Loss Mitigation – When A Deed-In-Lieu Isn’t
This is one of those concepts that appears from time to time in case law and is always worthy of mention to anyone involved with mortgage foreclosure or mortgage servicing. Sometimes what is intended to be a deed-in-lieu of foreclosure turns out not to be – and then it does not serve the purpose.
It is well-recognized that the deed-in-lieu of foreclosure can be an efficient and amiable way to settle a mortgage foreclosure action. Seeking to avoid the discomfort of a mortgage foreclosure action which proceeds to a conclusion (and sometimes concerned about personal liability for the debt) a borrower may offer, or be invited, to convey the property to the lender. In most instances, this means that the foreclosure ends and need not go to sale. The borrower may also persuade the lender not to pursue a deficiency in exchange for the deed in lieu.
But a deed-in-lieu of foreclosure must truly be an absolute conveyance. The critical concept to observe here is that although a document may call itself a deed, if it is given solely as security for an obligation, it is in actuality a mortgage. Although a well-accepted principle, it was recently enunciated yet again in Leonia Bank v. J.K. Kouri, 3 A.D.3d 213, 772, N.Y.S.2d 251 (A.D. 1st Dept. 2004).
In this case, a husband owed money to a wife arising out of a divorce and so gave her a deed to secure the repayment of the monies due. When he did not make the payments, the wife declared that she was the owner of the property (after all, she had a deed) although the court found that what she held was a mortgage which had to be foreclosed as such. Here it is obvious that the deed was not meant to convey ownership to the wife, but was given merely to secure the husband’s promise of future payments.
This peril is more typically encountered in mortgage foreclosure cases when a settlement gives rise to a modification agreement together with a deed-in-lieu, the deed presumably to become absolute if there is a default on the mortgage modification. Note again, however, that the deed in such a scenario is likely to be viewed by the courts as security for a promise – not a deed absolute. (Then it becomes a mortgage.)
In short, the lesson is that while a deed-in-lieu of foreclosure can be a primary settlement device, some care in making the arrangements is in order lest the deed-in-lieu fail. Anomalously, a servicer not exploring these concepts could in the end wind up with simply an additional mortgage needing to be foreclosed – hardly the goal intended.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.