Deeds in Lieu of Foreclosure
Robert P. Lindfors
In this season of fiscal distress, borrowers and
lenders are increasingly negotiating a relinquishment of the loan collateral in
exchange for a forgiveness of the loan indebtedness. The loan collateral is
turned over to the mortgage holder by a deed in lieu of foreclosure. Title
agencies are then asked to title insure the deed.
are countless terms to be negotiated. The borrower and mortgage holder should
rely upon the advice of their own professional counsel. Title agents are not
equipped to advise the borrower or lender.
deed in lieu of foreclosure must indicate the borrower and lender’s mutual
agreement that the trustor’s title be absolutely and unconditionally conveyed to
the mortgage holder. Title insurance is not available if the borrowers reserve
any right to reacquire the loan collateral.
title insurance to be considered, the following criteria must exist:
The deed in lieu of foreclosure must memorialize
the parties’ agreement that the conveyance of title is for the cancellation
of the debt secured by the deed of trust (with reference to its recording
data) and is not intended to be additional security for the loan.
The borrower/grantor must always surrender possession of the loan collateral
to the mortgagee. There is no option or collateral agreement by which the
loan collateral is reacquired.
All junior liens and inchoate claims of liens like contractors’ claims of
liens must be disclosed in Schedule B of the policy as an exception from
coverage. No mechanic’s lien coverage should be extended to the
grantee/lender even if an indemnity is offered.
The cancellation of the mortgage must be recorded contemporaneously with the
an owners’ policy for a liability amount equivalent to the forgiven loan amount
can be issued, the deed in lieu of foreclosure is an extra hazardous risk that
This article is
made available with the understanding that it is informational only, and it has
not been prepared to provide specific legal advice that may be relied on by a
reader. The author is under no obligation to update the information in the event
of a change in the law.