Clarifying Deed In Lieu Of Foreclosure – It’s STILL A Foreclosure



These days the housing news is abuzz with stories of various banks, Fannie or Freddie offering a “deed in lieu of foreclosure” to homeowners who are in danger of losing their home.

A foreclosure by any other name © steheap – Fotolia.com

This is being widely reported as “an opportunity for a home owner to avoid foreclosure and stay in their home”.

But this is something of a misnomer. Whether the foreclosure takes place through ordinary channels or the homeowner agrees to give the deed back to the bank, the same exact thing is taking place. The bank is taking back the title to the property, just as they would with a foreclosure.

In other words, borrowers who are agreeing to a “deed in lieu” are still losing the title to their home. If they participate in a rental program they are not “staying in THEIR home”, they are now a tenant with nothing more than a lease, and a rent payment. Let’s be clear here, this is not a way to “save your home”.

Yes it may allow the occupant of a property to remain in that property and avoid moving, but as far as the home owner is concerned, legally, it’s no longer “your house”. No more worries about maintenance or upkeep. That’s now the landlords responsibility.

I’m not even so sure that this makes sense for the banks either. Tenants are not an inherently better risk than an owner-occupant buyer, and managing rental houses in large numbers is not something that banks are equipped to do. If they can’t manage to keep up with foreclosure or short sale paperwork, or even advise a borrower on the status of a loan modification request, why should we assume that they will be good rental property managers? And the home could them be resold to another investor or investment company, creating further complications for the owner turned tenant.

The general media is reporting this as some kind of new program that is of benefit to home owners who are in danger of foreclosure, but a “deed-in-lieu-of-foreclosure” is really more of a help to the bank, as it allows the banks avoid thousands of dollars in legal fees and other costs related to pursuing a foreclosure – especially if the property is in a state that requires a judicial order to auction the property. Handing a bank a “deed-in-lieu” is basically handing them a free foreclosure.

The thing that puzzles me is why a bank or note owner is unwilling to modify a borrowers mortgage and make that mortgage payment more affordable, but they are more than willing to take back the title and then rent the property back to the same person at a lower, more affordable rent payment. Why not modify and let the owner keep their home, instead of turning the housing market into the worlds largest inventory of rental homes?

It seems to me that if the banks are willing to accept a lower rent payment, they’d be better off to avoid the hassles and costs of property management and just reduce the existing payments on the mortgage, even if only for a limited period of time.

I’m not really speaking of writing down the principal, but simply reducing the payment and keeping a home owner in their home as an OWNER, not a tenant. After all, when renting, one never pays off the home. Reducing mortgage payments to make them equally affordable might mean more years on the mortgage term, but at least the borrower has a fighting chance to get caught up and might be able to make additional principal payments in the future. But a program to convert owners into renters won’t be helpful for home values. It will however, help banks reduce the costs of foreclosure.

If you are a home owner who is in danger of default, and your bank is offering you a “deed-in-lieu-of-foreclosure”, think about it carefully before you agree. How much will your rent be? Can you afford the new rent payment? Do you realize that you are actually doing the bank a favor? After all, banks are not famous for doing things to help their customers. When it comes to the double speak idea of “staying in “your” home”, think twice before you take advantage of this “opportunity”.
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Donna S. Robinson is a real estate investor and investing consultant in Atlanta, GA. You may follow her on twitter at donnaconsults.

Comments

  1. The current HAMP program is a reduced interest rate loan modification for the borrower. It’s treasury subsidized, so the lender/servicer isn’t paying for the modification.

    Principal reduction is being practiced in limited amounts, but it has the potential to create even larger problems. What happens when the guy down the street wants his loan balance reduced also?

    Anyway you look at it, it’s a huge mess. I think there’s light at the end of the tunnel though.