alternative to foreclosure

[joseph44]

Hi Everyone,
I recently talked to a potential seller and as we talked he brought
up a subject:Here is the subject Deed in Lieu of Foreclosure New to me he
did not elaborate all he said is it was an option for him.Could someone explain
what is deed in Lieu of foreclosure the good,the bad,and ugly about this?Thanks all and have a good day!!

[Just Information]

A deed given by the mortgagor to the mortgagee when the mortgagor is in default under the terms of the mortgage.

This is a way for the mortgagor to avoid foreclosure.


This is an alternative to a foreclosure.

A Deed in Lieu may be submitted by the borrower by mutual agreement of the borrower and lender.

The ordinary effect of the taking of a Deed in Lieu is to extinguish the lender's deed of trust and vest the lender with title subject to all other existing liens and encumbrances. In effect, the lender becomes the new owner.

The lender is not required to accept the Deed in Lieu and can show his/her refusal by filing a Notice of Non Acceptance.

It is possible for the borrower to come back and reclaim the property accusing the lender of taking unfair advantage.

First, in most cases there must be equity in the property to assure the lender of recouping most of the mortgage balance by taking title and selling the property.

To determine the value and amount of equity in your property, the lender will utilize the services of a certified property appraiser.

The downside to a deed in lieu is the existence, if any, of any junior lien-holders or judgment holder who must be paid in full before the bank considers the proposition.

Most will accept under the following:


Mortgage must be in default
Property must be owner occupant
Borrower does not qualify for any other loss mitigation tool
Must be able to obtain clear title

[joseph44]

Thanks J M, for your promt reply I now learned something new.This site is
very fullfilling it's like a good meal you never leave the table hungry.Thanks
again and have a good day!!

[Jim Johnson]

I would use a deed in this way to take a property as a junior lien holder. Once you have the deed in hand, you notify the senior lien holder you are now the deed holder and they now contact you for all matter concerning the property. Holding a deed like this does not trigger a due on sale clause. It is another way of taking a property with sub 2 financing.

A deed given by the mortgagor to the mortgagee when the mortgagor is in default under the terms of the mortgage.

This is a way for the mortgagor to avoid foreclosure.


This is an alternative to a foreclosure.

A Deed in Lieu may be submitted by the borrower by mutual agreement of the borrower and lender.

The ordinary effect of the taking of a Deed in Lieu is to extinguish the lender's deed of trust and vest the lender with title subject to all other existing liens and encumbrances. In effect, the lender becomes the new owner.

The lender is not required to accept the Deed in Lieu and can show his/her refusal by filing a Notice of Non Acceptance.

It is possible for the borrower to come back and reclaim the property accusing the lender of taking unfair advantage.

First, in most cases there must be equity in the property to assure the lender of recouping most of the mortgage balance by taking title and selling the property.

To determine the value and amount of equity in your property, the lender will utilize the services of a certified property appraiser.

The downside to a deed in lieu is the existence, if any, of any junior lien-holders or judgment holder who must be paid in full before the bank considers the proposition.

Most will accept under the following:


Mortgage must be in default
Property must be owner occupant
Borrower does not qualify for any other loss mitigation tool
Must be able to obtain clear title

[Just Information]

I will have to disagree on this one.

A Deed in Lieu of foreclosure is a customer and lender based transfer of title subject to the lender agreeing to take the property and to forgo the foreclosure proceeding.

The Deed in Lieu of foreclosure document itself is structured in verbiage much different from other types of deeds

(DIL) Deed-In-Lieu of foreclosure is a disposition option in which a mortgagor voluntarily deeds collateral property to a lender in exchange for a release from all obligations under the mortgage

(WD) Warranty Deed in which the grantor warrants the title against defects arising before and during the time the grantor owned the land.

(QC) Quit Claim Deed, which operates, in effect, as a release of whatever interest the grantor has in the property. Grantors of quit clam deeds do not warrant title or possession; they only pass whatever interest they my have, if in fact any exists.

(CT) Certificate of Title is the conveyance of property through foreclosure. The Plaintiff is usually the mortgage holder. The Defendant, one of the names listed, will usually be the owner of the property, although it doesn’t always, nor does it have to be. The date of sale is the date the Certificate of Sale was filed.

(PR) Personal Representatives Deed (or Personal Representatives Certificate of Distribution), the legal proceeding by which the affairs of the deceased are resolved and the estate are distributed.

(SH) Sheriff’s Deed is the result of a lawsuit wherein the Judge has issued a "levy" for the sale of property to satisfy the Judgment.

(TD) Tax Deed is the transfer of ownership acquired through a sale for non-payment of property taxes.

(AA) Agreement for Deed (or Contract for Deed) is an agreement for the installment purchase of real property directly from the seller.

(AF) In the case of co-ops, ownership may be conveyed by an Affidavit.

(LE) Ninety-nine year Leases (Leasehold Estate Deeds) also create beneficial title to real estate and are handled as ownership transfers.

Just by taking deed to a property will not stop a lender from exercising the due on sale clause.

The due on sale clause is a provision in a mortgage enabling the lender to demand full repayment if the borrower sells the mortgaged property.

The due-on-sale clause is a type of acceleration clause that come with most and it usually takes effect when a buyer assumes a seller’s mortgage and monthly payment schedule. Less often, the clause is used when a homeowner misses payments or breaks a term that was agreed to in the contract.

Assumable mortgages require the lender’s approval. When you assume a mortgage, you inherit both its interest rate and monthly payment schedule.

Now keep in mind that when you take a property by way of Subject 2 types of investing you cause the original borrower to be in violation of the terms of the mortgage document and yes the lender can seek remedies against the original borrower.

Just the facts folks.

[Jim Johnson]

If a home was late a couple of payments and the homeowner needed to make up the late payments and get out of the house. And I were to loan (a second) the homeowner the money to make up those late payments, and the homeowner were to default on the loan. The homeowner might actually default on the loan by design. And I were to be given a deed in lieu of foreclosure as the holder of the second, have I not just taken the property with subject to financing and not triggered the due on sale clause? Thanks for your insight on this John.

I will have to disagree on this one.

A Deed in Lieu of foreclosure is a customer and lender based transfer of title subject to the lender agreeing to take the property and to forgo the foreclosure proceeding.

The Deed in Lieu of foreclosure document itself is structured in verbiage much different from other types of deeds

(DIL) Deed-In-Lieu of foreclosure is a disposition option in which a mortgagor voluntarily deeds collateral property to a lender in exchange for a release from all obligations under the mortgage

(WD) Warranty Deed in which the grantor warrants the title against defects arising before and during the time the grantor owned the land.

(QC) Quit Claim Deed, which operates, in effect, as a release of whatever interest the grantor has in the property. Grantors of quit clam deeds do not warrant title or possession; they only pass whatever interest they my have, if in fact any exists.

(CT) Certificate of Title is the conveyance of property through foreclosure. The Plaintiff is usually the mortgage holder. The Defendant, one of the names listed, will usually be the owner of the property, although it doesn’t always, nor does it have to be. The date of sale is the date the Certificate of Sale was filed.

(PR) Personal Representatives Deed (or Personal Representatives Certificate of Distribution), the legal proceeding by which the affairs of the deceased are resolved and the estate are distributed.

(SH) Sheriff’s Deed is the result of a lawsuit wherein the Judge has issued a "levy" for the sale of property to satisfy the Judgment.

(TD) Tax Deed is the transfer of ownership acquired through a sale for non-payment of property taxes.

(AA) Agreement for Deed (or Contract for Deed) is an agreement for the installment purchase of real property directly from the seller.

(AF) In the case of co-ops, ownership may be conveyed by an Affidavit.

(LE) Ninety-nine year Leases (Leasehold Estate Deeds) also create beneficial title to real estate and are handled as ownership transfers.

Just by taking deed to a property will not stop a lender from exercising the due on sale clause.

The due on sale clause is a provision in a mortgage enabling the lender to demand full repayment if the borrower sells the mortgaged property.

The due-on-sale clause is a type of acceleration clause that come with most and it usually takes effect when a buyer assumes a seller’s mortgage and monthly payment schedule. Less often, the clause is used when a homeowner misses payments or breaks a term that was agreed to in the contract.

Assumable mortgages require the lender’s approval. When you assume a mortgage, you inherit both its interest rate and monthly payment schedule.

Now keep in mind that when you take a property by way of Subject 2 types of investing you cause the original borrower to be in violation of the terms of the mortgage document and yes the lender can seek remedies against the original borrower.

Just the facts folks.

[Just Information]

Heck Jim now you just challenged my mind!

Let's see you help a foreclosed property owner by giving them a loan to bring the first current and securing your loan by a second mortgage.

So they default and you as the second mortgage holder will need to exercise your rights of some form of foreclosure proceeding. You foreclose and you take control of the property subject to the 1st mortgage holder now the only way you can have full control of the subject property is to bid up to the amount of the 2nd mortgage and than keep bidding until the 1st mortgage balance is cleared and now you have full control of the subject property.

Like you said this would be by design and is not the way I do business, for me all parties must win in the transaction or it is not worth doing.

Now let's say that you just do the foreclosure proceeding on the 2nd and leave the 1st in place you still do not have control of the subject property until the 1st is no longer in the game for the simple fact that if the 1st forecloses and no one bids or just enough bids to cover the 1st comes in you just lost your 2nd and your investment.

Just because you foreclose in a 2nd position does not place you in a position to assume the 1st with out permission of the 1st mortgage holder.

Any time a property is taken by deed "A name change from one party to another" without paying off the 1st or with approval of the 1st the lender can exercise the "due on sale clause".

Effect of Foreclosure on the Second when the First Forecloses Let's say that you find a foreclosure that is worth $100,000 and the property owner owes the Bank on a 1st mortgage $60,000 with $500/mo P & I and owes a 2nd mortgage $10,000 with $100/mo P & I The Bank (1st Mortgage Holder) is Foreclosing and the property goes to a public sale. The highest bidder will own the property. The proceeds of the sale will be paid to the first mortgage holder (bank) first; to the second mortgage holder second; to other lien holders, if any, third; and the remaining proceeds will go to the owner.

Example: Case 1: You are the high bidder at $75,000 (You are now the owner of the property)



$60,000 will go to the 1st mortgage holder
$10,000 will go to the 2nd mortgage holder
$5,000 will go to the original home owner
Case 2: You are the high bidder at $65,000 (You are now the owner of the property)



$60,000 will go to the 1st mortgage holder
$5,000 will go to the 2nd mortgage holder
Nothing will go to the original home owner
Case 3: You are the high bidder at $60,000 (You are now the owner of the property)



$60,000 will go to the 1st mortgage holder
Nothing will go to the 2nd mortgage holder
Nothing will go to the original home owner
Effect of Foreclosure on the First when the Second Forecloses Same story as above but the 2nd is foreclosing! Foreclosure is worth $100,000 and the property owner owes the Bank on a 1st mortgage $60,000 with $500/mo P & I and owes a 2nd mortgage $10,000 with $100/mo P & I The Bank (2nd Mortgage Holder) is Foreclosing and the property goes to a public sale. The highest bidder will own a note. The proceeds of the sale will be used to satisfy the second mortgage holder. The high bidder now must contact the first lien holder, to purchase the mortgage holders. Keep in mind that no lender has to sell their note. To actually own the property you will have to start a foreclosure proceeding after you purchase the first mortgage. Note: If you do not purchase the 1st mortgage and just hold the 2nd mortgage and the 1st mortgage holder forecloses on the property and not enough funds to cover your note come from the sale or the property is purchased back by the bank "Becoming an REO" you will loose you investment.


Now that said one can place a property in a form of trust that will limit the lenders right to exercise the due on sale clause under certain circumstances.

I said limit not stop - Look at it this way you do it all right - no errors - no mistakes and the lender exercised the due on sale clause so now you are faced with 3 options.

Option #1 Pay off the lender

Option #2 Defend your position

Option #3 Walk away

All cost money - option two and three cost the most.

[Jim FL]

John Michael,
This thread got me thinking a bit, because after reading your response twice, and then re-reading Jim Johnsons response above that again, it just did not make sense......to me anyway.

Here is why.....
What Jim, the other Jim, was proposing, I think I understand.......correct me if I'm wrong here Jim, or John...anyone, heck, it is a discussion.

So, homeowner, who is in default on a first mortgage, the only mortgage secured by the property, needs some cash to reinstate the first.
An investor comes in, agrees to reinstate the first, and secure the funds used to do so, with a second mortgage on the property.
The first is now in 'good standing' with no Lis Pendens against it.
The second note holder, the investor, then has the homeowners, or barrowers on the second unable to repay the second mortgage loan.......so, rather than default, they sign a 'deed in lieu of foreclosure', transferring ownership to the holder of the second, the investor in this scenario.
Follow me so far?

So, the investor, spends some money to reinstate, some cash to create and record a second to secure that money, then a deed, taking title to the property.
Because there is a first position lein there, the investor who took the deed in lieu...(how do you spell that anyway), has the right as far as I understand it, to protect his collateral, by maintaining the first mortgage, which is still in place, and NOT foreclosing, because the funds from the investor secured by the newly created second, reinstated it.

When I read your response John, it made sense, IF the lender who was foreclosing on the first, was not still proceeding...but with the loan resinstated, and the LIS PEN discharged, doesn't that change it a bit?

Seems to be the case in my humble very non-lawyer opinion.
I also recall reading something somewhere, perhaps by Bronchick, I'll need to look for it, about how federal law, or something protects the rights of the second lein holder, in a situation like this.........meaning, the second holder has the right to cure the default of the first, and maintain it, to protect their interest.

or am I wrong......if so, please share and tell.

I don't do things this way myself, instead, I'd just re-instate the first, in exchange for taking title.......in an enity of some sort of course.......no need for the second and all the extra work outlined above.........but, still a way that would technically work, wouldn't it?
I would think, and of course, now I'll look and verify, that the second holder who took title in lieu of foreclosure, would be exempt from due on sale clauses.......how could that clause be enforceable under the above scenario/circumstances.......doesn't seem right if you cannot protect your position when holding a second.

My thoughts anyway,
Jim FL

[Just Information]

Now this is getting to be fun!

Let me add another layer to the game and the risk with 2nd mortgages.

As a second mortgage, you will also risk the potential for a senior mortgage to be extended while continuing to hold first mortgage position thereby undermining the collateral value of any second mortgage.

Second mortgages usually have a higher interest to offset this risk.

In Barnes V Resolution Trust Corporation 664 So 2nd 1171 (fourth district 1995) the second mortgagee (lender) began making payments on the first mortgage after the second mortgagee had foreclosed on the second mortgage. Thereafter the first mortgagee sought to foreclose on the first mortgage. The second mortgagee argued that acceptance of installment payments by the first mortgagee from the second mortgagee estopped the first mortgagee from acceleration and foreclosure.

The Court disagreed and stated that "by terms of the mortgage, the first mortgage holder had a contractual right to foreclose when mortgagors (borrowers) defaulted. The first mortgage holder was not obligated to second mortgagees as they were not parties to the first mortgage, nor did they ever assume the first mortgage and there was no evidence that the first mortgagee...induced second mortgagee to continue making payments to satisfy first mortgage.

Also in Travers v Tilton 134 So 2d 807 (2nd DCA 1961), which suggests that to constitute estoppel, the mortgage holder must engage in conduct which intends, or reasonably calculates, to mislead to the detriment of the party asserting an estoppel.

Now let the games begin until our heads hurt

[Jim Johnson]

John, if the first was cured by the loan making up the back payments (the second), so now it is a good loan, in good standing. Then your second was default and you were to receive the deed. Would that trigger a due on sale?

[Jim FL]

John Michael,
Alright, how about this........by the way, that was good......let's have fun.

Okay, say I am a lender, who makes a loan to homeowner Bob, secured as a second on his home.
Bob, loses his job, and begins to default, not on the first (he pays that from savings), but on the second.
I send him collection letters, call him etc, the whole enchilada, and he still does not make the payments, or cover late fees etc.
I send him one last letter, stating my intent to foreclose, if payment is not recvd by a certain date.
I then offer him an alternative to foreclosure.......a deed to me, as long as title is clear other than the first mortgage.
When Bob deeds the house to me, I merely maintain the first mortgage account, making the payments, to keep my collateral for my second, which I now have title to, secure, until sold.
Are you telling me, with this case law in your post, that the first lender, could then foreclose, even if payments are being made, and unless I was able to come up with enough cash to satisfy the first in full before sale, or even as high bidder, I'd lose my interest completely?

Seems wrong to me.

I understand how if I held that second, and the first foreclosed, or even if I did, because the homeowner refused to sign over title, that the high bidder at sale would get the property, and all lein holders get paid, starting with the first, til money from the winning bid runs out.......meaning in most cases, unless the 2nd bids to cover themselves, they lose everything.
That makes sense to me, and is why I assumed that the risks are so high in holding seconds.

I've had buyers deed houses back to me, when they defaulted on seconds, and not had anything occur.....of course, title was transferred to an entity, not me.
It doesn't stink getting a house back two or three years later, with what was originally an 80% first against them.......especially in this appreciating market.
You'd think with the equity in some of the houses we see here, if this was possible, those first lenders would certainly be taking some action.
I've sent letters to lenders, from one lender to another, telling them we took title to a house, due to default, and from then on to send all account correspondence to us without a problem as well.

Perhaps this will shed some light on where my thinking is coming from.

Take care,
Jim FL

[Just Information]

John, if the first was cured by the loan making up the back payments (the second), so now it is a good loan, in good standing. Then your second was default and you were to receive the deed. Would that trigger a due on sale?

Keep in mind that a due in sale clause in most cases to be vary specific in that fact that if a deed changes ownership with out the permission or the pay off of the first mortgage holder the lender can exercise it's rights under the terms of the agreement!

With that said it is a common curiosity that lenders will work together and some will allow an assumption of the first mortgage.

A lender will simply look at the benefits! Is it cost effective to allow an assumption, to call the note due or to foreclose?

Holding a second mortgage simply has risk!

Back to In Barnes V Resolution Trust Corporation 664 So 2nd 1171 (fourth district 1995) The Court disagreed and stated that "by terms of the mortgage, the first mortgage holder had a contractual right to foreclose when mortgagors (borrowers) defaulted. The first mortgage holder was not obligated to second mortgagees as they were not parties to the first mortgage, nor did they ever assume the first mortgage and there was no evidence that the first mortgagee...induced second mortgagee to continue making payments to satisfy first mortgage.

Default constitutes what?

A breach in contract - A breach in contract has to do with payments and or breach in terms.

So in answer to your question "YES" it can trigger a due on sale (sale is transfer of title).

So the big question is will the lender call the note due!

Let's consider what the courts said The first mortgage holder was not obligated to second mortgagees as they were not parties to the first mortgage, nor did they ever assume the first mortgage and there was no evidence that the first mortgagee...induced second mortgagee to continue making payments to satisfy first mortgage.

Fact: The first mortgage holder was not obligated to second mortgagees