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Deed in Lieu of Foreclosure

This evening I received some awful news on behalf of my clients. (This is the part of the job that gets really sticky for me.)

The bank (Saxon Mortgage) is not going to honor their request for a Deed in Lieu of Foreclosure. Why? Because they have already incurred more costs in the foreclosure process than they wanted to...so for them to just take it back without attempting to recoup any money would not be a sound "business" move. When I heard those words it was like an arrow through my heart. This family has been through enough heartache beyond losing their house.

"Business move?" I had to ponder on this one. The lender was already standing to lose $150K just based on how far upside down the owners are. I have tried to explain to them time and time again, this area is in direct competition with New Construction where the builders can do whatever they want with their prices. So if they actually foreclose they are going to be faced with the same issue as the sellers...a house that has been sitting for months!!!

Any other lender nightmares going on out there?

Posted by Tracy Nicole Hamilton, Realtor®, Elk Grove CA, Sacramento, CA on 04/05/2007 02:48 AM

Comments (17)

california short sales, california reo, california foreclosures, short sales, reo, foreclosure, california real estate

17 Comments on Deed in Lieu of Foreclosure

APR

2007

No surprise.

Lenders (first mortgagee) will rarely accept a DIL unless all efforts to sell have been exhausted. Too many distressed homeowners are misinformed as to the feasibility of stated non foreclosure alternatives. Boilerplate foreclosure advisory letters sent to the homeowner by the lender will list a DIL as a non foreclosure alternative... but in the 25 years and thousands of preforeclosure scenarios I've worked... I can count on one hand the number of DILs I've confirmed as having been accepted by the lender.

There may be portfolios of loans in default considered predatory which may be resolved by the lender taking a DIL to avoid regulatory scrutiny... but these are the exceptions.

non profit preforeclosure counseling (for realtors, too!)

APR

2007

It's rare for a lender to take a Deed in Lieu. All the upside is for the borrower--credit, closure, etc. Furthermore, the lender has the potential to wipe out junior liens and preserve what little equity (if any) may be in the property in hopes that they will have bidders at Trustee's sale.

APR

2007

Thanks to all about the true stories regarding DIL. I had a client who did try to do one after we tried to sell the home as a short sale. The short sale was approved but only if the sellers would agree to take unsecured loan for the shortfall. They were so tapped out that was not even feasible for them. They then tried to do a DIL. My associate noticed recently an NOD was filed so it is only a matter of time before the trustee sale comes up.

APR

2007

Is the bank willing to short the sale?? They may accept that even though not the DIL was not accepted. That is the bad thing working foreclosures - loans are sold off to different investors and in different packages, so one time they may say YES the next no. Good Luck!

MAY

2007

Update ~ They have postponed the Trustee's Sale to entertain the offers that are on the table. I met the appraiser at the property this afternoon. So we are nearing the end of negotiations here...CROSS YOUR FINGERS!!!

MAY

2007

Fingers are crossed for you. You are really working hard and the knowledge you will gain is a master's degree in a short time!!

MAY

2007

Whether a DIL, or short sale, don't forget about the 1099 tax consequences.

An Ethical Approach (to short sales)

JUN

2007

WHAT ARE THE 1099 TAX CONSEQUENCES

JUN

2007

1099 TAX Consequences - based on my knowledge, is where the home owner would have to pay taxes on based on the $ amount left after the home is sold by the bank or sold as part of a short sale.

For example.

I owe $320,000 and have an offer on the house for $240,000

That leaves $80,000 being upside down amount for me.

Bank may issue a 1099 tax statement where $80,000 will show as your income.

The following tax year, this is added to your yearly income and you have to pay taxes accordingly. Depending on your situation you may be able to right off some stuff to keep the balance owed at the end of the year low.

A rough quess on taxes owed on 80k would be around 20k. I don't think you would owe the 80k in whole to the bank after a sale (short sale or bank sale) unless the bank slaps the 80k on you.

Please confirm with a lawyer but this is from what I have gathered to date.

JUN

2007

Check out Bill HR1876 that has passed in Senate and now waiting for Congress to decide what they will do with it. I wrote a post on this as it was introduced back in March 2007. It is a bill that if passed with give relief to those that are victim to pre-foreclosure/foreclosure short sales. Be on the look out for it.

See my post: Tax Relief from Short Sale - will it pass? HR 1876

Not promoting my post, but it is some good information to know about an update on short sale tax relief.

AUG

2007

Hi all. I have been dealing with some short pay situations. I heard about something I didn't know about today. Is it true that even if the house is foreclosed, that the owner of the house will still get a 1099 tax? I know they get one for the difference of the amount they owe and the net payment that the bank(s) receives from a short sale but what about if the house ends up foreclosed on? Anyone know?

AUG

2007

From what I know, if it is a trustee sale - there is no 1099. But check further on this and I will too and come back and let you know my findings.

I think this has been said. Don't give up so quickly. These mortgages change hands often and when 1 say no -- go to the next one. They also may need to look into Chapter 13 and still keep trying to sell the property before it actually foreclosed.

Check with Mike Mueller's webiste -- he's got more information on there regarding short sales. Good luck and if you need more information remember those sites as well as my blog Mother and Daughter Blog and so many experts on the subject. But don't give up -- might have a couple more options to use. And by that time, they may rethink taking an offer. lol

SEP

2007

Anyone know how Citi or AMC are with DILs?

SEP

2007

What are the credit implications of a DIL. I am current on my mortgage, and have never been late, but am certain that I will only be able to pay for another few months as my income has dropped nearly 40%. I contacted Countrywide to start the DIL process today, providing them with the hardship letter and financial info. If approved, what can I expect this to do to my credit rating? I hear so many say that it's the equivalent of a foreclosure, so why call it "In Lieu" if the implications are comparable?

OCT

2007

I know my back will not accept a DIL but what I want to know is when you do a forclosure are you still responsible for paying the property taxes?

And in regards to short sale balance I was told that if you do a short sell you will get a 1099 and pay taxes on the balace and if you forclose you will be sued for the remaining balance and can settle for a small amount if you have cash if not you have to make payments on the remaining balance. Is that crazy or what? Can anyone help? sorry for my bad spelling.

APR

2008

What came of your DIL with Countrywide with you being current on your payments?

JUL

2008

I have done approx. 10 short sales successfully negotiated every one. Saxon is very difficult to deal with. Working on a short sale with them now and they are rude, inflexible and think that a property is worth more than it really is. NEVER again will I deal with Saxon!

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