Kenneth Harney: Foreclosure alternative gaining favor
Short sales have been the hot solution for financially stressed homeowners and their lenders for the past year, but here's another potent foreclosure alternative that's about to take center stage: deeds in lieu.
Some of the largest mortgage servicers and lenders in the country are gearing up campaigns to reach out to carefully targeted borrowers with cash incentives that sometimes range into five figures, plus 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 as little as 30 to 45 days. How about it?
Mortgage companies say troubled borrowers are increasingly signing up. One of the largest servicers, Bank of America, has mailed 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 are deeds in lieu? The full name is 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-box 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, a Scottsdale, Ariz., firm that works with lenders to solve troubled borrowers' problems, said deeds in lieu represent "a very expeditious way to move on" for underwater borrowers who are facing potential foreclosure.
"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 or signs on the front lawn that reveal their financial squeeze to neighbors. They don't want to haggle with potential buyers coming in with lowball offers. But they also don't want to simply walk away -- strategically default -- because that will crater their credit files and scores for as much as seven years.
Greg Hebner, president of the MOS Group of San Diego, which also works with banks and investors across the country to resolve defaulting borrowers' situations, said a key motivation is that lenders are stuck with massive backlogs of underwater homes that haven't yet gone through foreclosure and been put on the market -- the so-called shadow inventory.
Not only is it cheaper for them to do deeds in lieu to gain control of those properties, but with mortgage rates below 5 percent, they also will probably be able to resell them faster and on potentially more favorable terms in the summer and fall.
"If you can get a lot of inventory moving in the next couple of months" of prime home-buying season, Hebner said, "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 borrowers and mortgage owners that his company is running pilot programs in major housing markets to alert borrowers who might benefit but are 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, Vernon said.
What are the downsides or limitations of deeds in lieu for homeowners? Probably the most important, experts said, 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 the lender.
Deeds in lieu usually don't work when there are multiple mortgages from different creditors encumbering the property. Also, 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, said on its "MyFico" Web site that deeds in lieu and short sales are treated as "not paid as agreed" accounts and are treated the same by the FICO scoring model.