Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

I'm working on several deed in lieu of foreclosure agreements right now.  So, I'm putting to use the thoughts and suggestions offered up to you here (and in prior postings) on this topic.

Here are a couple more frequently asked questions about a deed in lieu of foreclosure:

FAQ #36 - What other factors should I consider?

• Bankruptcy issues
• Fraud/Duress
• Lockbox (once again, focus on the cash [rents] generated by the collateral; "trap" rents in a lockbox and perfect your lien on the cash)
• Clogging of Redemption (take steps to avoid future assertions by the borrower that the structure prevented borrower from paying off the loan and obtaining a release of your lien)

FAQ #37- What are the major provisions (or topics to be addressed) in the deed in lieu agreement?

• Deed Form (General Warranty Deed if possible)
• No merger (you don't want your lien being extinguished because you have obtained "full" title to the collateral pursuant to the deed - the "greater" title evidenced by the deed will extinguish the "lesser" title evidenced by the lien instrument, unless the agreement clearly negates the is general principal [as in all things, check your local law on issues])
• Unconditional and absolute transfer
• Acknowledgment of Indebtedness
• Agreement to Convey Property
• Future Claims
• Representations/Warranties
• Remedies for Default
• Confidentiality

Thanks to Courntey Bristow for her insight, expertise and help in putting this FAQ together.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

• Email This
• Print
• Comments
• Trackbacks

This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

The following questions cover deeds in lieu of foreclosure, which is a situation where borrower literally gives ownership of the commercial real estate to Lender by transferring title to Lender.  

FAQ #34 - In doing a deed in lieu (of foreclosure) transaction, should Lender require a legal opinion covering the deed in lieu transaction, and if "yes," then what should it cover?

• Yes, require a legal opinion from Borrower's legal counsel: treat the deed in lieu transaction more like entering into a new loan than simply a purchase of an asset.  Why? Because the lien will NOT be extinguished and the DIL agreement covers many important matters to the lender (such as the items listed here)
• Due authorization and execution
• Validity and enforceability of documents
• Non-merger (of the Lender's lien [which is NOT released] and the deed given to the Lender
• Releases of any claims against Lender

FAQ #35 - What due diligence items should Lender consider obtaining?

• Taxes: property taxes; transfer taxes
• Environmental Report
• Appraisal/Broker's Opinion of Value
• Physical Needs Assessment Report
• Junior Liens (notice per any intercreditor agreement)
• Green Building/Operating Systems
• Insurance Claims
• Title Certificate or Title Commitment
• List of Payables and Operating Statements
• Current Financial Statement
• Tenant Security Deposits

Thanks to Courntey Bristow for her insight, expertise and help in putting this FAQ together.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

• Email This
• Print
• Comments
• Trackbacks

This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

We've addressed deeds in lieu of foreclosure in the past (link).  Here is some more information on it.

FAQ #32 - When should a lender (or servicer) seek/accept a deed in lieu agreement?

• State's foreclosure process is lengthy
• Immediate threat to the property (is a receiver a better option?)
• Borrower & Lender = common good
• Unable to sell/refinance the property
• Voluntary (on the part of Borrower)
• Unencumbered by multiple loans (and NO mechanics' liens)
• Avoid foreclosure taint
• The property is valued LESS than the loan (if this is not true, then other creditors will be motivated to attack the transfer)

FAQ #33 - What title insurance issues should be considered?

• Do NOT release borrower from warranties of title (in loan documents) as it will void title coverage
• Confirm: loan policy "converts" to or continues as an owner's policy
• SPE (owned by lender) vs. taking title in name of lender
• Creditor's Rights Issues: ALTA 21 not available
• Important: non-merger provision
• Decision: buy new owner's policy or merely obtain binder?

Thanks to Courntey Bristow for her insight, experise and help in putting this FAQ together.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

• Email This
• Print
• Comments
• Trackbacks

We're handling more and more deed in lieu agreements, typically in these situations:

• state foreclosure process is very, very long (such as Florida, where judicial foreclosures clog up the courts)
• the parties desire to avoid publicity (in that a DIL will not hit the papers)
• states where the borrower has a redemption right after foreclosure
• other reasons

Often, the loan is non-recourse against the borrower - with "bad boy" exceptions that form the basis for liability against the other assets of the borrower and (typically) the key principal of the borrower.

So, here's the question: if the borrower is willing and desires to do a deed in lieu, then . . .

• should the deed in lieu transaction itself be FULL recourse, so that a breach of the agreement (example: refuses to close) gives the lender\purchaser something other than specific performance (which is yet another law suit to go along with the judicial foreclosure - in a clogged up court system)?
• without some recourse, how does a lender know that the DIL is not a delaying tactic?
• should the DIL agreement contain a liquidated damages clause (thereby eliminating the need to prove damages)?
• should the conveyancing deed (from the borrower\seller) be a general warranty deed?
• should the borrower\seller place a deed into escrow at the time the DIL agreement is signed (to be released to the lender\purchaser upon a borrower\seller default under the DIL agreement)?
• in the DIL agreement, should the borrower\seller consent to a receiver (if it breaches the DIL), with the receiver having the express power to market and sell the property?

From my perspective, the answers are yes, (n\a: rhetorical question), yes, yes, yes and yes.

They are all good choices.

• What do you think?

Please post your thoughts below.

• Email This
• Print
• Comments
• Trackbacks

This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).  While I've covered this subject before [link], here's another overview of the advantages and disadvantages of taking title (to real property collateral) back from a borrower "in lieu of" doing a foreclosure.

FAQ# 16 - What are the advantages of a Deed in lieu of foreclosure (DIL)?

• A DIL should be used if it can be accomplished quickly (i.e., without extensive negotiation).  It allows the lender to obtain ownership of the property without the cost and time delay associated with judicial or non-judicial foreclosure.  This is very important in states where the foreclosure process is very lengthy (such as Florida [up to 2 years] and Ohio)
• Since a DIL is voluntary, the parties can agree upon the amount and related terms of any deficiency (and thereby avoid a dispute as to valuation), together with a release of any claims against the lender
• Since a DIL is voluntary, the lender can condition its acceptance of the DIL agreement upon receipt of such things as complete and accurate copies of the borrower's financial statements, tax records, leases, service contracts, construction plans, sale contracts, vendor payables, etc., which may result in a better "turn over" of the property to the lender (although a "friendly" non-judicial foreclosure can achieve the same result if the borrower cooperates with the lender and furnishes the information)
• The lender can condition its acceptance of the DIL agreement upon not being placed in a worse position than if it foreclosed (i.e., there is no reason to relinquish lender's rights to surviving indemnities under the loan documents, involving things such as keeping a continuing right to indemnity for environmental conditions or prior misrepresentations, and/or collections costs as set forth within the loan documents); and a DIL does NOT include the concept of a "right of redemption" (which is a right in some states giving the borrower the ability to pay the debt and "redeem" or get back title to the property after foreclosure) (In Texas, there is no right of redemption after a foreclosure - but this rule of law varies state to state)
• A DIL is a private transaction and avoids adverse publicity for the borrower (i.e., there is no publication or court filings like in a foreclosure), which may also minimize the impact upon property valuation
• A DIL avoids the problems with the foreclosure process, including the possibility of post-foreclosure attacks on the sale as a 'wrongful foreclosure'
• A DIL does not automatically release the lender's lien or space leases—these can be preserved by expressly making the deed in lieu subject to those interests, and permit the lender to foreclosure at a later date if necessary to extinguish a subordinate mechanic's lien

FAQ# - 17 What are the disadvantages of a DIL?

• The transferee takes the property subject to all existing liens (unlike a foreclosure sale which extinguishes junior or subordinate liens)
• Neither a deficiency amount nor property value is established unless expressly set forth in the DIL agreement (unlike a foreclosure sale which establishes any deficiency as the difference between the foreclosure sale price and balance due on the loan)
   

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind.  First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

• Email This
• Print
• Comments
• Trackbacks

Here's another topic from our "ticking sound" series covering insurance issues and environmental issues:

The subject of insurance for foreclosed properties doesn't seem to come up very often, most likely because there are so many other more pressing problems to worry about. But failing to ensure that the property has adequate insurance – not just "trendy" coverage like environmental impairment insurance but also "old fashioned" property, liability and flood insurance – is absolutely vital to avoid problems that arise all too often.

A lender, servicer or foreclosure purchaser's analysis of insurance on foreclosed property should start with the working presumption that the borrower's insurance will not protect the lender, servicer or foreclosure purchaser after the property is transferred. This may no be so, particularly if care has been taken on the front end to ensure that the lender is included as a named insured on applicable policies, but it still is possible (if not quite likely) that the borrower quietly cancelled the policies to pick up any premium refunds that might be available. Even if the borrower did not resort to such a tactic, the transfer of title from borrower to lender may deprive the borrower of an insurable interest in the property, without which the policy may be void. Some policies also include exclusions or other provisions limiting or precluding coverage for abandoned property, and when the borrower walks away, these provisions may be triggered. The result can be a nasty surprise when a claim occurs later.

• Email This
• Print
• Comments
• Trackbacks

You've reached agreement in concept with your borrower for a debt workout. The borrower will deliver the keys (and title) to the collateral, the noteholder doesn't intend to pursue recourse liability carveouts (or has agreed to forego pursuit of any claims) and you want to accomplish all of this in short order. There are several key documents and provisions you will want to work with to close your deal.

Deed in lieu of foreclosure
The quickest way to transfer title to the noteholder in a consensual workout is a deed in lieu of foreclosure. Legally, this has the effect of accomplishing what the noteholder/mortgagee could accomplish through the power of sale reserved in the mortgage or deed of trust – but without the notices, time delays and attendant costs.

If you are certain your lien interest is a first priority perfected lien interest, you are in good shape. If there is any chance you have lien priority issues, you should consider things further. Potential lien priority issues typically will involve property tax and other tax liens and mechanics and materialmen's liens (especially as to removable improvements). In that event, make certain your settlement documents include warranties and representations to the effect that there are and will be no lien claims arising based on the period of time the debtor held title. But remember, you already had a note obligation from the borrower that wasn't honored – chances are a claim for breach is going to be little consolation.
 

• Email This
• Print
• Comments
• Trackbacks