If the lender agrees to accept a deed in lieu of foreclosure, the responsibility for the mortgage deficit is not finished. The lender generally has the homeowner sign an Acceptance Agreement as well as a new deed. This agreement will stipulate that if the lender sells or transfers the property for less than what is owed on the loan (including all penalties, interest, and attorneys' fees), the guarantor of the loan (usually the homeowner) will owe any deficiency. This deficiency amount can then be pursued in the courts as a deficiency judgment or the lender can issue the homeowner an IRS Form 1099. In this latter case the deficit becomes "Phantom Income" to the homeowner. Federal legislation enacted in December 2007 now allows the homeowner to avoid income taxes on this phantom income under certain strict circumstances.

So is a "deed in lieu of" an ideal solution for a homeowner in foreclosure? The answer is clearly "no" since very little is accomplished by the deed transfer because the homeowner or guarantor, is still responsible for any loan deficiency after the sale. If the homeowner does nothing, he will not have to sign the Acceptance Agreement. By not signing this agreement, the homeowner will not be opening himself to even further liability. The terms of the Acceptance Agreement should release the homeowner (guarantor) from future liability (i.e. deficiency amount). The bottom line is that if the "deed in lieu of" isn't a better solution for the lender, the lender has no motivation to take back the deed. If the lender readily takes back the deed, the homeowner should be concerned there may be substantial equity in the property that the lender will receive "free and clear". If there are additional liens on the home, the lender does not need the deed since he has to complete the foreclosure action to extinguish them.

In summary, it is a best questionable whether it makes economic sense to give back a "deed in lieu of" unless the Acceptance Agreement clearly stipulates that the homeowner does not have an obligation for the deficiency amount. You should not sign any documents from the lender or anyone else without having an attorney review and approve your signing.

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