a day) and finding renters is getting harder. I carried the property and my apartment for six months last year, and the tenant is leaving shortly, so I could easily carry it for another five months this year.
Needless to say, this really strains my budget.
Neither of us wants to deliberately incur a foreclosure or bankruptcy, which is the only way for us to escape personal judgment for the foreclosure amount. In fact, my friend is ineligible for another bankruptcy until late in 2011. So we see no alternative, when push comes to shove, except for a deed-in-lieu.
How do we do this, and can we do it ourselves?
What exactly are the steps, and what should be said and sent to the lender? What are the pitfalls and circumstances that could cause it to fail? Can a lender legally opt to foreclose if a mortgagor requests or demands a deed-in-lieu? –Lauren
Dear Lauren: Before I answer your question, I am puzzled about something. If your friend previously filed for bankruptcy relief, how was he able to get a loan to buy his house? Typically, if one files for bankruptcy, he/she will not be able to get a mortgage loan for at least six years following the filing.
Did you get one of those so-called “no doc” loans, where the lender basically “winked his eyes” and made the loan, without checking your credit standing? In this instance, the lender relies on oral or written representations of the borrower’s credit and does not require the borrower to produce any documents such as tax returns, 1099s from employers or bank statements.
This no-doc process, which is difficult if not impossible to get nowadays, was one of the factors leading up to our current mortgage meltdown.
What’s a deed-in-lieu? Oversimplified, it means that the borrower gives the property to the lender in lieu of having the lender file for foreclosure.
About a year ago, the federal Treasury issued guidelines encouraging lenders to accept properties by way of the deed-in-lieu. In fact, in many situations, the government will give homeowners who utilize this process $1,500 in a “cash for keys” policy.
But you cannot do this alone. You cannot just prepare a deed granting the property to your lender and send it to your local recorder of deeds. You need your lender’s permission.
From the bank’s point of view, a deed-in-lieu makes sense. It avoids the time and expense of foreclosing on the property and allows the bank to pursue a short sale so as to rid itself of the property expeditiously.
Nonetheless, banks seem to prefer foreclosure. Why? I just don‘t know other than to say that banks are banks and have their own mindset.
However, if you have more than one mortgage on the property, unless you can work out an acceptable arrangement with the second or third deed-of-trust holder, your bank will not accept a deed-in-lieu. Why? Because a foreclosure by a first-trust (mortgage) holder will wipe out any subordinate liens other than some local, state of federal liens. If the bank takes the property by way of a deed-in-lieu, those subordinate liens remain on the books.
In order for the bank to then sell the property, the second-trust lender as well as all other outstanding liens must be paid off. And these second-trust holders always want some money before they release their lien.
Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.