What is a “Deed in Lieu” of foreclosure ?

This is from a great handout from the California Association of Realtors:

Q 2.  What is the difference between a foreclosure and a deed in lieu of foreclosure?

A A foreclosure refers either to a trustee’s sale foreclosure (not a judicial proceeding) or to a judicial foreclosure (a judicial proceeding).  A deed in lieu of foreclosure means that the lender has agreed to accept title to the property and the borrower transfers title to the lender rather than waiting until the lender forecloses on the property.  A deed in lieu of foreclosure is not a special instrument.  It is simply a conveyance of the property to the lender by grant deed or quitclaim deed; and, in exchange, the lender cancels the promissory note secured by the real property.  In this way the lender can avoid the foreclosure process to regain title to the property.

However, a borrower cannot simply transfer title to the lender without the lender’s permission.  Because some lenders have refused to negotiate and accept the deed in lieu of foreclosure, some creative homeowners have quitclaimed the property to the lender anyway, and have recorded the instrument without the lender’s permission.

In 1993, the California legislature passed a statute to protect lenders from involuntary (and invalid) transfers of real property to the lender.  The lender must record a “notice of nonacceptance of a recorded deed” in the county where the real property is located.   Redelivering a grant of the real property back to the original homeowner (e.g., borrower) does not legally retransfer the title.  (Cal. Civ. Code § 1058.5.)
 
A lender may not want to take a deed in lieu of foreclosure because taking title in this manner does not extinguish any junior liens.  A foreclosure by a senior lienholder essentially wipes out all junior liens.

Copyright© 2007, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) 

If you would like the full handout “Taxation of Forclosures,Deeds in Lieu of Foreclosures, and Short Sales” by the California Association of Realtors please download it from here- http://eastbayplus.squarespace.com/downloads/short-sales/