Bank repossessions are rising more swiftly than foreclosure filings, according to online real estate firm Realty Trac, which specializes in foreclosed properties.
The reason?
A growing number of underwater homeowners — those who owe more than the value of their homes — now opt to negotiate what’s called a “deed in lieu of foreclosure.”
A deed-in-lieu occurs when the bank and the borrower agree that the bank will take title to the house as full compensation for whatever is still owed on the mortgage.
It’s easy to see how this arrangement benefits distressed homeowners, because a deed-in-lieu means the lender has no further recourse to collect money and the borrower suffers less credit damage than they would under foreclosure.
In today’s devastated real estate market, lenders benefit, too.
Though they’ll still lose money, banks that take deed-in-lieu agreements might lose less by taking immediate control of the mortgaged property instead of waiting for the lengthy and expensive foreclosure process to end.
It even puts realtors back to work, since many have converted full-time to promoting and disposing of bank fire-sale properties rather than go out of business.
Laws in a handful of states prohibit lenders from suing borrowers for additional funds after foreclosure, which also makes a deed-in-lieu deal attractive.
California, Florida, and Arizona, all high-foreclosure-rate states, have so-called anti-deficiency statutes, as do Alaska, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Texas and Utah.
"These anti-deficiency laws make a huge impact on foreclosure rates because they are basically ‘get out of jail free’ cards," Todd Zywicki, a law professor at George Mason University, told The Seattle Times.
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