NEW BEGINNINGS - A NOVEL APPROACH TO OBTAINING DEEDS IN LIEU OF FORECLOSURE

THE STANDARD APPROACH IN NEW YORK

  • Upon default, a ninety (90) day notice is sent to the homeowner as required by NY RPAPL 1304.
  • File sent to foreclosure counsel.
  • Foreclosure counsel requests scheduling of a mandatory settlement conference required by CPLR 3408.
  • Foreclosure counsel requires the homeowner to complete financial forms to determine their “eligibility” for a deed in lieu of foreclosure.
  • Title search obtained to ensure there are no subordinate liens encumbering the mortgaged premises. 

THE DELAY

Even if a deed in lieu is accepted, there will be a substantial delay before the deed is obtained.

Ninety Day Notice 

3 Months 

Filing Summons and Complaint

1 Month

Serving Summons and Complaint

1-2 Months

Time to Answer

1 Month

Mandatory Settlement Conference(s)

3-12 Months

Completion of Financial Forms

1-2 Months

Total Delay

10-21 Months

 

ADDITIONAL PROBLEMS

  • HOMEOWNER FEAR: Failure to disclose assets for fear lender  will pursue  a deficiency judgment.
  • HOMEOWNER INTIMIDATION:  Failure or procrastination in completing financial forms resulting in numerous requests for adjournments of mandatory settlement conferences. 
  • OUTDATED DOCUMENTS: By the time lender obtains all financial documentation, the initial documentation has expired and/or become outdated, creating frustration for all parties.
  • SUBORDINATE LIENS: Homeowner ineligibility when subordinate liens encumber the property.

THE RESULT

  • Deed in Lieu not obtained.
  • Delayed foreclosure action (1 year or more) and ultimately requiring an eviction proceeding.
  • Court frustration at lender’s refusal to resolve the foreclosure, resulting in sanctions for “failure to negotiate in good faith"

THE IRONY

  • LENDER REFUSAL: Some lenders refuse to release the homeowner from personal liability in exchange for a deed in lieu, but still fail to pursue a deficiency judgment upon completion of the foreclosure action.
  • COST EFFECTIVENESS: Most lenders do not pursue deficiency judgments because they are not cost effective.
  • ADDITIONAL COSTS: Typically foreclosure attorneys do not accept contingency fees to obtain and collect deficiency judgments, resulting in additional costs to the lender. 
  • TIME CONSTRAINTS: Since deficiency judgments must be made within ninety (90) days of the foreclosure sale, there is not  enough time to transfer the file to a collection attorney working on a contingency basis.

THE SOLUTION

  • Immediately upon a homeowner’s default, a lender can offer a release of liability if it can determine from the outset, that a deficiency judgment will not be pursued.
  • Lender, or its foreclosure attorney, can send a letter offering to release the homeowner from personal liability in exchange for a deed in lieu, emphasizing, “NO QUESTIONS ASKED” and “NO FINANCIAL STATEMENTS REQUIRED.”

THE BENEFITS

  • SAVE COSTS: Obtaining a deed at the start of the foreclosure action will save years of real estate taxes, insurance, interest, legal fees and costs. 
  • COURT APPROVAL:  Courts will perceive the lender as having negotiated in good faith by offering the release of personal liability in exchange for a deed in lieu.

Even when the foreclosure process must be completed, in order to extinguish subordinate liens, there are still substantial benefits to obtaining a deed:

  1. No mandatory settlement conference requirement.
  2. No delays caused by homeowner litigation. 
  3. No delays caused by homeowner bankruptcy filing.
  4. REO Marketing can begin while the foreclosure is in process.

AVOIDING MERGER

  • Non-merger language should always be included in the deed in lieu.
    •  In order to preserve the mortgage lien.
    • To enable the Lender to complete the foreclosure should any intervening liens need to extinguished.
  • Alternatively, the deed may be conveyed to a third party entity, which may be lender’s subsidiary or affiliated entity.

CONCLUSION

  • Lender should confirm at the outset that a deficiency judgment will not be pursued.
  • Lender should offer a release of personal liability to the homeowners in exchange for a deed in lieu.
  • A letter emphasizing that no financial forms or other requirements are needed should be sent by the lender or its counsel at the beginning of the foreclosure process.