Deed-in-lieu of foreclosure (DIL) is a disposition option in which a borrower voluntarily deeds collateral property to HUD in exchange for a release from all obligations under the mortgage. Though this option results in the borrower losing the property, it is usually preferable to foreclosure because the borrower mitigates the cost and emotional trauma of foreclosure and is eligible to receive borrower's consideration of $500. Also, a DIL is generally less damaging than foreclosure to a borrower's ability to obtain credit in the future. DIL is preferred by HUD because it avoids the time and expense of a legal foreclosure action, and due to the cooperative nature of the transaction, the property is generally in better physical condition at acquisition.

Unlike a legal foreclosure however, acquisition by DIL does not extinguish junior liens or terminate tenancies. Therefore, there is substantial responsibility placed on the lender to determine that the condition of the property and the title meet HUD's minimum requirements. The most significant change in this option is a new requirement that the lender enter into a written agreement with the borrower, stating specific actions the borrower must perform in order to take advantage of this option and receive the financial consideration.

A. Loan Default

Prior to acceptance of the deed conveying the property to HUD, a the loan must be in default (delinquent more than 30 days), and the cause of the default must be determined to be incurable. Lenders may exercise their discretion to enter into DIL agreements with borrowers whose loans are current but are facing imminent default, and should document their decision in the claim review file. The loan must be in default at the time that the DIL is recorded and the property conveyed to HUD. Under no circumstances shall DIL be available to borrowers who have abandoned their mortgage obligation despite their continued ability to pay.

Qualified properties should first be offered for sale through the PFS program. Lenders who elect to accept a DIL without attempting a PFS must provide written justification for their decision in the claim review file.

  B. Borrower Qualifications

The DIL option may be extended to borrowers who are unable to continue to support the mortgage debt and who occupy the property as a primary residence.

Lenders are authorized to grant reasonable exceptions to non-occupant borrowers when it is verifiable that the need to vacate was related to the cause of the default (job loss, mandatory job transfer, divorce, death), and the subject property was not purchased as a rental investment, or used as a rental for more than 12 months. However, pursuant to 24 CFR 203.357(b) and (c), lenders must obtain the prior written consent of the Commissioner prior to accepting a DIL from a corporate mortgagor or a mortgagor who owns more than one FHA insured property. To obtain this consent lenders should contact:

U.S. Department of Housing and Urban Development
Servicing and Loss Mitigation Division
500 W. Main Street, Suite 400
Oklahoma City, OK 73102

A DIL may not be considered if HUD has elected to pursue a deficiency judgment against the borrower.

 C. Tenant Occupied Properties

HUD will not accept a DIL if the collateral property is occupied at the time of conveyance to the Department, unless HUD determines that the tenancy is in the best interest of the Secretary as defined in 24 CFR 203.671. Lenders should follow the process established in 24 CFR 203.675 to request authorization for an occupied conveyance.

D. Financial Analysis

The lender is required to assess the borrower's financial condition as described in Section H, page 10. HUD expects the lender to project the borrower's surplus monthly income for a minimum of three months and use good business judgment to determine if the borrower has the capacity to support the mortgage debt. Under no circumstances shall deed-in-lieu of foreclosure be available to borrowers who have abandoned their mortgage obligation despite their continued ability to pay. The financial analysis requirement may be waived for borrowers who had previously participated in the PFS program.

  E. Condition of Title

Good and marketable title must be conveyed to the Secretary. The lender must complete a title search and may be required to secure release of junior liens and/or endorsements to the title policy. HUD will not accept title subject to most junior liens including IRS liens. However, HUD will allow liens securing repayment of Section 235 assistance payments, partial claim advances and Title I liens.

It is frequently in HUD's interest for the lender to aid in the discharge or discounted payoff of secondary liens. With the borrower's consent, the consideration payable to the borrower may be applied toward discharge of liens if this will result in clear title.

  F. Required Documentation

A written DIL agreement must be executed by the mortgagor and lender which contains all of the conditions under which the deed will be accepted, including but not limited to:

•  Certification that the borrower does not own any other property subject to a mortgage insured by or held by HUD.

•  Specific transfer date.

•  Notification that there may be income tax consequences as a result of the DIL.

•  Acknowledgment that borrowers who comply with all of the requirements of the agreement shall not be pursued for deficiency judgments.

•  A statement describing the general physical condition in which the property will be conveyed.

•  Agreement that the borrower will convey the property vacant and free of personal property unless an occupied conveyance has been approved by HUD.

•  Itemization of the keys, built-in fixtures and equipment to be delivered by the lender on or before the transfer date.

•  Borrower's agreement to provide evidence that certain utilities, assessments and homeowner's association dues are paid in full to the transfer date unless otherwise agreed to by the parties.

•  The dollar amount of consideration payable to and/or on behalf of the borrower (not to exceed $500).

  FHA does not dictate a specific format for documentation of the deed-in-lieu agreement. The lender is responsible for ensuring that the deed-in-lieu documentation is in compliance with all applicable laws and regulations.

G. Conveyance

The property must be conveyed through a special warranty deed. The original credit instrument must be canceled and surrendered to the borrower, indicating that the mortgage has been satisfied. Whenever possible, title must be conveyed directly from the borrower to HUD. If it is necessary to first convey title to the lender, and then to HUD, the lender must document the reason in the claim review file.

As with all conveyance claims, the lender must record the special warranty deed and deliver the original, recorded deed to the HUD Office having jurisdiction over the subject property within 45 days of the date that good and marketable title was conveyed to the Secretary.

  H. Timing

A DIL must be completed or foreclosure initiated within 6 months of the date of default unless the lender qualified for an extension by first trying another loss mitigation option or has received an extension approved by HUD prior to the expiration of the time requirement.

If the DIL follows a failed special forbearance agreement or pre-foreclosure sale, the DIL must be completed or foreclosure initiated within 90 days of the failure. If the DIL follows any other option, it must be completed or foreclosure initiated within 9 months of the date of default. All extensions of time to initiate foreclosure including “automatic extensions” (Section L, page 12) must be properly identified on form HUD-27011, Block 19.

Failure to comply will result in interest curtailment as more fully described in Mortgagee letter 98-7, FHA Loss Mitigation Program Policy and Procedural Updates .

  I. Lender Incentives

FHA will pay the lender an incentive fee of $250 for administrative expenses. This incentive payment should be claimed on line 129 of form HUD-27011.

J. Borrower Consideration

The borrower is entitled to consideration of $500 upon satisfaction of the requirements of the deed-in-lieu agreement. However, no consideration may be paid if the property is occupied at conveyance.

  K. Claim Filing

As with other conveyance claims, the lender is expected to follow the claim instructions detailed in HB 4330.4 REV1 and any updates thereto. Reimbursable expenses include, reimbursement of title costs, the consideration paid to (or on behalf of) the borrower not to exceed $500, and a $250 lender incentive fee.

L. Lender Reporting Requirements

The DIL must be reported to credit reporting bureaus. The lender is also responsible for filing information return Form 1099-A with the IRS, reporting any discharge of indebtedness in accordance with the Internal Revenue Code.

  M. Option Not to Convey

The lender may elect not to convey title to HUD and to terminate the contract of mortgage insurance. If this decision is made, HUD must be notified on Form HUD-27050-A.

Sincerely,

William C. Apgar
Assistant Secretary for Housing -
Federal Housing Commissioner