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Thursday, July 7, 2011

Deed in Lieu of Foreclosure: What You Need to Know

 Deed in Lieu of Foreclosure: What You Need to Know.


What is a Deed In Lieu of Foreclosure?


The Federal Government defines a deed in lieu of foreclosure (“DIL”) as follows: the process by which a homeowner may voluntarily transfer the deed to a home to the servicer when payments cannot be made. Note: the Federal Government use of the term “servicer” here may or may not be correct. The deed may be transferred to the mortgage loan holder (the entity actually owed the $) instead of the servicer (the entity which handles day to day items relating to the mortgage loan). Elsewhere, it describes a DIL as: to avoid foreclosure (“in lieu” of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process does not allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.


How is a DIL different than a mortgage loan modification or a short sale?


A mortgage loan modification results in the homeowner remaining the homeowner, but with a mortgage loan which has had its terms changed. By way of example: a 30 year loan at 7% with monthly payments of $2000 might be modified so that the loan is paid back over 35 years and/or the interest rate is lowered, resulting in a lower monthly payment for the homeowner.


A short sale is the process by which a homeowner sells the home for less than what the homeowner owes the mortgage loan holder, but the mortgage loan holder agrees to accept the sale amount as repayment of the mortgage loan. By way of example: a homeowner owes $300,000 but is only able to sell the home for $250,000 and the bank / mortgage loan holder agrees to accept the $250,000 as repayment of the mortgage loan (instead of demanding the full $300,000).


A deed in lieu of foreclosure is when the mortgage loan servicer and/or mortgage loan holder agrees to accept the deed to the house (accept full legal and actual ownership of the house), typically in return for allowing the homeowner to walk away free and clear of any further obligations. As you can tell by the name of this process, this may occur when the home was heading toward an involuntary foreclosure.


Do mortgage loan holders have to accept deeds in lieu of foreclosure?


Sometimes – but not usually. Through the Federal Government’s Home Affordable Foreclosure Alternatives program, loans originated on or before January 1, 2009 which are owned, guaranteed, or securitized by Freddie Mac may be subject to a deed in lieu of foreclosure. However, there are other requirements to qualify, including attempts at loan modification and short sale before attempting to utilize a DIL.


For loans which aren’t associated with Freddie Mac as described above, the mortgage loan holder (and the investors which have influence over that mortgage loan) has some discretion regarding alternatives such as mortgage loan modifications, short sales, and deeds in lieu of foreclosure.


Why don’t banks and other mortgage loan holders like deeds in lieu of foreclosure?


There are numerous reasons, and here are two of them.


If a homeowner owes $300,000 on the mortgage loan but the mortgage loan holder could only sell the property for $250,000 if it took ownership of the home, obviously this would not be attractive to the mortgage loan holder.


Another issue is that the mortgage loan holder may have to deal with any title issues which accompany the property, or spend time, money, and resources ensuring that the title is clear and conveyable. The last thing any homeowner wants – whether that homeowner is an individual or a bank – is to find out that there are issues which might interfere with subsequent free use and/or sale of the property.


So, bottom line, is a deed in lieu of foreclosure likely to be a way to get a homeowner out of a mortgage mess?


Unfortunately, probably not. However, it usually doesn’t hurt to ask, and there are people out there who have used this method to put a mortgage loan problem behind them and move on with their lives.


McGrath & Spielberger, PLLC is a law firm which may provide assistance to homeowners struggling to pay their mortgages or otherwise interested in exploring their alternatives. Inquiries can be made by emailing Info@McGrathSpielberger.com or by clicking here: mortgage loan modification / foreclosure negotiation assistance.