Is Deed in Lieu right for you?

Deed-in-lieu of Foreclosure (DIL) was not getting much attention a year ago, but today, a lot more upside-down homeowners are talking about it. This is no accident. Mortgage lenders have started more aggressively pushing for them. Why? Because it saves them money, of course. But is it good for homeowners? Let’s review!

First, what is DIL? DIL is the current homeowner agreeing to sign title over to the lender. This saves the lender from having to go through the time and expense of foreclosure, which can easily cost the lender tens of thousands of dollars. The law will not allow the homeowner to do this unilaterally. The lender has to agree to it.

What are the benefits to the homeowner?

  1. They “get” to leave sooner rather than later with the disposition of their home “resolved.”
  2. The bank typically will pay them to leave—anywhere from $1,500 to $3,000.

What are the draw backs for homeowners?

  1. The homeowner gives up their legal rights and is compelled to leave when the lender says they must leave, rather than the lender having to follow normal legal guidelines.
  2. In other words: the homeowner must leave much sooner than they would in a foreclosure or short sale. So even though a lender may pay them $3,000 to vacate, if they vacate 3 to 6 months before they would otherwise have to, have they saved any money? Or has this COST them money?
  3. DIL does not guarantee that the homeowner is free from further debt liability. Though a lender will agree to take over the home, they will not automatically forgive the unpaid principal after the lender sells the home. The homeowner could still be on the hook for this. Debt forgiveness must be negotiated. This is particularly true for non-purchase money loans (refinances after the purchase of the home).
  4. DIL does NOT mean that the word “Foreclosure” will not still show on your credit report. There are no guarantees how the lender will choose to report it, and they often do report it as a foreclosure, and thus prevent the current homeowner from qualifying for new mortgage financing (to buy a new house) for 7 to 10 years—versus 2 years after a short sale.

Who qualifies?

Note that the purpose of a foreclosure is to clear title of all subordinate claims against the house except for the primary lender (not taking into account property taxes). So if there is more than one mortgage lien against the property, if the home does not go to foreclosure, the junior liens must agree to come off title. They won’t do this for free. So who can get a DIL?

  • If the homeowner has one lien, they should be able to negotiate one.
  • If they have two liens, both purchase money (loans used to buy the home), both with the same lender, they could get one (it will likely take more time to negotiate).
  • If the homeowner, however, has an equity line-of-credit, even with the same lender as the First Trust Deed, they will NOT be able to negotiate a DIL. Similarly, if the 2nd lien is with a different bank, be it an equity-line or purchase money, the homeowner can count on NOT being able to negotiate a DIL. There just won’t be enough money to pay off the junior liens.

Bank representatives are still suggesting homeowners with two and three liens (with different lenders) attempt to get a DIL. I have never seen one or heard of one being successful. The only way to force the junior liens to come off title is through an actual foreclosure process, or SOMEONE will have to pay the junior lien(s) a LOT of money. In a short sale, the buyer can be asked to pay them off. In a DIL, there is no buyer! Only the seller’s money.

Remember, the bank is NOT your friend, despite the cheery disposition of your bank customer service representative. Your lender is more than willing to give you a bad deal if it benefits them. EVERYTHING they do, from the questions they ask you to the documentation they request, is geared toward establishing leverage against you to assist them in collecting their debt. You MUST be educated before engaging them. It usually helps to have some professional guidance.

Who can you trust in real estate?!

A message to the up-side down, financially distressed homeowner….

When I began my career in mortgage financing, one of the first observations I made was the phenomena that occurred any time someone spoke out loud the words “I think I want to buy a home.”

From that moment, the clouds part, they would hear angelic applause, and could bank on finding themselves surrounded by people assuring them this was a VERY good decision. The mantra of support would be like a ceaseless beating drum. Is it no surprise that many of those voices stood to make a considerable amount of money from the decision. Yet the chorus of cheers will also come from parents and friends who have no clue what your financial situation is. They just blindly believe that home ownership is one of the most important accomplishments of a human life–plus, they own, so they want you to join them. (Ironically, once you buy, and realize you now don’t have any money to live on, those same friends and family will laugh and THEN tell you “yeah, welcome to home ownership.”)

Do I sound like a conspiracy theorist when I point out that real estate is a HUGE industry with TRILLIONS invested in the myth of the critical importance of home ownership? With trillions to be made, would it surprise you that all levels of government and politicians are easily recruited to support The Cause? You know politicians LOVE to take credit for increases in home ownership. None of them will talk about concurrent trends that result in upwards of 50% of owners’ income going to keep a roof over their head. Hey, they were all out-spoken fans of the mortgage boom that finally began imploding in 2007. (Then it was everyone else that was short sighted, not them!)

What is my point? You don’t have a friend in real estate. The real estate agent wants their commission, the loan officer wants their points, your bank wants their servicing fee, the politician wants the bank to get their servicing fee (so they can afford more campaign contributions), and every homeowner in your zip code wants their home value to stay high or go higher. Unless you play ball, you are threatening very large and entrenched vested interests. How dare you?!

In other words, as you try and make a sound financial decision for yourself, there will be a lot of voices out there pretending to be looking out for you, that really are not. They are armed with color brochures, elegant spreadsheets, videos, books and every conceivable form of media. But their message is self-serving. They need you to buy, they need you to mortgage your life, they need you to be a part of their big picture–THEIR bottom line.

Bamboozled?!

You will have to separate yourself from the fantasy. You will have to face the fact that you will be hard pressed to find a true friend in the world of personal finance. There are a lot of powerful paradigms out there, and they compete to suck you in. My goal is to shine light in dark waters that others want to keep murky–to show you facts, so you can hopefully make better informed decisions that will lead to a better life.

As a mortgage mitigator, I can’t exaggerate how confused most of my clients are. They are confused as to how they found themselves in such financial trouble when they only did exactly as they were told. They are frustrated because they took their lenders at their word and believed the lender when they said they wanted to work “with” them, but instead treated them like an enemy, and functioned more like an arm of the mafia than an honest business. And they are really confused by what politicians promise on TV, versus how their political programs function (or do not function) in real life. (If I had a dollar for every time a client, on the verge of foreclosure, said to me “but Obama…” stunned that the government was, in truth, offering them NO help–I’d be rich.)

They are confused and frightended because they simply have not yet seen behind the “green curtain” (a la, The Wizard of Oz).

If you are a frustrated homeowner, stressed because you now owe WAY more than your home is worth, and are (or may not be) struggling to make your payment, and certainly now realize that holding on to your piece of the “American Dream” will lead to economic disaster, allow me to re-define the players that got you here. Allow me to shed some light, and part the Wizard’s green curtain:

Your real estate agent is now teatering on bankruptcy personally, because they believed the same bull they were shoveling. They are currently only intersted in talking to you if you are interested in “short” selling your home.

The bank will not be re-negotiating with you (in a truly helpful way), since they can make more money foreclosing on you than modifying your loan terms. They will pretend to be interested in helping you only so they can gather information that gives them leverage to seek deficiency judgements against you in the future. If your loan is serviced by a government agency, like FNMA or Freddie Mac or FHA, this is doubly true. They WANT to foreclose, not help. They are WORSE than private banks.

Politicians have NO interest in helping you, because the only way to help you would be to step on the toes of the banks, and, well, that is just too much campaign money to piss off. But politicias can’t afford to be seen as doing nothing either, so they will create “voluntary” program after “voluntary” program, that the banks will support, and then “volunteer” not to participate in–while America’s foreclosures continue unabated. If you wait on a politician to save you, you will still be waiting when you move your family under a bridge.

Attorneys will love to position themselves as your advocate and hero. But, only if you pay them up-front. You name your cause, and your goal, and they will support it, just keep writing those checks. Their success rate is less than pathetic.

So who do you trust? Your number one asset is your OWN mind–and your ability to do math. But ultimately, YOU are your only advocate. At the risk of sounding melodramatic, you are alone. You don’t have friends. You don’t have anyone to rely on. You are going to need to learn how the game is played, and you are going to have to fight for your rights and success. But I will implore you here, do not rely on anyone else.

Finally, you will likely need to re-define your idea of a successful resolution. For too many, the only resolution they will accept is keeping their home with the mortgage severely discounted. But this approach will almost certainly lead to disappoinment. You will need to expand your definition of success to mean escaping financial liability for onerous debt, maintaining your standard of living, while keeping a roof over your head at a price you can afford and makes sense. If THAT is your focus, you have a real good chance to achieve success and obtain your dreams.

Your biggest challenge will be all the voices out there trying to tell you what you want to hear. They are all self-serving. And they will all tempt you with exciting promises they can’t deliver on. Don’t let them lead you to ruin.

The purpose of this blog will be to provide information that will arm you to defend against the charlatans, and to better understand your options and how to reach your goals. In short, I want you to be able to see behind the green curtain, and see who is really pulling all the levers and why! In the end, Dorothy found her way home. I intend to hep you do the same!

How dare you presume to question the great and powerful OZ!!!