New rules are coming for the deed in lieu of foreclosure on March 1, 2013.  If a loan modification or short sale is not feasible, there will be a practical alternative to foreclosure, regardless of whether you are current on the mortgage payments.  The previous ridiculous rule was that you had to be in default to be considered for a loan modification or short sale, and the banks did not accept a deed in lieu.

Deed in Lieu of Foreclosure

As of March 1st, borrowers who are current on their mortgage but meet certain criteria will be eligible for a deed in lieu of foreclosure. A deed in lieu of foreclosure is a quit claim deed that grants the property to the bank without a foreclosure.  It is a voluntary act by the homeowner and this new rule will allow banks to accept a deed in lieu.  Fannie Mae and Freddie Mac will offer loan servicers $1,500 for every deed in lieu completed following the new guidelines, and they will now be able to offer up to $6,000 to second lien holders to expedite deeds in lieu.  Being able to offer the second lienholders something will certainly facilitate approval.

New Rules for the Deed in Lieu

As part of the new rules, borrowers who are 90 days or more delinquent must be experiencing and be able to document one of 10 hardships: 

Deed in Lieu of Foreclosure

  • Unemployment
  • A hardship that has caused a reduction in income due to circumstances outside their control (fewer regular working hours, for example).
  • A hardship that has caused an increase in housing expenses due to circumstances outside their control.
  • Divorce or legal separation, or separation of borrowers unrelated by marriage, civil union or similar domestic partnership. 
  • Death of a borrower, or death of either the primary or secondary wage earner in the household.
  • Long-term or permanent disability, or serious illness of a borrower or co-borrower or dependent family member.
  • Disaster (natural or man-made) adversely impacting the property or borrower’s place of employment.
  • Distant employment transfer or relocation.
  • Business failure.
  • Other: a hardship that is not covered above.

For borrowers who are current or less than 31 days delinquent, the loan must be for the borrower’s principal residence, and borrowers’ total monthly debt-to-income ratio must exceed 55 percent.

Deed in Lieu Relief

These new rules are slow in coming, but it is good that they will be implemented, and this deed in lieu of foreclosure makes a lot of sense for everyone.  It will help bring some small measure of stability to an already chaotic foreclosure market, help to dispose of homes more quickly rather than run a home through a year long foreclosure process.  For those struggling financially, they will now have a more practical and quicker resolution with the deed in lieu of foreclosure.

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