Should You Consider a Deed In Lieu of Foreclosure?

When a homeowner has defaulted on their mortgage, it is common that they are seeking any way possible to avoid foreclosure of their property. One method of avoiding foreclosure that is commonly discussed is called a “deed in lieu of foreclosure.” While there can be benefits to using this method of foreclosure avoidance, it may not always be the best possible option for a homeowner. All options should be carefully weighed based on benefits and costs and considering the specific situation and needs of an individual homeowner.

What is a deed in lieu of foreclosure?

A deed in lieu of foreclosure is a legal instrument in which a mortgage borrower voluntarily conveys ownership interest to the lender. Once the homeowner turns over ownership rights, they are released from their mortgage debt. A deed in lieu of foreclosure can have certain benefits for homeowners as the transfer is voluntary, the defaulted debt is forgiven, and the lengthy and stressful foreclosure process can be avoided. However, the homeowner still loses their property and their credit score will be significantly affected as the mortgage was settled for less than the originally agreed-upon amount.

In addition, the mortgage balance often exceeds the value of the home, and a lender may not agree to a deed in lieu of foreclosure. If a lender does agree to a deed in lieu, it is in spite of the discrepancy between the balance and the property value and is often because it allows them to take ownership of the property without pursuing a foreclosure action in court. However, in this situation, the prior homeowner will risk a substantial taxation by the IRS due to forgiveness of the balance of the debt.

The deed in lieu agreement is hard to get, especially when the buyer demands a price too far below fair market value and when the bank believes that there may be other liens on the property. It is important to remember that simply exploring the option of a deed in lieu of foreclosure does not create an obligation to convey ownership. Instead, both the lender and the borrower have the right to withdraw from the negotiations prior to the signing of a final agreement. If a deed in lieu agreement cannot be arranged, there are other options to pursue to potentially avoid foreclosure.

New York's Home Equity Theft Prevention Act

In 2006, the New York legislature passed the Home Equity Theft Prevention Act (HETPA)¹ to protect the interests of homeowners in the sale of their homes when they are in default or foreclosure. When facing possible foreclosure, property owners are often in a vulnerable position and buyers may easily take advantage of them and acquire ownership of the distressed property through abusive or fraudulent means. For this reason, HETPA sets out strict requirements for contracts in this situation. If the requirements are not met, the seller could have up to two years to rescind the contract and reacquire ownership interests in the property in question.

For several years following the enactment of HETPA, many mortgage lenders were not clear on whether the contract requirements and the possible two-year rescission period applied to deeds in lieu of foreclosure, as there was no explicit exclusion. For this reason, many lenders were hesitant to accept this type of deed instead of proceeding with a foreclosure. In 2011, the banking section of the New York Department of Financial Services published a letter² indicating they did not interpret HETPA as applying to deeds in lieu of foreclosure. Despite this letter, many New York mortgage lenders may still be reluctant to accept this alternative to foreclosure.

Contact an experienced New York foreclosure attorney

Even if a deed in lieu of foreclosure is not the right option for you, there are other alternatives to avoiding foreclosure, such as a loan modification or a short sale. Experienced Long Island foreclosure lawyer Ronald D. Weiss has nearly three decades of experience assisting homeowners with foreclosure solutions, so please call today at 631-296-0912 if you need assistance.

References:

¹http://www.dfs.ny.gov/consumer/hetpa.htm

²http://www.dfs.ny.gov/legal/industry/il110510.htm