July 31, 2007

A Burdensome Mortgage

By JAY ROMANO, The New York Times

Q. We are buying a new home from a builder who is providing the financing, but we have not sold our current home yet. We believe our asking price is less than what the current home is worth, but we still cannot sell it. Is there any way we can get out from under the mortgage on the current home? Someone mentioned a deed in lieu of foreclosure. How exactly does this work? We have run out of options.

A. Steven Einig, a Manhattan lawyer who specializes in foreclosures, said that a deed in lieu of foreclosure is a negotiated settlement between a lender and a borrower. Basically, Mr. Einig said, when a borrower is in default on a mortgage, the lender has two options: to foreclose against the property – which can be a lengthy and expensive procedure – or accept a deed in lieu of foreclosure in which the borrower voluntarily transfers ownership of the property to the lender in exchange for forgiveness of the balance due on the mortgage.

Typically, Mr. Einig said, unless a borrower is in default - that is, he is already behind in his payments - there is no incentive for the lender to consider a deed in lieu of foreclosure. At the same time, however, once the borrower starts missing payments, late charges begin to accrue and, under most mortgage documents, the borrower can be held responsible for any legal fees incurred by the lender. If the borrower goes into default, Mr. Einig said, there is no guarantee that the lender will consent to a deed in lieu of foreclosure, but could proceed with a foreclosure instead, which would leave the borrower with no house and with a judgment for the balance of the loan not paid off by the foreclosure sale, as well as for the costs of the foreclosure.

There are two other potential problems to consider. First, it is possible that in the documents under which the builder is providing the financing for the new home, the buyer is making a representation that he is not in default of any existing loans. If such a default occurs, it is possible that the deal on the new home could fall through. And secondly, according to David Petrovich, executive director of the Society for the Preservation of Continued Home Ownership, a counseling organization in Oakhurst, N.J., it is possible that any forgiveness of debt on the original mortgage will be considered taxable income on both the federal and state level.

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