The A,B,C's of Deeds In Lieu of Foreclosure

Posted on September 24, 2010 by Nycole A. Thompson

 

In today’s economic climate, homeowners in default on their note and mortgage obligations may believe that foreclosure is inevitable.  However, a deed in lieu of foreclosure is an alternative that homeowners facing foreclosure should consider.

 

I. Advantages

1. Virgin Islands law[1] recognizes the social desirability of allowing a commercial lender and borrower to “workout” a problem loan through a deed in lieu of foreclosure, noting that it is “common for a mortgagee to take a conveyance from the mortgagor in full or partial satisfaction of the mortgage obligation and as a substitute for foreclosure.” Land Holdings (St. Thomas) Ltd. v. Mega Holdings, Inc., 1999 WL 1044836 at *4, n. 5 (D.V.I. 1999) (citing, Restatement (Third) Property: Mortgages § 8.5, at 608 (1997))

2. The lender may opt for a deed in lieu of foreclosure if the debt is so large that the borrower cannot repay it.  

3. The Virgin Islands Stamp Tax Act imposes a two percent excise on the value of real property transferred “by instrument of conveyance.”  33 V.I.C. § 121(a)(1) (1994). However, an exemption from the Virgin Islands Stamp Tax specifies that excise tax “shall not apply to a transfer of title ... solely in order to provide or release security for a debt or obligation.” 33 V.I.C. § 128(a)(2) (1994). Conveyances by deed in lieu of foreclosure may be exempt from the Virgin Islands Stamp Tax because the borrower transfers the property to the lender in order to satisfy a debt or obligation. Therefore, the borrowers should execute and submit an Affidavit For Exemption From Stamp Tax in order to request an exemption from the Virgin Island Stamp Tax.

4. Executing a deed in lieu of foreclosure saves the parties the time and money.  The lender will obtain title to the property immediately rather than waiting for the legal proceeding to conclude. The parties also save the legal fees and costs associated with a judicial foreclosure and Marshal's Sale.

5. By executing a deed in lieu, the lender typically accepts the property in full satisfaction of the debt. The lender may even agree to waive its right to seek a deficiency judgment against the borrower.

II. Beware

 

1. The mortgagee (usually the lender) always must be on the alert for junior interests because a “deed in lieu of foreclosure is not, after all, a foreclosure, and it will not operate to terminate such [interests].” Land Holdings (St. Thomas) Ltd. v. Mega Holdings, Inc. 1999 WL 1044836 at *5 (D.V.I. 1999) (citing, Restatement (Third) of Property (Mortgages) § 8.5 cmt. b, at 612)). Examples of the types of liens that can be filed against real property are tax, construction and homeowners association liens.

2. Property taxes have to be paid in order to record the Deed In Lieu in the Office of the Recorder of Deeds. Therefore, if the borrower has not paid property taxes, the lender will be required to pay the property taxes before the Deed in Lieu will be recorded. The lender can request a Property Tax Status report. The Office of the Recorder of Deeds charges Twenty Five ($25.00) and 00/100 Dollars for a Property Tax Status Report.

II. Checklist

1. Obtain a Property Tax Status Report to determine whether or not property taxes have been paid. 

2. Draft a deed in lieu of foreclosure

3. Draft an affidavit for exemption from the Virgin Islands Stamp Tax. 

4. Draft a release of mortgage. 

5. Fees and Costs For Deed In Lieu incurred by:

a. Ordering a Property Tax Status Report.

b. Obtaining an Updated Title Search to verify that there are no liens/encumbrances on the property.

c. Drafting the Deed In Lieu.

d. Drafting the Affidavit for Exemption of Property Taxes.

e. Drafting the agreement to forgive any deficiency (the amount of the loan that is not covered by the sale proceeds) that remains after the house is sold.

f. Paying Fees to Record the Deed at the Office of the Recorder of Deeds. The recording fee will be $15.00 for the first $3,000.00 of the value of the property + $1 for each additional $1,000.00 of the value of the property + $1 for each page to be recorded (the tax clearance letter is considered a page so add $1 for this letter, as well) + $2.50 for the first page of any attachment (in this case, the Affidavit for exemption from Stamp Tax) + $1.00 for the other pages of the attachment. 

g. Paying attorney’s fees.

h. Dismiss the judicial foreclosure pending in Court.

Nycole Thompson is an attorney with the Litigation Practice Group of BoltNagi PC. a full service business law firm in St. Thomas, Virgin Islands.


[1]In the absence of such local law to the contrary, the rules of common law as expressed in the American Law Institute's restatements of law shall be the rules of decision in courts of the Virgin Islands.  Land Holdings (St. Thomas) Ltd. v. Mega Holdings, Inc., 1999 WL 1044836 at *4, n. 5 (D.V.I. 1999) (1 V.I.C. § 4).

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"White Knights" for Residential Mortgage Workouts

Posted on August 9, 2010 by A. Jennings Stone, III

 

One of the areas of practice for BoltNagi PC is commercial and residential mortgage foreclosure law.  Although the substantive law governing commercial and residential mortgage foreclosures is virtually identical, commercial borrowers have an important advantage over residential borrowers:  If a commercial borrower is facing foreclosure, it can seek out new investors or a “white knight” to get it out of trouble.  Residential borrowers don’t generally have that option.

 

However, residential borrowers actually do have a network of potential “white knights” who can help them get back on track:  Family members.  Family members are usually deeply vested in one another’s relative success, and the burdens that are occasioned by the loss of a home for one family member can have ripples throughout the rest of the family.  Foreclosed home owners often have to turn to other family members for financial support after the fact, and there is no mechanism for supportive family members to recoup the money that they spend.  And, arguably, that money could have been better spent reinstating the defaulting home owner’s loan.  If a borrower’s family members could be encouraged to help the borrower become current on his or her payments and stay current, then everybody wins.

Usually, a white knight in a commercial context gets an interest in the company in exchange for its investment.  Lenders could experiment with similar (and creative) incentives to encourage “investment” in a troubled mortgage loan by family members.  Incentives for family members might include a lienable interest in the property (with the approval of the mortgage lender) up to the amount that the family members contribute to reinstating the loan.  If a lender agrees to guarantee repayment of those amounts—either through some sort of guaranty or subordination of the lender’s mortgage interest to these (relatively) miniscule amounts—then family members would be even more enticed to help “bail out” a family member who has fallen on hard times.

An alternative to the subordination idea might be for lenders to offer some sort of guaranteed rate of return—an eighth (or even a tenth) of a percent shaved off the interest rate—so that family members see this as way to assist their family members without throwing good money after bad.  The key is not to make these arrangements some kind of alternative to regular investments.  The key is simply to allow family members to contribute to the well-being of the borrower with some kind of guarantee that they will see their money again.  This plan could even be spread across several family members, with each member contributing a small amount, without any single family member taking on the enormous burden of bailing out the borrower.

Even if these suggestions are ultimately unworkable, borrowers, family members, and lenders should be encouraged to experiment along these lines.  The incentives for family members to invest in one another’s success are based on informal age-old family bonds.  If these naturally-existing loyalties can be retooled and incentivized in the context of

residential mortgage loans, then the same incentives that exist for commercial investment can be brought to bear on the problem of residential mortgage foreclosures.  Given the right circumstances, it is generally beyond dispute that family members will rally to help one of their own, so long as the downside risk for any one of them is not too great.

 

A. Jennings Stone is an attorney in the litigation practice group and concentrates his practice in the area of foreclosures at the law firm of BoltNagi PC. BoltNagi PC is a full service business law firm in St. Thomas, Virgin Islands.

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