Many borrowers, when faced with foreclosure proceedings by their mortgage lenders, elect to execute and deliver a deed in lieu of foreclosure, in full or partial satisfaction of the secured obligation. Only those deeds in lieu which are voluntarily executed and deemed to be an absolute conveyance by mortgagor to mortgagee, with all mortgagor’s rights thereby terminated, may be insured. The deed in lieu should contain language stipulating that it is a deed of absolute conveyance of title in consideration for the cancellation of the debt secured by the [referenced] mortgage and is not intended to be a mortgage or some type of security instrument.”
In addition, an estoppel affidavit should be obtained from the grantor(s), and the lenders, if possible, for the purpose of addressing any potential creditor’s rights problems. Such affidavit should state that the conveyance is intended to be an absolute conveyance and is not given with conditions or sale agreement for repurchase or lease, and act as security for a debt and is freely and voluntarily without coercion nor under duress; and in consideration for cancellation of the debtedness and released the mortgage that the deed is not being given as a preference against any other creditors of the affiant/grantor; that no other persons or entities hold an interest in the property at time of conveyance; that the affiant/grantor is solvent and no other creditor’s rights will be prejudiced by the conveyance; and that the affiant/grantor is not under obligation of any other mortgage whereby a lien exists or has been created against the subject property. Since deeds in lieu do not extinguish liens and encumbrances recorded after the mortgage, such matters filed of record against the property or the mortgagor as of the date the deed in lieu is recorded must be excepted to on the title policy. In some cases, the mortgagee may attempt to preserve its lien priority of the mortgage by stipulating in the language set forth above that the consideration is intended to be a release of only the personal liability of the grantor (borrower) and that the fee simple title being conveyed will not merge with the lien, so that the lien may be preserved in favor of the mortgagee. The mortgage will then remain as an exception to title on the new owner’s policy issued in favor of the mortgagee.