A deed in lieu of foreclosure is “one of the oldest concepts in real estate”, though it has recently surged back into the limelight given the current climate fostered by the abundance of short sales and foreclosures in our market.
What exactly is a deed in lieu of foreclosure and why should we take note?
It is a “voluntary transfer of property ownership from the borrower to the creditor which makes the need for foreclosure proceedings, should the borrower default on payments, unnecessary”.
For example, a borrower who is underwater on their home could deed the title of their home to their lender and walk away from the property. In most cases, the lender will not go after the borrower to collect a deficiency (the difference between what the borrower owes on the mortgage and what the bank will eventually obtain from the sale of that home at a later stage). Those borrowers who are tired of dealing with the stress and anxiety surrounding the short sale process have a relatively stress free alternative.
Are troubled borrowers taking part in this option?
Mortgage lenders have seen an increase in the number of troubled borrowers signing up for this alternative. According to officials, Bank of America has mailed out 100,000 deeds in lieu solicitations to customers in the past 60 days, and the number of completed transactions has increased since its inception. This program has also received its fair share of publicity when the Obama administration included it as part of its Home Affordable Foreclosure Alternatives program (HAFA). Borrowers may also be glad to know that mortgage giant, Fannie Mae, has reduced the penalty time for homeowners who use this technique from four years to two before being able to qualify for another home mortgage.
What is a banks motivation to call attention to deeds in lieu?
Banks have a very clear incentive to find a resolution to their borrowers’ default, as it all boils down to speed. Deeds in lieu allow banks to quickly gain ownership of their borrowers’ properties and in turn are able to resell the property. Given the current interest rate levels available to borrowers in good financial standing, lenders could resell a number of properties acquired via this alternative in weeks, not months as has been the case with short sales. Lenders are still holding an enormous backlog of homes that have not been processed through to the foreclosure stage. In order to speed up the process and gain control of these homes, lenders such as Bank of America have begun offering cash incentives that range from $ 3,000 to $15,000 to their underwater borrowers in the hopes of enticing them go down the deed-in-lieu route versus the usual short sale process.
Are there any downsides of deeds in lieu?
This type of alternative may not be appropriate for those cases involving serious mortgage default, for instance if you have a substantial amount of equity built up in your home, you may wish to seek a loan modification and then go down the route of a short sale before simply handing over all your hard earned equity to your lender! Those with multiple mortgages from various creditors will not benefit from this alternative as the encumbrances will hamper the timing of the process.
Deeds in lieu do less damage to borrowers’ credit history than foreclosures or bankruptcy, as they are treated as debts that are “not paid as agreed”.
Source: Washington Post, Ken Harney (06/26/2010)