Consider deed-in-lieu before a foreclosure

Despite credit hit, benefits may surprise you

DEAR BENNY: What are the pros and cons of a deed-in-lieu of foreclosure? –Tom

DEAR TOM: A deed-in-lieu is where you give the deed to your house to your lender and the lender does not foreclose. Thus, the concept "in lieu," meaning "instead of."

The pros of a deed-in-lieu include unloading your property with little hassle; not having to suffer the embarrassment of having the sheriff hold a foreclosure auction right on your front porch (which is the practice in many parts of the country); and you can reach agreement with your lender in advance as to how much money (if any) you will have to pay the lender.

In many deed-in-lieu arrangements, while the lender will agree to take the house back and cancel your loan, sometimes it comes at a cost, i.e., you will have to pay something for this. Compare this to a foreclosure, where you won’t know what the house will sell for, and in many states you can be sued for the difference between what you owe and what the house sold for (called a deficiency judgment).

One more positive: Congress just extended the "forgiveness of debt" law for 2013, so in many situations you will not have to pay tax on the debt that was forgiven when the lender took the deed-in-lieu.

Compared to a foreclosure, I cannot think of any negatives by doing a deed-in-lieu. However, if a short sale is at all possible, I would opt to go that route instead of giving the deed to your lender. But whether you lose your house by way of a foreclosure or a deed-in-lieu, or enter into a short sale, your credit will be seriously impacted.

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DEAR BENNY: My husband took out a reverse mortgage in 2005. I was 58 and he was 62 at the time. I had to give him a quitclaim deed, and later I was put back on the deed.

We have contacted our lender and asked if I could be put on the reverse mortgage or refinance it. They said no to both. We have tried to refinance with other companies, but were told we would have to come up with at least $30,000 to do this!

I recently came across an article about Bennett v. Donovan, a U.S. Court of Appeals for the District of Columbia case where two widows have brought suit against HUD, and Judge Laurence Silberman said that the intent of the law was to let the widows remain in their homes until they died, moved or sold.

Has this become the law yet? I want to be protected in case something happens to my husband. –Donna

DEAR DONNA: The Bennett case involved only a procedural issue: whether the two widowed spouses had legal standing to sue. The court held that they did and sent it back to the lower court for a trial on the merits. However, the judge did write the following: "… We admit to being somewhat puzzled as to how HUD can justify a regulation that seems contrary to the governing statute."

HUD initially authorized lenders to require the house to be sold if the deceased spouse was the only one on the mortgage. However, as the judge pointed out, the statute specifically states "for purposes of this subsection, the term ‘homeowner’ includes the spouse of a homeowner."

There are two issues pending in the court case. First, can the surviving spouse be permitted to stay in the house after their spouse dies? And second, can the surviving spouse be allowed to pay off the mortgage by paying the lesser of the mortgage balance or 95 percent of the current appraised value of the property?

Stay tuned — I never guarantee everything, but this is a hot consumer issue being handled by AARP. I suspect it will end up favorable for seniors.

DEAR BENNY: Thanks for your recent article, "7 steps to protect condo funds from embezzlement." I wrote an article about a similar topic after a woman was arrested last month for embezzling funds from her community association. She used some of the funds to cover operating costs for a restoration project she organized, which involved a restaurant in the area. She was only the association’s secretary, but was given access to their funds because she was well-trusted by the community.

In my article I recommended most of the control measures that you recommended. Here are some additional steps a condo association can take to protect itself:

1) Make sure your bank doesn’t authorize access to the bank account to anyone without a corporate resolution authorizing it. That bank gave the woman mentioned above an ATM card just because she told them she’s an officer. She used the ATM card to purchase food for herself at local markets.

2) The board of directors should review the organization’s financial statements, in advance of the board meeting, on a monthly basis.

3) Review the property manager’s accounting policies and procedures manual.

4) Review the property manager’s computer system safeguards concerning the condo association’s accounting and other confidential data.

5) Review the property management company’s financial statements with detail concerning the condo association’s accounts. It’s common for the property manager’s financial statements to be audited every year or two. The condo association might insist on an audit if one hasn’t been performed.

Although an audit or review every year is sound management practice, audits are expensive and smaller organizations can’t afford them every year. I recommend they be performed occasionally. In the absence of an audit or review every year, an organization should have its financial statements compiled at least twice a year by an independent accountant. –Gary

DEAR GARY: I agree with all of your points except the last one. I recognize that an audit (or even a review) is expensive, but in my opinion, every association must obtain one of these on a yearly basis.

First, many state community association laws require an audit or a review. Second, prospective homeowners want to know the financial status of the association in which they are considering to buy. And third, most lenders want to see these financials before they will be willing to make purchase loans or refinances within that association.

DEAR BENNY: I recently saw the words "lis pendens" on my title report. What exactly does that mean? –Terry

DEAR TERRY: It is Latin for "suit pending." Under most state laws, depending on the circumstances, if you want to put a hold on someone selling property, you file with the local recorder of deeds a document entitled "lis pendens." Your state law will govern the procedure and the requirements, but if done properly, it effectively stops the homeowner from selling or refinancing. It usually takes a judge to remove it from land records. Talk to your lawyer about your situation.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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