Why a Deed in Lieu of Foreclosure is a Bad Thing

A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower ) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings.

How a Deed in Lieu of Foreclosure Works
In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair market value of the property. Other times, lenders will agree since they will end up with the property anyway and the foreclosure process is costly to the lender.

Because of the requirement that the instrument be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parol evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations.

Neither the borrower nor the lender is obliged to proceeed with the deed in lieu of foreclosure until a final agreement is reached.

Looks easy and sounds good right? Well, not if you are the bank...and that generally becomes a problem for the homeowner. Why would this be so difficult to get the bank to voluntarily agree to this situation? Because the homeowner generally has no equity in their property when they pursue this option. So if the bank does a Deed in Lieu, they have the EXACT SAME PROBLEM that the homeowner did. They have no equity in a property that they now have to move. When a bank sees this, it is very hard to get them to voluntarily enter an agreement to take the deed to the house.

Banks don't want to own houses. They want to lend money and collect interest. If you want a better understanding of how mortgages connect the individual homeowner to Wall Street, check out this link.

Rob Alley, Realtor at Keller Williams Charlottesville
540-250-3275 (cell)
roballeyrealtor@gmail.com
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