Does A Deed-In-Lieu Of Foreclosure Automatically Release A Borrower From Personal Liability?

A deed-in-lieu of foreclosure (DIL) is one of many alternatives to foreclosure.  For background, review my post Deeds In Lieu Of Foreclosure: Who, What, When, Where, Why And How.  Today I discuss the Indiana Court of Appeals’ opinion in GMAC Mortgage v. Dyer, 965 N.E.2d 762 (Ind. Ct. App. 2012), which explored whether a DIL in a residential mortgage foreclosure case released the defendant borrower from personal liability. 

Deficiency.  In GMAC Mortgage, the borrower sought to be released from any deficiency.  The term “deficiency” typically refers to the difference between the fair market value of the mortgaged real estate and the debt, assuming a negative equity situation.  Exposure to personal liability arises out of the potential for a “deficiency judgment,” which refers to the money still owed by the borrower following a sheriff’s sale.  The amount is the result of subtracting the price paid at the sheriff’s sale from the judgment amount.  (For more on this topic, please review my August 1, 2008, June 29, 2009 and March 9, 2012 posts.) 

DIL, explained.  GMAC Mortgage includes really good background information on the nature of a DIL, particularly in the context of residential/consumer mortgages.  According to the U.S. Department of Housing and Urban Development (HUD), a DIL “allows a mortgagor in default, who does not qualify for any other HUD Loss Mitigation option, to sign the house back over to the mortgage company.”  A letter issued by HUD in 2000 further provides:

[d]eed-in-lieu of foreclosure (DIL) is a disposition option in which a borrower voluntarily deeds collateral property to HUD in exchange for a release from all obligations under the mortgage.  Though this option results in the borrower losing the property, it is usually preferable to foreclosure because the borrower mitigates the cost and emotional trauma of foreclosure . . ..  Also, a DIL is generally less damaging than foreclosure to a borrower’s ability to obtain credit in the future.  DIL is preferred by HUD because it avoids the time and expense of a legal foreclosure action, and due to the cooperative nature of the transaction, the property is generally in better physical condition at acquisition.

Release of liability in FHA/HUD residential cases.  The borrower in GMAC Mortgage had defaulted on an FHA-insured loan.  The parties tentatively settled the case and entered into a DIL agreement providing language required by HUD that neither the lender nor HUD would pursue a deficiency judgment.  The borrower wanted a stronger resolution stating that he was released from all personal liability.  The issue in GMAC Mortgage was whether the executed DIL agreement precluded personal liability of the borrower under federal law and HUD regulations.  The Court discussed various federal protections afforded to defaulting borrowers with FHA-insured loans, including DILs.  In the final analysis, the Court held that HUD’s regulations are clear:  “A [DIL] releases the borrower from all obligations under the mortgage, and the [DIL agreement] must contain an acknowledgement that the borrower shall not be pursued for deficiency judgments.”  In short, the Court concluded that a DIL releases a borrower from personal liability as a matter of law. 

Commercial cases.  In commercial mortgage foreclosure cases, however, a lender/mortgagee may preserve the right to pursue a deficiency, because the federal rules and regulations outlined in GMAC Mortgage do not apply to business loans or commercial property.  The parties to the DIL agreement can agree to virtually any terms, including whether, or to what extent, personal liability for any deficiency is being released.  The point is that the issue of a full release (versus the right to pursue a deficiency) should be negotiated in advance and then clearly articulated in any settlement documents.  A release is not automatic. 

GMAC Mortgage is a residential, not a commercial, case.  The opinion does not provide that all DILs release a borrower from personal liability, and the precedent does not directly apply to an Indiana commercial mortgage foreclosure case. 

Indiana 2013 Legislation, Part III: Mortgage Statute Of Limitations Amended

This is my third and final post about the relevant Indiana legislation arising out of this year’s session.  At issue is House Bill 1079 and Indiana Code § 32-28-4-1 through 3, which deal with the expiration of mortgage liens, together with the statutes of limitations applicable to foreclosure actions.  Today’s post will supplement my September 3, 2010 post that touches upon the prior statutory language.  (For more on statutes of limitations, including the statute applicable to promissory notes, please read my March 9, 2009 post.) 

Lien expiration/bar date.  There are two components to the provisions in I.C. § 32-28-4.  The first deals with the expiration of a mortgage lien (general rule).  The second involves the deadline to file a foreclosure action (exception to general rule).  In either instance, the applicable time period is the same.  (HB 1079 and I.C. § 32-28-4 also apply to vendor’s liens, which were the topic of my August 7, 2012 post.)

I.C. § 32-28-4-1:  maturity date identified.  As of July 1, 2012, the general rule is that a mortgage lien expires ten years after the maturity date stated in the recorded mortgage.  The exception is if the mortgagee files a foreclosure action within that ten-year period. 

I.C. § 32-28-4-2(a):  maturity date not identified.  If the recorded mortgage does not identify a maturity date (articulated as when “the last installment of the debt secured by the mortgage lien becomes due”), then the expiration of the mortgage depends on the date of the mortgage.  If the parties created the mortgage before July 1, 2012, the lien expires 20 years after the mortgage execution date, unless the mortgagee files a foreclosure action within that 20-year period.  If the parties created the mortgage after June 30, 2012, the mortgage lien expires 10 years after the mortgage execution date, unless the mortgagee files a foreclosure action within that 10-year period.  (Please note that amended I.C. §§ 32-28-4-1(b) and (c) deal with instances in which there is no date of execution in the document.) 

I.C. § 32-28-4-3:  affidavit of maturity date.  Indiana law provides a remedy for situations in which a mortgage fails to identify a maturity date.  The solution is to record an affidavit stating a maturity date.  Such filing triggers the application of 10-year/20-year rules. 

Retroactive?  The General Assembly placed an effective date on the amendment of July 1, 2012.  As a matter of law, post-2012 mortgages omitting a maturity date will expire in 10 years, unless a Section 3 affidavit is recorded.  It’s my understanding there was some confusion about whether a prior change in the law (from 20 years to 10 years) could have applied to pre-2012 mortgages.  The concern was that mortgages over 10 years old suddenly expired with the enactment of the law.  I’m told that, through some litigation that has since been dismissed, the Indiana Attorney General has opined that retroactive application of the date change would be unconstitutional.  In practice, therefore, the 10-year rule does not apply to pre-2012 mortgages (without maturity dates). 

Pointers.  The critical lesson here is that secured lenders should always identify a maturity date in an Indiana mortgage.  Additionally, parties holding mortgages would be wise to examine their Indiana mortgage portfolios to ensure that all mortgages have a maturity date defined.  If the mortgage omits such date, mortgagees should take steps to record the necessary affidavit to protect their lien.