"What Exactly Is A Deed In Lieu of Foreclosure And Is It Right For Me?"

April 21, 2012

iStock_000007577163XSmall.jpgWhether a deed-in-lieu of foreclosure is right for your California-based distressed residential property depends on many factors. Don't listen to anyone who tells you "you should do I deed-in-lieu of foreclosure, because I did" As with anything, it is important that you carefully weigh the pros and cons of your situation, based on your unique set of facts and circumstances, before deciding on any one option as it relates to your distressed mortgage. For many, a strategic foreclosure is their best option, for others, a short-sale, and for others a deed-in-lieu of foreclosure . . . assuming it is available by the borrower's lender. How can you determine if a deed in lieu of foreclosure ("DIL") is right for you?

Let's begin with some basics:

WHAT IS A DEED IN LIEU OF FORECLOSURE?

In situations in which there is no hope or little equity and no interest or hope of keeping the property or selling the property (e.g. short-sale) one alternative is negotiating a deed in lieu of foreclosure with your lender. The borrower may want to offer a DIL to avoid the lender from foreclosing via a trustee's sale or going to court and getting a deficiency judgment against them. A deed-in-lieu of is a transfer of title back to the lender. Having more than one loan (with more than one lender) often makes this option difficult to procure. However, if your lender will consider this option, one possible benefit of this option is that the lender, in writing, agrees to not file a "1099" with the IRS on their loss which is considered regular income to the borrower--which otherwise, would be taxable to the borrower!

SO, HOW DOES A DEED IN LIEU OF FORECLOSURE WORK?

If a homeowner chooses to try for a DIL of foreclosure in order to avoid foreclosure of their home they need to sign several legal documents such as the Agreement in Lieu of Foreclosure and a quit-claim deed. The purpose of the first document is to set out the terms and conditions of the deed-in-lieu of foreclosure, and is signed by the lender and the borrower. The second document, the quit-claim deed, conveys legal ownership of the property to the lender.

The lender will then mark the borrower's note as "paid" and provide the borrower with two documents - one which states that the debt is canceled and the other that waives the lender's right to a deficiency judgment (the lender's right to ask for the amount of the debt they are unable to recover from the sale of the home).

The agreement for deed in lieu of foreclosure is usually executed through an escrow company which will receive the borrower's note (marked as "paid") from the lender. The escrow agent will then record the deed in the property's file at the county recorder's office and send the note to the borrower, releasing the borrower from all obligations under the mortgage.

ADDITIONAL BENEFITS

A deed in lieu transaction may be advantageous to both parties--the borrower and the bank. By the lender accepting a deed from the homeowner, the lender avoids the delays and costs related to foreclosure. For the homeowner, he or she benefits by having predictable results. When the homeowner is irretrievably in default and has no equity in his or her property, using a deed in lieu may protect the borrower to the extent from the embarrassment and impaired credit rating a public foreclosure sale produces, and gives the borrower immunity from a possible deficiency judgment.

RISKS

Some unscrupulous lenders have the borrower sign a document promising to pay any deficiencies. For example, if the home is worth $200,000 and the value is $180,000, the borrower is on the hook for the remaining $20,000. Beware!

LIMITATIONS

Before 2012, most lenders were not willing to consider a deed in lieu of foreclosure under the following circumstances:

There was no verification of financial hardship;

There were more than two loans, with different lenders on the distressed property; thus, making it impossible for the homeowner to give title to the home to one lender.


ARE THEIR TAX CONSEQUENCES?

Possibly. There are three types of taxes to consider when considering a deed in lieu of foreclosure:

Deed tax
: Because a deed in lieu foreclosure involves the transfer of real property, the borrower may need to pay a state deed tax on the transfer of property to the lender.

Capital Gains Taxes: The homeowner must also consider issues of capital gains taxation if the transfer is at a value in excess of the borrower's adjusted original purchase price (whether or not the property is the borrower's principal residence If you are considering this option, it is well-advised to seek the counsel of a good tax advisor.

Taxes on Forgiven Debt
--assuming the Lender has, in writing, agreed to forgive the remaining amount owed to the lender.

To learn more about income tax in connection with canceled debt: Mortgage Debt Forgiveness Tax Relief Act and the California Mortgage Debt Relief Act, which states that a consumer does not need to pay any income tax on canceled "forgiven debt" (unpaid loan balance which is forgiven by lender) resulting from a deed in lieu of foreclosure. However, a borrower will need to satisfy certain conditions.


TIMES ARE CHANGING--FAST FORWARD TO 2012

If you recall, back in October 2010, Bank of America put a moratorium on foreclosures in all 50 states. Bank of America's official reason for the moratorium was to give Bank of America time to review their pending foreclosures-to ensure they were being done properly and in accordance with the laws of the various states. Unofficially, Bank of America put a moratorium on their pending foreclosures because of the public's outcry and pressure put upon them by various governmental agencies resulting from Bank of America negligently foreclosing on homes where the homeowner was in a trial modification or was in review of a trial modification.

Lawsuits: Bank of America's negligence created a rippling affect. By January 2011, the tide was now turning against Bank of America and other major lenders--consumers were fighting back and suing their lenders. Furthermore, numerous governmental agencies were putting added pressure on lenders to assist homeowners with distressed properties. To compound the pressure, numerous attorney generals throughout the country were filing lawsuits against the major banks, to include JP Morgan Chase, Wells Fargo, Bank of America, Citi, and Ally/GMAC. In February 2012, a $25 billion foreclosure settlement was reached between the 5 major banks and 49 attorney generals, including California's Attorney General, Kamala Harris.

New Laws and Government-Sponsored Programs: the creation of new California laws and federal programs make the short-sale process harder, not easier--the homeowner, the realtor, the buyer and the lender. As a result, more and more lenders are reconsidering the option of deed-in-lieu of as a viable option to assist both the homeowner and lender, in lieu of short-sale or foreclosure.

What was once an unlikely option back in 2006, the deed-in-lieu of foreclosure option is quickly becoming the favorable option to both the homeowner and lender. For instance, starting early this year, Chase is now offering deed-in-lieu of foreclosures to a select few. JP Morgan Chase has started sending out letters to homeowners, offering deed-in-lieu of foreclosure options. Ideal candidates are those who have been denied a loan modification and least once and have only one mortgage. Those lucky to qualify are paid $35,000 to give their home to Chase bank!

At first, I was very skeptical about Chase's new program when I first heard about it. I also thought it was a scam of sorts because it sounded too good to be true. Being doubtful, I personally called Chase and received confirmation of their new program. A similar program was offered in 2011 by Chase for short-sales, but the representative explained to me that due to the complex nature of short-sales, to include inordinate delays, Chase calculated that it was "cheaper" to offer the homeowner a deed-in-lieu of foreclosure with a $35,000 incentive payment to the homeowner to move out and give title to Chase than agree to undertake a short-sale. The Chase bank representative further explained to that unlike past years, foreclosures are becoming cost-prohibitive for the bank--because of the exponential increase in lawsuits being filed--causing undue delays and cost-prohibitive fees and costs to the bank.

Need Help?

At the Law Office of Linda C. Garrett, an online virtual law office, providing full-scope and limited-scope legal services in the practice areas of consumer law, mortgage law, bankruptcy law and family law, I can help a distressed homeowner determine the options and programs personally available to them, taking into account their unique facts and circumstances, to include, but not limited to, their short and long-term goals, their income streams, their assets, their debts and their monthly expenses--factors that are important to consider when conducting a thorough analysis of their options. For instance, while deed-in-lieu of foreclosure is a possible option for a homeowner to consider, it's not a practical solution if the homeowner wishes to stay in the home.

Some examples:

• If a homeowner has previously been denied HAMP loan, I can determine whether the borrower remains an ideal candidate for a HAMP loan. (For instance, a common mistake by self-employed individuals is that they fill out the Profit and Loss Statement incorrectly.)

• Help the borrower determine if a strategic foreclosure or short-sale is a viable option for them--taking into account taxation issues and deficiency-judgment issues.

• Provide the borrower with additional information regarding current laws, programs and referrals to third party to assist with their distressed mortgage. Since 2006, many new laws, and state and federal programs and relief has been made available to California consumers, such as the Department of Justice $25 Billion Settlement, HARP program, HAFA program, UP program (Unemployment) Program

Some helpful links:

Contact the Law Office of Linda C. Garrett--to set up a 30-minute free consultation or paid consultation

Services--to learn the types of services the Law Office of Linda C. Garrett provides

Practice Areas--to determine the other areas of law the Law Office of Linda C. Garrett can provide consumers.

Attorney Profile--to learn more about Ms. Garrett, Ms. Garrett's goals, Ms. Garrett's philosophy and how she "Gives Back".

California Family Law and Divorce Blog

Other Blog Posts Related to Deed In Lieu of Foreclosure:

Is Short-Selling My California Home Right For Me?

What Does the $25 Billion Mortgage Settlement Mean To Me?

Consumer Protection Financial Bureau (CPFB)
Denied a MHA HAMP Loan Because of hte NPV Test? The "Fat Lady" Hasn't Finished Singing!
The California Short-Sale--A Better Alternative to Foreclosure,or a Percolating Nightmare?
At Risk or Facing Foreclosure?