Insuring Deeds in Lieu of Foreclosure

In this season of fiscal distress, borrowers and lenders are increasingly negotiating a relinquishment of the loan collateral in exchange for a forgiveness of the loan indebtedness. The loan collateral is turned over to the mortgage holder by a deed in lieu of foreclosure. Title agencies are then asked to title insure the deed.

There are countless terms to be negotiated. The borrower and mortgage holder should rely upon the advice of their own professional counsel. Title agents are not equipped to advise the borrower or lender.

The deed in lieu of foreclosure must indicate the borrower and lender’s mutual agreement that the trustor’s title be absolutely and unconditionally conveyed to the mortgage holder. Title insurance is not available if the borrowers reserve any right to reacquire the loan collateral.

For title insurance to be considered, the following criteria must exist:

The deed in lieu of foreclosure must memorialize the parties’ agreement that the conveyance of title is for the cancellation of the debt secured by the deed of trust (with reference to its recording data) and is not intended to be additional security for the loan.
The borrower/grantor must always surrender possession of the loan collateral to the mortgagee. There is no option or collateral agreement by which the loan collateral is reacquired.
All junior liens and inchoate claims of liens like contractors’ claims of liens must be disclosed in Schedule B of the policy as an exception from coverage. No mechanic’s lien coverage should be extended to the grantee/lender even if an indemnity is offered.
The cancellation of the mortgage must be recorded contemporaneously with the deed.

While an owners’ policy for a liability amount equivalent to the forgiven loan amount can be issued, the deed in lieu of foreclosure is an extra hazardous risk that warrants caution.

This article is made available with the understanding that it is informational only, and it has not been prepared to provide specific legal advice that may be relied on by a reader. The author is under no obligation to update the information in the event of a change in the law.