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What is a Deed in Lieu of Foreclosure?

Posted by attorney Patrick MacQueen

The Basics of Deeds in Lieu of Foreclsoure

Once upon a time, there was a loan, secured by a Deed of Trust, whereby the borrower agreed to faithfully make his payments for a period of thirty years. Then, without notice, the Great Recession hit Arizona borrowers, lenders, and property owners greatly changing Arizona’s economic landscape. As a consequence of Arizona’s new economy, many borrowers have changed the ways in which they view their loan obligations, owners have changed the ways in which they deal with distressed assets, and lenders have revised the ways in which they underwrite loans. These changes are revealed by the waves of foreclosures and loan defaults, the prevalence of short-sales, and requests for deeds-in-lieu of foreclosure – concepts that were foreign to many of us just 5 years ago.

Experience has shown that Deeds in Lieu are a fast and cost-effective way for borrowers and lenders to undo their loan transactions. In particular, Deeds in Lieu have proven to be an effective way for borrowers to “walk-away" from distressed real estate all while preserving credit, saving “face", maintaining government clearances, and obtaining immediate closure to a stressful situation. Similarly, Deeds in Lieu have been particularly beneficial to out-of-state borrowers and borrowers that have been denied the ability to short-sale their properties. While there may be tremendous benefits associated with Deeds in Lieu, they carry significant legal consequences.

A Deed in Lieu of Foreclosure, commonly referred to as a Deed in Lieu, refers to a transaction in which a lender accepts a conveyance of mortgaged property to satisfy a loan that is in default or nearing default. More particularly, a Deed in Lieu is a formal conveyance of real property from a borrower to a lender, which allows the borrower and lender to avoid potentially messy, lengthy, and costly foreclosure proceedings.

The fundamental reasons a lender will accept a Deed in Lieu involve time and money. In fact, upon acceptance of Deed in Lieu, a lender receives immediate possession of the real property being conveyed. Immediate acceptance can save a lender months, and potentially years, of having to deal with distressed real property. Similarly, significant costs, especially in attorneys’ and administrative fees, can be avoided by “cutting to the chase" and accepting a Deed in Lieu.

Execution of a Deed in Lieu by a borrower may allow a borrower to walk-away from a property without an actual foreclosure on their credit report. In addition, many borrowers have moral / ethical objections to walking-away from their homes – a Deed in Lieu may allow for significant “face saving" and some credit savings.

Similarly, because a Deed in Lieu will cut short a borrower’s ownership of property, a borrower may experience significant cost savings by virtue of no longer having to maintain insurance, home-owners association, electrical, and other payments associated with owning real property.

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