As of March 1, 2013, Fannie Mae has implemented new deed-in-lieu guidelines, streamlining the process and allowing borrowers who are current with their loan to be eligible. Previously, only borrowers who were delinquent were eligible. Now, if borrowers who have stayed current with their loan payments experience either the death of a borrower or co-borrower, or the long-term or permanent illness or disability of a borrower or co-borrower or dependent family member, they too would be eligible for a “mortgage release,” which is what the program is called.
As further incentive, Fannie Mae and Freddie Mac will offer loan servicers a payment (increased from $275) of $1,500 for deeds-in-lieu that comport with Fannie/Freddie guidelines. These incentives are bigger push from Fannie Mae and Freddie Mac, who first delegated short sale and deed-in-lieu authority to the servicers in October of 2012. http://www.fanniemae.com/portal/about-us/media/corporate-news/2012/5877.html
For further information on the new eligibility guidelines for “Mortgage Release” from Fannie Mae and Freddie Mac, visit http://www.knowyouroptions.com/avoid-foreclosure/options-to-leave-your-home/overview .
What is a Deed-in-Lieu?
A deed in lieu of foreclosure is a deed given by a trustor (borrower) to the beneficiary (lenders) to avoid the inconveniences of foreclosure. The transfer of title to the party holding a lien on that title destroys the lien. Therefore, the beneficiary takes title to the property free and clear of its former lien. (Bernhardt, Cal. Mortgage and Deed of Trust Practice (3d ed.2000) § 7.2, pp. 474-475) In California, the borrower is the trustor on the deed of trust, and the lender is the beneficiary. Accordingly, when the borrower deeds back the property to the lender, it is a voluntary transfer that skips using a trustee to conduct the trustee’s sale (non-judicial foreclosure sale).
If a lender accepts a deed-in-lieu, the borrower is usually released from the underlying debt of the promissory note but it is specific to the language contained within the deed-in-lieu.
“A security interest cannot exist without an underlying obligation, and therefore a mortgage or deed of trust is generally extinguished by either payment or sale of the property in an amount which satisfies the lien.” (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1235.)
Pros and Cons for Lenders Accepting the Deed-in-Lieu
When lenders accept a deed-in-lieu, they step into the shoes of the borrower and thus are at risk for junior liens like judgment liens, support liens and tax liens. Accordingly, most lenders prefer to conduct a trustee’s sale to wipe out any junior encumbrances. However, if a title company will insure clean title, then lenders can accept the deed-in-lieu without that concern. Additionally, as a condition of accepting the deed-in-lieu, the lender can choose to inspect the property and require that it be broom clean before the lender will record the deed-in-lieu. This reduces the cleanup work for a lender or the risk that a prolonged vacancy will subject the property to vandalism and theft.
If you are a creditor dealing with a matter similar to the contents of this article and believe you need real estate legal representation, please contact the Law Offices of Peter N. Brewer at (650) 327-2900, or visit our website at www.BrewerFirm.com.