Next up as a quicker alternative to foreclosure: deeds-in-lieu
WASHINGTON — Short sales have been the hot solution for financially stressed homeowners and their lenders for the past year, but another foreclosure alternative is about to take center stage: deeds-in-lieu.
Some of the largest mortgage servicers and lenders in the country are reaching out to carefully targeted borrowers with cash incentives and a simple message: Let's bypass the time-consuming hassles of short sales and foreclosures. Just deed us the title to your underwater home and we'll call it a deal. We won't come after you to collect any deficiency between what you owe us on the mortgage and what we obtain from the home sale. We might even be able to wrap up the whole transaction in 30 to 45 days. How about it?
Mortgage companies say troubled borrowers increasingly are signing up. One of the largest servicers, Bank of America, has mailed out 100,000 deed-in-lieu solicitations to customers in the past 60 days, and its volume of completed transactions is breaking company records, according to officials.
What precisely are deeds-in-lieu? Formally called deeds-in-lieu-of-foreclosure, they are voluntary transfers of property ownership from borrowers to creditors that make court-directed foreclosures unnecessary.
The concept is one of the oldest in real estate, but it got a special boost this year when the Obama administration included it as an option in its Home Affordable Foreclosure Alternatives program and mortgage giant Fannie Mae cut the penalty time for homeowners who use the technique from four years to two before they can qualify for another home mortgage.
Deeds-in-lieu also are surging because they provide a win-win for borrowers and mortgage investors that short sales often cannot match. Tops on the list: speed. Travis Hamel Olsen, chief operating officer of Loan Resolution Corp. in Scottsdale, Ariz., said deeds-in-lieu represent "a very expeditious way to move on."
"A lot of owners just want to be finished with it, now," he said. "They don't want to deal with (the house) anymore." They don't want to deal with real estate agents, signs on the front lawn or potential buyers coming in with lowball prices. But they also don't want to simply walk away — strategically default — because that will crater their credit files and scores for years.
Greg Hebner, president of the MOS Group Inc. of San Diego, which works with banks and investors to resolve default situations, said a key motivation now is that lenders are stuck with massive backlogs of underwater homes that haven't gone through foreclosure and been put on the market — the so-called shadow inventory.
Not only is it cheaper for the banks and investors to do deeds-in-lieu to gain control of those properties, but with current mortgage rates below 5 percent, they're likely to be able to resell them faster and on potentially more favorable terms.
"If you can get a lot of inventory moving in the next couple of months (prime homebuying season)," said Hebner, "you are solving a lot of problems."
Matt Vernon, Bank of America's top short sale and deed-in-lieu executive, said the technique works so well for both borrowers and mortgage owners that his company is running pilot programs in major housing markets to alert borrowers not familiar with deeds-in-lieu.
To sweeten the pot, Bank of America is offering cash incentives that range from $3,000 to $15,000 — and is getting a strong response, according to Vernon.
What are the downsides or limitations of deeds-in-lieu for homeowners? Probably the most important, say experts, is that they don't work for every situation involving serious mortgage default. For example, if you have equity in the property, you'll probably want to pursue a loan modification first, then a short sale, rather than hand your equity stake over to a lender.
Deeds-in-lieu also usually don't work when there are multiple mortgages from different creditors encumbering the property. And though deeds-in-lieu do less damage to borrowers' credit histories than foreclosures or bankruptcies, they definitely leave a mark. Fair Isaac, developer of the widely used FICO credit score, says on its "MyFico" website that deeds-in-lieu and short sales are both labeled as "not paid as agreed" accounts and are treated the same by the FICO scoring model.
Ken Harney can be reached at firstname.lastname@example.org.