Legal Question in Real Estate Law in California

Re: What is a Deed in Lieu?

Mr. Whipple, as is usual, has given a thorough answer to a complex situation.

Questions like your will be more and more common in the upcoming days, due to the housing situation, collapse of mortgage markets, and very possible recession.

Follow Mr. Whipple's advice!

Re: What is a Deed in Lieu?

A deed in lieu of foreclosure need not be accepted by a lender and there is a form for "non-acceptance of deed in lieu" of foreclosure which they routinely record when a borrower tries to do this without their agreement. One reason why they would prefer to foreclose is that a borrower has a right of redemption for one year and the lender cannot get a title policy covering a sale during that time period because no title insurer will insure against the potential of a borrower exercising that right. Another reason is that when a lender gets title by a deed in lieu of foreclosure rather than after foreclosure, he gets the title with all tax liens, judgment liens, or other "warts" that attached to the title--all of these would be extinguished in a foreclosure.

Re: What is a Deed in Lieu?

A "deed in lieu of foreclosure" is just an ordinary deed given by a borrower facing foreclosure to the lender threatening foreclosure. It says in effect, "OK, I give up, I surrender, here's your house, I know you're gonna get it anyway!" to which the lender in effect replies, "OK, I accept the house, I'll tear up the mortgage!"

Remember that "in lieu of" is legal French for "instead of." The idea is that if the parties are both willing, the deed in lieu of foreclosure makes the trustee sale unnecessary, thus saving some expense, maybe some time, and possibly helping the (former) owner's credit by keeping a foreclosure off his or her credit record.

Some lenders will work out further helpful details of the transaction, such as giving the former owner a right to redeem or repurchase for a little while, or giving the former owner the right to lease the house and thus not have to move out right away.

There is a full chapter on deeds in lieu of foreclosure in the Nolo Press book "Stop Foreclosure Now" (paperback) which is well recommended for folks facing foreclosure.

A deed in lieu of foreclosure may be very complicated to work out when there are other significant liens on the property such as junior trust deeds or tax liens.