Navigating a deed-in-lieu of foreclosure
DEAR BENNY: My friend and I would appreciate knowing how to go about initiating a "deed-in-lieu of foreclosure."
We both own homes, bought in late 2006 and early 2007. Each of us knows through appraisal that our home value is now less than what we owe, despite buying below market at the time. Each of us has asked our respective lenders to lower the payments and the mortgage amount, but both of us have been ignored (or laughed at).
Neither of us can see owning/holding an "asset" that is upside down for long, and neither of us has confidence in a supposed short- or mid-term rise in home values. Both of us are heading for retirement shortly. My friend is already at that age, but still works -- both of us have jobs. Neither of us can afford to quit our jobs, but will eventually have to stop working, which will require my friend, at least, to sell his home.
Both of us are able to pay now, but my situation is more difficult: My property became a rental (I couldn't commute two-plus hours a day) and finding renters is getting harder. I carried the property (and my apartment) for six months last year, and the tenant is leaving shortly, so I could easily carry it for another five months this year. Needless to say, this really strains my budget.
Neither of us wants to deliberately incur a foreclosure -- or bankruptcy, which is the only way for us to escape personal judgment for the foreclosure amount. In fact, my friend is ineligible for another bankruptcy until late in 2011. So, we see no alternative, when push comes to shove, except for a deed-in-lieu.
How do we do this, and can we do it ourselves? What exactly are the steps, and what should be said and sent to the lender? What are the pitfalls and circumstances that could cause it to fail? Can a lender legally opt to foreclose if a mortgagor requests (or demands) a deed-in-lieu? --Lauren
DEAR LAUREN: Before I answer your question, I am puzzled about something. If your friend previously filed for bankruptcy relief, how was he able to get a loan to buy his house? Typically, if one files for bankruptcy, he/she will not be able to get a mortgage loan for at least six years following the filing.
Did your friend get one of those so-called "no doc" loans, where the lender basically "winked his eyes" and made the loan, without checking his credit standing? In such instances, the lender relies on oral (or written) representations of the borrower's credit, and does not require the borrower to produce any documents such as tax returns, 1099s from employers, or bank statements.
This "no-doc" process, which is difficult if not impossible to get nowadays, was one of the factors leading up to our current mortgage meltdown.
What's a "deed-in-lieu"? Oversimplified, it means that the borrower gives the property to the lender in lieu of having the lender file for foreclosure. About a year ago, the federal Treasury issued guidelines encouraging lenders to accept properties by way of the deed-in-lieu. In fact, in many situations, the government will give homeowners who utilize this process $1,500 in a "cash for keys" policy.
But you cannot do this alone. You cannot just prepare a deed granting the property to your lender, and send it to your local recorder of deeds. You need your lender's permission.
From the bank's point of view, a deed-in-lieu makes sense. It avoids the time and expense of foreclosing on the property, and allows the bank to pursue a short sale so as to rid itself of the property expeditiously.
Nonetheless, banks seem to prefer foreclosure. Why? I just don't know other than to say that "banks are banks" and have their own mindset.
However, if you have more than one mortgage on the property, unless you can work out an acceptable arrangement with the second (or third) deed-of-trust holder, your bank will not accept a deed-in-lieu. Why? Because a foreclosure by a first-trust (mortgage) holder will wipe out any subordinate liens -- other than some local, state of federal liens. If the bank takes the property by way of a deed-in-lieu, those subordinate liens remain on the books.
In order for the bank to then sell the property, the second-trust lender (as well as all other outstanding liens) must be paid off. And these second-trust holders always want some money before they release their lien.
DEAR BENNY: My divorce was finalized in January 2009. There are two properties, and both of us are on title as well as obligated under the mortgages. Our property settlement indicates we have until 2012 to refinance or sell.
My ex-husband remarried two months after the divorce. There is nothing specific in the divorce decree pertaining to the properties and remarriage. I am encouraging him to attempt to either assume or refinance one property, and I would do the same with the other one. But he is not responding. My hands are tied. He has been more than 30 days late on the mortgage for which he is responsible (through our property settlement),and he has charged more than $12,000 on a credit card where I was an "authorized user" (I have contacted the card company to ensure I am removed as an "authorized user" and have disputed this through the reporting agency).
Both of these issues, obviously, have affected my credit, and I fear that additional financial hardship on his part is going to tank my credit. All I want is for my name to be removed from that debt and deed, so that I can do the same. How can I push the issue, legally? Amend the property settlement? Something such as this must have occurred elsewhere, for this certainly couldn't be the only existing case like this, could it? --Stacie
DEAR STACIE: It will not be a consolation to you, but you are not alone. This happens quite often when couples who own property -- even just one house -- get divorced.
I am surprised that your property settlement agreement was not made a part of the divorce agreement, but perhaps your attorney had a reason for that. But since your ex does not have to take any action until next year, your hands are, unfortunately, tied.
However, if your ex is required to keep the mortgage payments current, and is not doing that, you could take him back to court. But that's time-consuming and expensive.
The real problem is that lenders will generally not let one spouse off of the mortgage. They made the loan to husband and wife based on their joint income, and the only way to resolve this is for one party to refinance, or sell. When that occurs, the house can then be transferred from the two of you just to the refinancing party.
Mortgage interest rates are still quite low, and by 2012 may be much higher. They are already starting to creep up. Try to convince your ex that if he waits until next year, his mortgage payments may be a lot higher. And if he is unable to qualify next year for a refinance loan, the properties may have to be sold.
Maybe that threat will work.
DEAR BENNY: I own a condo, which I have never lived in long enough to qualify for a capital gains tax exclusion. I bought the property originally for $175,000. My son rented it from me for several years, but I continued to pay the mortgage, taxes and insurance. Two years ago, I added him to the deed and we understand that my original basis now becomes his as well, plus whatever we both spent to improve the property. However, he now pays the mortgage, taxes and insurance. Can this be interpreted as a sale? When we decide to sell the property at some future time, will he be eligible for the exclusion? --Carolyn
DEAR CAROLYN: In order to qualify for the up-to-$250,000 exclusion of gain (or up-to-$500,000 if you are married and file a joint tax return), you have to own and live in the house for two out of the five years before it is sold. Because you did not live in the house, you cannot qualify for any exclusion. But when your son will have owned and used the property for a full two years, he should be able to claim the exclusion. And because the tax code does not limit the exclusion for partial owners, I am of the opinion that he would be eligible for the full exclusion.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.
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