What happens with a deed in lieu of foreclosure?

A deed in lieu of foreclosure is an agreement where a borrower voluntarily transfers ownership of their property to the lender to satisfy a defaulted mortgage or loan and avoid formal foreclosure proceedings.

 

It benefits the lender, if the borrower is cooperative, in that it does not have to advertise and conduct a foreclosure. It may benefit the borrower by giving some room to make a dignified exit from her property. Sometimes, the lender will even offer money for moving.

 

It will still be a hit to a borrower’s credit and will likely prevent her from getting certain loan types, like a FHA loan, for several years.

 

If you are able to sell the house, you will almost certainly do better. A good realtor will be adept at this, knowing who will buy a house in this situation, and realizing that speed is essential.

 

In my experience, a candidate for a deed in lieu has a relationship with the lender, often a smaller lender, and doesn’t have the wherewithal to get the house ready for a proper listing and sale.

 

How it works:

  • The borrower is in default (or about to be).

  • Instead of going through foreclosure, the borrower (the homeowner) signs a deed transferring the property to the lender.

  • In return, the lender cancels the debt (in whole or sometimes in part). Beware, often the lender does not cancel the debt when the deed in lieu is transferred. The deed in lieu will have a provision about this, that the lien is not cancelled. Instead, the lender waits until it transfers the property again, to a third party, before it cancels the lien of the borrower. The lender does want to give up any of its rights to the debt in case something unexpected happens to the borrower.

 

Key Features:

  • Avoids foreclosure: Less damaging to the borrower’s credit than a formal foreclosure.

  • Saves time and costs: Lenders can regain title without going through court or auction.

  • Typically requires lender approval: The lender won’t accept a deed in lieu unless they’re confident there are no junior liens or title defects.

  • No deficiency judgment: Many agreements specify that the lender won’t pursue the borrower for any unpaid loan balance.

 

Risks:

  • If there are other liens, the lender will prefer foreclosure to wipe subordinate liens. Plus, the “seller” is still on the hook for those liens.

  • It’s generally considered loss mitigation—not debt forgiveness for tax purposes, so the borrower will likely get a 1099 and might have to pay substantial taxes.

  • The borrower will still likely take a big credit hit, but sometimes not as big as a foreclosure.

  • A bankruptcy court could strike the deed in lieu, if it appears the lender is trying to get around priority rules.

 

 

Can a clause from an 1820’s document shut down a current real estate development?

Construction of Memphis Brooks Museum of Art Halted Amid Legal Dispute

Construction of the $180 million Memphis Brooks Museum of Art (MAM) has been at a

standstill for nearly four years due to a legal dispute over land use. The core issue revolves

around whether the project violates an 1820 riverfront easement, which mandates that the land

be preserved as a "promenade" for public use.

The controversy began when Friends for Our Riverfront, a local advocacy group, filed a 284-

page lawsuit against both the Brooks Foundation and the City of Memphis. The group claims

that the museum’s construction infringes upon the 1820 easement. Since the lawsuit was filed,

the project, which broke ground in 2021, has been delayed as the court determines whether

construction can continue.

Ownership and Control of the Land: The Heart of the Dispute

At the center of this legal battle is a question of ownership and control over the land in question.

In their petition, Friends for Our Riverfront—along with descendants of historical figures like

Virginia O. McLean (a descendant of Judge John Overton) and Elizabeth O. Snowden (a

descendant of Judge Overton)—argue that the heirs of the original landowners—President

Andrew Jackson, Judge John Overton, General James Winchester, and their associates—retain

ownership of the riverfront property.

The petitioners contend that the original 1819 Plan of Memphis dedicated the land for public

use, including the “Public Promenade,” which was to be the “crown jewel of the riverfront”.

According to their claims, the heirs maintain fee title to the land, while the public holds an

easement to use it as a promenade. They argue that the City of Memphis has no ownership

interest in the land but merely serves as a trustee, responsible for maintaining the public’s

easement. See Memphis v. Overton, 216 Tenn. 293, 392 S.W.2d 98, (Tenn., 1965).

Bruce McMullen, who represents the city and the Brooks Foundation, argues that the museum

aligns with the city’s commitment to public use, and that “the use is for the current-day

administration to decide.” Historically, the site housed a fire station and a city-owned parking

garage uses that Friends for Our Riverfront never contested.

The Broader Impact on Memphis Riverfront Development

Ultimately, the court will make the decision with the scales tilted toward approving construction

the MAM. Even if a reverter clause, or use easement, doesn’t prohibit a particular use, the MAM

episode shows that it can certainly stall the process and increase the costs. It shows the

importance of knowing your title documents.

Sources:

Friends for Our Riverfront Page

2023 Petition

Article from the Daily Memphian (March 4, 2025)

Homeowners at risk of Foreclosure due to Decade-old "Zombie Second Mortgages"

In recent years, a troubling trend has emerged in the real estate world: the revival of “zombie” second mortgages. These are dormant loans, often forgotten or deemed forgiven, that have come back to haunt homeowners in the form of massive debt and even foreclosure.

The history of second mortgages in the United States is closely tied to the housing boom of the early 2000s. At this time, homeowners were encouraged to take out multiple loans to finance their homes—typically a first and second mortgage. These second mortgages were viewed as a positive alternative for individuals who could not afford to make a down payment in cash.

 In 2008, as home prices plummeted, and millions of homeowners were left underwater—owing more than their homes were worth—many found themselves struggling to keep up with mortgage payments. In response, the federal government introduced various relief programs, including loan modifications under the Home Affordable Modification Program (HAMP), which aimed to make mortgages more affordable and prevent foreclosures. Individuals facing financial hardship received assurances from lenders that their second mortgages would either be modified or, in some cases, outright forgiven. Many stopped receiving statements or updates from their second mortgage lenders and thus assumed the second mortgage had been taken care of.  

 Almost two decades later, as the housing market has recovered and home prices have risen, these “forgiven” second mortgages are returning to suffocate over ten thousand homeowners in the United States today. Economists from Planet Money and NPR explain that the “zombie” second mortgage is the recent activity of investors and debt collectors who are aggressively going after the second mortgages that many homeowners believed were forgiven. Collectors are buying these second mortgages from investors for a fraction of their original value, raising interest rates and then forcing individuals to foreclose on their homes because of their outstanding debt. In most cases, monthly statements were never prepared or distributed to borrowers, leaving them unaware of their rising debt. Kristi Kelly is a consumer protection attorney in Fairfax, VA who has worked with several homeowners to fight against these collection agencies and prevent foreclosure. Kelly views the situation as a huge injustice, noting that even “very sophisticated people” are unaware that a second mortgage company could foreclose on their homes if they do not take action to stop it.

One key element in these cases is the issue of missing monthly statements. Under the Truth in Lending Act (Regulation Z), mortgage companies are required to send monthly statements to homeowners if there is interest accruing on a loan. However, many homeowners with zombie second mortgages have not received such statements for years. According to Kelly, this oversight can provide homeowners with an opportunity to fight back: “In some ways, the greed of these second mortgage holders has given people leverage in their cases, because it’s just not good enough to collect the value of the note, and they want to get every last dollar and take every dime of equity. They then open themselves up to serious legal consequences and provide consumers the leverage they need to stay in their homes.”

The rise of zombie second mortgages underscores ongoing risks for homeowners, even as the housing market has rebounded. It’s a reminder of the long-lasting impact of the housing crisis and the importance of staying vigilant about financial obligations. Homeowners facing such situations should seek legal advice to protect their interests.

More from Planet Money

The CrossMod Conundrum: Defining ‘Mobile Home’ in the Age of Innovation

According to Jonathan Douglas v. Five Star Properties, Inc. the CrossMod home is not a mobile home because it is designed to be a permanent structure once placed. It is affixed to a permanent, load-bearing foundation, and experts testify that it is not easily movable once constructed. These factors distinguish the CrossVue home from traditional mobile homes, which are intentionally designed to be transportable.

In Jonathan Douglas v. Five Star Properties, Inc. the Tennessee Court of Appeals at Knoxville discussed the enforcement of restrictive covenants, specifically regarding the development of mobile homes.

The central issue in this case was the ambiguity of the term "mobile home," as neither the plat nor deed restrictions defined it. The key question upon appeal was whether the initial trial court erred in its interpretation of the restrictive covenant.

Originally, the trial court ruled that Five Star Properties’ development of the CrossMod home violated the covenant, mainly focusing on the home’s construction process and its off-site manufacturing (over 70% of the CrossMod is built off-site). The court was initially concerned with the appearance of the CrossMod and its close resemblance to a mobile home.

However, the appellate court took a different approach, focusing on the permanence of the structure. Five Star Properties argued that the trial court had wrongly applied previous cases, (particularly Neas and Napier), and instead should have followed the precedent set in McKeehan v. Price (2022) and Williams v. Williams (Tennessee Supreme Court). These cases reject the idea that homes built off-site should automatically be classified as mobile homes. In McKeehan, the court explained that a "mobile home" refers to a structure designed for transient occupancy or ready transportability, not one intended to be permanent.

They determined that, although the CrossMod home is mainly manufactured off-site, it is designed to be a permanent structure once placed on a foundation. It is affixed to a permanent, load-bearing foundation, and experts testified that it is not easily movable once constructed, distinguishing it from a traditional mobile home, which is typically designed to be easily transportable.

The Tennessee Court of Appeals reversed the trial court's decision, concluding that the CrossMod home should not be considered a "mobile home" as defined by the restrictive covenant.

"Relative" Risks: Untangling Family Ties in Conflict of Interest Transactions

Last month, the Tennessee Court of Appeals addressed the issue of conflict of interest in In Re Estate of Joyce Ann Hendrickson, which involved a transfer of assets. The case centered on an LLC owned by a mother, father, and daughter, which held seven properties. The mother, holding the majority voting interest and serving as the LLC’s manager, transferred most of the LLC’s assets to another LLC, owned by her daughter and son-in-law. The transfer was made without the father’s knowledge. After the mother’s death, her estate sought to recover the transferred assets, arguing that the transactions violated conflict-of-interest provisions under Tennessee law.

In 2021, the administrator of the estate filed a complaint against the deceased mother’s children, asserting that the transactions were invalid due to a conflict of interest. Both parties agreed that a conflict of interest existed, but the defendants argued that the transfers should not be voided under exceptions outlined in Tenn. Code Ann. § 48-249-404(b).

"For purposes of this section, a member, manager, director or officer of the LLC has an indirect interest in a transaction, if, but not only if:

(1) Another entity in which the member, manager, director or officer has a material financial interest, or in which the member, manager, director or officer, as applicable, is a general partner, is a party to the transaction; or 

(2) Another entity for which the member, manager, director, or officer is a member, governor, director, manager, officer or trustee is a party to the transaction, and the transaction is, or should be, considered by the members, managers or directors, as applicable, of the LLC."

The defendants contended that since the deceased mother did not personally receive a "material benefit" from the transfer, the transaction should stand. However, the court disagreed, claiming that this argument ignored the critical statutory language "if, but not only if." The Appeals Court further clarified its position by referencing Holmes Financial Associates, Inc. v. Jones, where the court did not interpret the "if, but not only if" language narrowly, but rather adopted a broader interpretation. This approach was consistent with the court’s view that indirect interests arise in transactions involving family members, given the inherent conflicts of interest that such relationships create.

Additionally, this transfer violated specific regulations regarding the required disclosure of interests to all members of an LLC before transferal. The third and final member was “kept in the dark” about these transactions.

Ultimately, the court found that these transfers violated various Tennessee Codes, including conflict-of-interest rules, and declared them void. This decision underscores the importance of closely scrutinizing transactions involving LLCs, especially when family members are involved, as these relationships can create inherent conflicts.

Rent to Own versus Owner Financing - are you getting a bad deal?

A rent-to-own agreement and a purchasing with a loan (including owner financing) both provide pathways to homeownership but differ in structure, responsibilities, and timelines.

 

Rent-to-Own Agreement

Historically, “sellers” used rent to own agreements as a way to push the taxes, insurance and maintenance on the renter/buyer, and charge a higher monthly amount. Meanwhile, taking the property back via eviction was fast and cheap compared to foreclosure.

I’m not sure this is the case now for a decently sophisticated buyer. State laws on foreclosure are very lenient to the lender while tenants can fight eviction with a few more tools; you at least get a court date with an eviction. A local attorney can tell you how the local judges handle these things; it truly varies court by court.

 

Here are a few other details:

1. Ownership Structure: Initially, the tenant does not own the home but pays rent with an option or obligation to buy the property later.

2. Payment: The tenant makes regular rent payments, often with a portion applied toward the future purchase.

3. Purchase Option: Rent-to-own agreements often include a lease term with an option to buy the property at a set price by the end of the lease.

4. Less Commitment: If the tenant decides not to buy, they can typically end the lease without the long-term commitment of a mortgage. However, they might lose any option fees or credits applied to the purchase.

5. Property Responsibilities: The property owner may still handle maintenance and repairs, though that is often the attraction to the property owner: not having to deal with those responsibilities.

 

Buying with a Loan/Owner Financing

1. Ownership Structure: The buyer owns the home from the start but finances it through a loan secured by the property.

2. Payment: The buyer makes monthly payments on the loan, which include principal and interest, and often property taxes and insurance.

3. Long-Term Commitment: Home loans are typically long-term loans (15-30 years), and defaulting on payments can lead to foreclosure. Owner financing may be quite shorter, with an obligation to refinance after a few years.

4. Building Equity: Each payment builds equity (ownership value) in the home over time.

5. Property Responsibilities: As the owner, the buyer is responsible for all repairs, maintenance, property taxes, and insurance.

 

Generally, a rent-to-own agreement is a way to work toward homeownership with more flexibility, while a mortgage involves immediate ownership but with a long-term financial commitment and responsibilities.

Is Verbal Authorization to Accept Service by a Roommate a Valid Method of Service?

Last month, a defendant appealed a default judgment saying she was never served.

In TN Farmers Mutual Insurance v. Johnson, a Deputy testified that the Defendant (Ms. Johnson) gave him verbal authorization to leave the documents at her residence with an individual who she identified as James Johnson. Deputy Thompson followed her directions. (Legally, as long as the recipient provides verbal authorization of service, this is a valid method of service). Ms. Johnson said she had no recollection of this authorization. The court ruled that Ms. Johnson should not be considered a reliable witness due to the emotional trauma she endured. Deputy Thompson's recollection of events was considered credible. 

The Appeals Court distinguished another case.

In Watson v. Garza, two separate individuals were served for their equal involvement in an accident. The suit was filed against both Garza and Harber but only Harber was served. Garza appealed because he never received notification of the suit and did not authorize Harber to accept the process on his behalf. No evidence was presented or found against this claim. 

According to the Tennessee Rule of Civil Procedure 4.04(1), service is achieved “by delivering a copy of the summons and of the complaint to the individual personally, or if he or she evades or attempts to evade service, by leaving copies thereof at the individual's dwelling house or usual place of abode with some person of suitable age and discretion then residing therein, whose name shall appear on the proof of service, or by delivering copies to an agent authorized by appointment or by law to receive service on behalf of the individual served.

Verbal authorization by the defendant to leave with a roommate is valid. Although it can well lead to a messy factual dispute.

When do you need a Quiet Title Action?

In short, the answer is when the title insurance company says so. The lender won’t lend you money because of an issue raised by the title insurance company.

 

A Quiet Title action is typically needed by individuals or entities who have a disputed or unclear title to a property. This legal process helps "quiet" any challenges or claims against the property title, ensuring clear ownership.

 

Most quiet titles that I’ve handled stem from a tax sale in the chain of title. In Georgia, insurers generally won’t insure for 20 years after a tax sale without an order from a court quieting title. In Tennessee, it’s shorter, around 7 years. These time periods are set by the insurers to minimize risk.

 

Besides tax sales, quiet titles arise when there are two parties claiming title. I’ve seen this when the same seller has deeded the property to two different purchasers and the first didn’t record the deed. This usually comes form inherited property and situations when there are other issues with title.

 

Lastly, I see quiet titles when there is unclaimed property and the owner is claiming adverse possession.

 

In these cases, a Quiet Title action helps the property owner confirm clear, undisputed ownership, enabling them to sell, mortgage, or enjoy the property without legal concerns.

 

I handle a lot of these in Tennessee and Georgia. Please contact me if you need counsel.

Al Roker and Gaining Ground

Al Roker (yes, that Al Roker) is the executive producer of a new documentary on heirs property. Heirs property refers to property owned by the descendants of the deceased persons listed on the deed, where the estate was never probated or administered. This land very often involves substantial title issues impeding selling the land for value or borrowing against it.

Gaining Ground: The Fight for Black Land tells the story of land loss among black farmers since the Civil War. One study showed that black farmers lost $326 billion worth of land in the 20th Century.

One of the proposals to ameliorate and correct this loss is the Uniform Heirs Property Act.

You can read my article in the Tennessee Bar Journal about Tennessee’s implantation of the Act.