DEEDS IN LIEU OF FORECLOSURE: Who, What, When, Where, Why and How
April 09, 2007
In the event a loan becomes non-performing, commercial lending institutions that hold mortgages in Indiana need to be familiar with deeds in lieu of foreclosure.
Who. The parties to a deed in lieu are the mortgagor (generally, the borrower) and the mortgagee (usually, the lender). Both sides must consent. Most lawyers will say that it isn't advisable to accept a deed in lieu if there are multiple lien holders. Lenders will have to negotiate releases of those liens in order to secure clear title. The better approach may be to proceed with foreclosure, which will wipe out such liens.
What. A deed in lieu of foreclosure is a document that conveys title to real estate. What is unique about this particular deed is that the mortgagor surrenders its interests in the real estate to the mortgagee in consideration for a complete release from liabilities under the loan documents. The release, among other things, usually is articulated in a separate settlement agreement.
When. Lenders normally pursue deeds in lieu when there is no chance of collecting a deficiency judgment - the mortgagor is judgment proof. For example, this option makes sense with non-recourse loans. Another consideration is when the value of the property unquestionably exceeds the amount of the debt. If the lender thinks it may be able to liquidate the real estate for more than the borrower owes, pursuing a money judgment may be superfluous.
The parties typically will explore a deed in lieu of foreclosure early on in the dispute - once a determination is made by the lender to foreclose. Although this is the point in which deeds in lieu are best utilized, in Indiana it's possible to execute the deed right up until the time the property is sold at a sheriff's sale.
Where. Deeds in lieu are the product of out-of-court settlements. The process of the securing of a deed in lieu is non-judicial.
Why. The fundamental reasons why a lender may want to take a deed in lieu of foreclosure involve time and money. A deed in lieu grants to the lender immediate possession of the real estate. Several months, conceivably years, can be saved. Just as importantly, spending thousands of dollars, primarily in attorney's fees, could be avoided by cutting to the chase with a deed in lieu. Expediency and expense are the primary factors that motivate lenders to accept a deed in lieu of foreclosure.
How. Other than the obvious - executing a deed - there are certain steps a lender should consider taking before it enters into a deed in lieu. The lender should know whether it is acquiring clear title. A title insurance policy commitment should be ordered to examine the status of any liens, taxes and other potential clouds on title. Work also may need to be done to get a handle on the value of the property. This may include an appraisal, an inspection or an environmental assessment. These things generally are recommended when evaluating how to proceed with any distressed loan.
One potential land mine must be specifically highlighted here. Without getting too technical, in Indiana there needs to be language in the deed protecting against a merger of the mortgagor's fee simple title and the mortgagee's lien interest, which merger could extinguish the mortgagee's rights under the mortgage. Without the appropriate language expressing the intent of the parties in the deed, the lender's interest in the property could become subject to junior liens without the right to foreclose. So, be sure that you or your lawyer inserts an anti-merger clause into the deed. Please contact me if you want to see an anti-merger clause our firm has used.