Black and Buono Blog

...by Kiley Black

A Deed in lieu of foreclosure is becoming an increasingly popular alternative to foreclosure.  A “deed in lieu” means the homeowner transfers all their interest in the property to the lender in order to avoid a foreclosure. The main difference: the transfer is voluntarily made. However, there are some limitations and restrictions you must be aware of if you are contemplating a deed in lieu of foreclosure.

Creditors Claims - Preferences: There is the possibility that other creditors of the Mortgagor may attempt to void the conveyance as a fraudulent transfer or a preference under bankruptcy law.  In order to prevent such a re-characterization, you have to demonstrate that the value of the property is less than the amount of outstanding debt.  You can do this by obtaining an appraisal, which needs to show the current value of the property is now less than the amount of outstanding debt owed under the note and mortgage at the time of the deed in lieu.  Massachusetts has adopted the Uniform Fraudulent Transfer Act and, in doing so, has created a four year period for avoidance of fraudulent conveyances.
 
An Absolute Conveyance -Freely Made: The deed in lieu should indicate that it is an absolute conveyance and that there are no other agreements between the parties with respect to the property.  As a practical matter, this means there cannot be agreements between the parties that would allow the Mortgagor to make a claim in the future, that despite the recording of the deed, the actual intent was to allow for redemption and reacquisition of the property by the Mortgagor if future payments were to be made.  Also, to avoid any suggestion of duress, undue influence and coercion, the deed should also recite that it is freely and fairly made.
 
Affidavit from the Mortgagor: The intent of the Mortgagor should be confirmed by a satisfactory Affidavit, which states that the conveyance is an absolute conveyance, freely and voluntarily made, not given as a preference against other creditors of the Mortgagor, and that the consideration for the deed includes the cancellation of all debts and charges secured by the mortgage (describing the mortgage and the recording information) and the release of the mortgage.  
 
Payoff All Outstanding Mortgages and Liens: Unlike a foreclosure, a deed in lieu is a voluntary conveyance and, therefore, subject to all junior mortgages and liens that would normally be extinguished by a proper foreclosure.    Hence, you will need to obtain and record the necessary releases of all other mortgages and liens on the property or our title insurance policy would need to take an exception for the same.

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