Bill Schuette, Attorney General of Michigan, referred to the Michigan housing crisis as a "perfect storm." Job losses coupled with rising mortgage payments and depreciation in property values have led to some of the highest foreclosure rates in the country. A deed in lieu of foreclosure is an agreement that struggling homeowners have opted to attempt prior to being foreclosed upon.
How It Works
A deed in lieu of foreclosure deal occurs in Michigan when a lender agrees to accept the title or deed to a property in exchange for cancelling debts associated with that property. The reason lenders agree to this process is because it is less expensive for them than the costs they incur through a full-fledged foreclosure. In both cases, the lender ends up with the deed to the property and sells it in order to retrieve as much of the mortgage loan back as possible.
There are a number of issues a lender will consider prior to agreeing to a deed in lieu of foreclosure request. These include: whether the property in question has any other liens attached to it, the fair market value of the home versus the amount of outstanding debt owed, if the homeowner has attempted to prevent foreclosure in any other way, and the estimated final losses to the lender after the property is sold at auction.
The office of the Michigan Attorney General warns homeowners to be wary of anyone who offers to negotiate for them for a fee. These groups often refer to themselves as "foreclosure prevention specialists" and prey upon desperate homeowners. The Michigan Attorney General's Office reminds Michigan residents that lenders are willing to speak with homeowners directly and that there is no need to pay a middle-man to make the calls. However, it is important that you have an attorney look at your contract after the lender has agreed to a deed in lieu of foreclosure and before you have signed it. Most deed in lieu deals contain a deficit amount, and a contract may state that you are ultimately responsible for the money the lender loses. You want your deed in lieu of foreclosure agreement to release you from all future liability deficiency amounts, and an attorney can help you do this.
Executing the Deed in Lieu
Once your deed in lieu of foreclosure document has been drafted in a way that best protects you, you'll need to sign several legal documents. The first will set out the terms and conditions of the agreement and is signed by both you and the lender. You will also sign the deed, conveying legal ownership of the property to the lender. The lender will mark the note as "paid" and will give you a document that states that the debt is canceled. The lender will also give you a document that waives its right to come after you for the debt it is unable to recover through the sale of the property.
The Mortgage Debt Forgiveness Tax Relief Act is applicable until the end of 2012. This act says that you don't need to pay income tax on debt that has been forgiven by the lender through a deed in lieu of foreclosure agreement. However, certain conditions need to be met, so check with a tax specialist to ensure that your particular taxes are properly filed.