Our Real Estate Blog

Deeds-in-Lieu of Foreclosure

March 20th, 2009 11:32 AM by Lehel Szucs

Deeds-in-Lieu of Foreclosure

Current market conditions have necessitated some innovative solutions to current situations.  Although the deed-in-lieu has been around for quite some time, most recently it has received a new popularity amongst lenders and borrowers alike.

When a borrower signs a deed conveying the property encumbered by a mortgage to the lender rather than go through the foreclosure process, this is called a deed-in-lieu of foreclosure. A deed-in-lieu of foreclosure may be taken by a lender in conjunction with a loan workout of residential, commercial or agricultural properties.  It is often given as part of a bankruptcy workout or in the case of a prepackaged bankruptcy plan.

Most lenders will not accept a deed-in-lieu unless an appraisal on the property reveals that there is no equity in the property and if there are no other liens.  In most cases the lender will leave the mortgage of record until the property has been resold to a new purchaser.  This allows the lender to maintain priority over subordinate liens and provides a safety net to foreclose the mortgage in the event that the conveyance is set aside as being fraudulent by other creditors or as a preferential-transfer action by a trustee in bankruptcy.

Most savvy lenders require a settlement agreement, the deed to contain non-merger language and that the note not be cancelled and in return merely agree not to sue under the note.

The concern is that the deed-in-lieu may be determined to constitute an equitable mortgage and could be set aside or subordinated to the claims of other creditors.  As such most lenders require a new title policy to be issued at the time of the execution of the deed-in-lieu and that the new policy contain a non-merger endorsement.

Another concern in the acceptance of a deed-in-lieu is the possible violation of the “clogging the equity” doctrine, i.e., the use of said deed as a means of preventing the borrower from exercising its statutory and/or equitable rights to redeem the property from a foreclosure sale.

Recharacterization and “clogging” issues are compounded if the borrower retains any rights in the property such as a rental agreement or an option to repurchase the property.

Title companies generally will not insure a deed-in-lieu if the borrower retains any such rights.

Most importantly, if and when a lender or borrower finds it beneficial to both parties to engage in a deed-in-lieu transaction, care should be taken to consult a title company with experience and knowledge of the issues at hand. 

Posted in:General
Posted by Lehel Szucs on March 20th, 2009 11:32 AM



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