By Michael R. Sment
The Great Economic Recession continues. Among the devastating problems the U.S. economy continues to endure is the ongoing large number of home foreclosures.
Double-digit increases in foreclosures persist in most California counties. Some are “judicial” (meaning court actions are filed), and intended primarily to obtain post-foreclosure deficiency judgments and liability against borrowers. Judicial foreclosures can be extremely expensive and very delayed, however, often running into the tens of thousands of dollars in fees and costs, and months or years of time. The vast majority of California foreclosures continue to be “non-judicial” foreclosures, meaning that no court action is involved. Instead, lenders use the power of sale contained in the recorded deed of trust, and process a foreclosure through the notice of default and trustee’s sale procedures.
Different options for dealing with real property often exist for California homeowners who have missed payments and are in default or foreclosure. Those options include: a short sale (if the property has value, the loan balance is not too high above that value, and the lender agrees); a non-judicial foreclosure (trustee’s) sale (creating credit problems, potential tax liabilities, and extra fees and charges); a judicial foreclosure sale (the lender’s choice, not the borrower’s, and it can result in personal liability, a deficiency, for amounts owed on the defaulted loan plus court costs); or just a “give-back of keys” (surrender of property) to the lender (NEVER a recommended option).
An additional and increasingly offered option is a deed in lieu of foreclosure (“Deed In Lieu”) from the borrower to the lender. This procedure essentially involves the borrower merely giving back his title and property to his lender, instead of the lender doing a judicial or nonjudicial foreclosure, and a release of loan obligations. This is accomplished simply through an agreement between the parties and then recording a one- to three-page instrument, the deed in lieu. The process is easy and quick and has minimal costs.
In the past, lenders benefited from deeds in lieu by avoiding the time, costs and delays of a foreclosure, while the borrower avoided the foreclosure’s costs and credit implications. Sometimes, borrowers were given time to move or free rent. Other times, lenders were given repainted or repaired, or cleaned, properties, by a certain date.
But, unlike other deeds or instruments in California, a deed in lieu cannot just be given and delivered to the lender or bank without its consent or agreement. A 1993 statute allows a holder of a security interest (a lender) to record a notice of non-acceptance of a recorded deed, like a deed in lieu. See Civ. Code §1058.5(a). A lender that does not want title to a piece of property on which it holds a security interest may record that notice with required information and decline a transfer of title, by deed in lieu or otherwise.
The practical effect of the statute, and the long-standing customary practice regarding such deeds, is that the lender or bank must agree to accept the deed in lieu. This is generally the biggest obstacle to using a deed in lieu. If the lender agrees, however, it is a matter of trying to achieve some terms or conditions favorable to the borrower, like relocation reimbursement.
Michael R. Sment – is a member of the CITATIONS Editorial Board, practices real estate, foreclosure and bankruptcy law in Ventura.
Continue reading – August issue of CITATIONS Page 17