We often get questioned on what it takes to further insure a Deed in Lieu of foreclosure (DIL). A recent bulletin received from Fidelity National Title breaks down the requirements very nicely and we are sharing the highlights.
A mortgagor may give up his or her equity of redemption in a separate instrument which is supported by adequate consideration. (The mortgagee’s forgiveness of the mortgage debt is generally deemed to fulfill this requirement.) The instrument is usually called a deed in lieu of foreclosure [“DIL”], presents two major problems: First, the mortgagee acquires title subject to junior (or intervening) liens, encumbrances, etc. Second, if the mortgagor files a bankruptcy petition, the DIL is vulnerable to attack as a preference or fraudulent conveyance. See Handbook of NJ Title Insurance Practice, §8307, for more information.
Note that the mortgagor may not waive the equity of redemption in the mortgage instrument itself, or in a document executed contemporaneously therewith. Accordingly, requests to insure the validity of DILs delivered into escrow at the time of the mortgage closing [are] viewed with skepticism. This is because the same may be attacked as a clog on the mortgagor’s equity of redemption. Handbook, §8117.
Furthermore, if the mortgagor-grantor dies, is adjudicated incompetent, or files a bankruptcy petition prior to delivery of the DIL out of escrow, questions may be raised about its effectiveness as a conveyance of title. Handbook, §3704.
The mortgagee may wish to have the DIL recite that the mortgage is not intended to merge with the fee, in order to facilitate a strict foreclosure suit, if the same should prove necessary, Handbook, §8304, or in the event the transaction is subsequently attacked by the mortgagor’s bankruptcy trustee. Handbook, §§ 2910, 2916 & 8305A. However, most recording officers now take the position that unless the mortgage is discharged before or simultaneously with the recording of the DIL, the realty transfer fee must be paid. Handbook, § 4005. Upon subsequent conveyance to a bona fide purchaser for value, the mortgage may be discharged in the conventional fashion, or by recital in the deed.
In cases where the mortgage is not merged with the DIL, you may be requested to provide so-called non-merger coverage in the owner’s title insurance policy insuring the DIL grantee. Although there is no standard form or endorsement for the same, insurers have agreed to do so in some instances. Nevertheless, owing to the extra risk involved, all such requests must be referred to underwriter counsel and are reviewed on a case by case basis.
Providing title insurance subsequent to a DIL may be supplied, however subject to the following additional requirements:
1- All liens or interests appearing of record, whether prior or subsequent to the recording of the mortgage, are set up as exceptions;
2- Proof is obtained that the mortgagor has vacated the property (or the exception for rights of parties in possession is retained in the title insurance policy);
3- When the property is occupied as a marital residence, the DIL must be executed by both spouses;
4- We will run searches against the name of the DIL grantor (the mortgagor) until the date of the recording of the DIL to ensure that no judgments or other liens appear, and that no bankruptcy petition has been filed;
5- DIL was executed by the borrower after default, and not simultaneously with the mortgage, and was not being held by the mortgagee or by its attorney or an escrow agent under a forbearance or similar agreement;
6- Proof is obtained that the right of rescission (where applicable) has not been exercised;
7- The other guidelines set forth herein and in Handbook §8307 are adhered to; and
8- The ALTA Title Insurance Owner’s Policy (2006) (which contains a creditors’ rights exclusion) is issued.
About World Wide Land Transfer:
World Wide Land Transfer is a full service Settlement and Escrow Company also providing comprehensive title insurance services for all forms of real estate transactions ranging from a home purchase or refinance to the most complex commercial transaction. World Wide Land Transfer is ready, willing and able to answer any questions as they pertain to the potential issuance of title insurance of a deed in lieu. World Wide Land Transfer started predominantly as a PA Title Company in 2004 but grew quickly and started issuing NJ Title Insurance, NY Title Insurance, MD Title Insurance, VA Title Insurance and FL Title Insurance. World Wide now covers most counties throughout the nation.