• Holding a Deed in Lieu in Escrow
  • October 8, 2014 | Authors: Heather Sue Nason; Jonathan R. Sacks
  • Law Firms: Rogers Towers, P.A. - Orlando Office ; Rogers Towers, P.A. - Jacksonville Office
  • To avoid foreclosure, a borrower might agree to execute a deed in lieu of foreclosure to be held in escrow. In these circumstances, the borrower would execute a deed-in-lieu of foreclosure to the mortgaged property in favor of the lender. The deed would be held by the lender or other third party in escrow for the remainder of the loan term or some other specified time period decided between the parties. If the borrower defaults on payments or otherwise breaches the terms of the loan with the lender, the lender could then take the deed from escrow, record the deed, and effectuate a transfer of the property to the lender without foreclosing on the property or negotiating other workout possibilities with the borrower.

    This practice was once considered an efficient alternative to a costly and time-consuming foreclosure. However, challenges in the courts to the validity of these conveyances and the resistance of title companies to insure these transactions over the past few years generally preclude these conveyances from continuing to be viable workout options.

    Courts in a number of states have determined that a conveyance of a deed in lieu out of escrow is, in essence, an equitable mortgage because it acts as security for the loan and so should be foreclosed in the same manner as any mortgage. In these jurisdictions, the rulings significantly limit the ability of a lender to utilize a deed in lieu held in escrow as an efficient alternative to foreclosure.

    A few years ago a number of national title companies further determined that they would not insure deeds in lieu delivered to the lender out of escrow. Title companies were concerned over the rising litigation involving these transactions brought by borrowers alleging that the bank prematurely released the deed. Title agents for these companies are directed not to rely on any deed in lieu delivered out of escrow and to obtain a new deed-in-lieu of foreclosure before insuring title.

    Given the high potential for litigation surrounding the practice of holding deeds in lieu in escrow, the reluctance of title companies to insure these deeds and, in some jurisdictions, the questionable validity of these conveyances, it is recommended that lenders pursue other foreclosure alternatives instead of holding a deed in lieu in escrow. A deed in lieu (not held in escrow), loan modification, or another loan workout option should prove to be more viable options.