Sept 2017 edition of Merrimack Valley Housing Report

The September 2017 edition of the Merrimack Valley Housing Report was just delivered to subscribers by email. This monthly electronic newsletter about housing and real estate in the Merrimack Valley is produced jointly by UMass Lowell and the Middlesex North Registry of Deeds. For a free subscription, email David Turcotte at David_Turcotte@uml.edu.

This month, I wrote about distressed sales. Here is my article:

Distressed Sales

By Richard P Howe Jr

Foreclosure activity in August at the Middlesex North Registry of Deeds district was down considerably from a year ago. Foreclosure deeds dropped from 51 to 13, and orders of notice dropped from 41 to 20. By any measure, that is a positive development. However, there are also indicators that lenders are increasingly turning to deeds in lieu of foreclosure and short sales as alternatives to traditional foreclosures.

To understand how deeds in lieu of foreclosure and short sales work, it is best to first review the elements of a mortgage. What most people call a mortgage in Massachusetts is really two different documents. First is the promissory note. That is a contract between the borrower and the lender that establishes the debt and sets out the terms of repayment. The promissory note does not get recorded at the registry of deeds.

The second document is the mortgage. In Massachusetts, a mortgage is a type of deed. When you sign a mortgage, you convey to the lender an interest in the property. That interest is the right to foreclose on the mortgage if the borrower defaults on the repayment of the note. Foreclosure means the lender can auction off the property and use the proceeds from the auction sale to pay off or pay down the debt owed on the promissory note and thereby cut off the borrower/owner’s right to the property.

A deed in lieu of foreclosure is also used when the borrower faces foreclosure. Instead of proceeding to foreclosure, the borrower/owner, with the consent of the lender, conveys the property directly to the lender which then releases the mortgage and sells the property to a third party. This may be attractive to the lender because in most foreclosures, the lender ends up owning the property anyway, so a deed in lieu early in the process saves time and money. However, a deed in lieu of foreclosure is not appropriate when there are junior liens such as a second mortgage or a court execution that would survive a deed in lieu but would be extinguished by a foreclosure.

The other non-foreclosure option, a short sale, involves a borrower/owner who owes more on the note than the mortgaged house is worth. Since the proceeds of a sale would be insufficient to pay the amount owed, the borrower/owner must get the lender to agree to allow a sale to a third party and still release its mortgage despite being paid less than is owed on the note. If the lender is convinced that the proposed sales price reflects the true value of the property and that the value is unlikely to rapidly appreciate, then the lender may be willing to take the money and release the mortgage rather than proceed to foreclosure.

Both deeds in lieu and short sales are useful tools that can benefit both lenders and distressed borrowers. The community in which the property is located also benefits, because properties that otherwise would face a long foreclosure process are put in the hands of new owners who are better able to afford and care for them.