Pre-Signed Deed in Lieu Execution (Montgomery County, PA)

[Nic Armond]

Hello, BP.

I'm looking to contest a deed in lieu that was recorded against an investment property of mine on 11/16/22.

Just a quick backstory: this deed in lieu was given to me by lender to sign (which I agreed to after the process was explained to me) on 12/20/21. Fast forward to 5/5/22, when I defaulted on paying the entire loan balance. Lending team reached out to me to allow me additional time to come up with the funds to pay off balance owed. I was unsuccessful with doing so, and during this process, it was told to me by the lending team in July 2022 that I'd need to sign a new deed in lieu since the first one that I signed could not be recorded. I decided against signing a new set of documents based on the guidance I was receiving from legal counsel at that time. This ultimately caused the lending team to notify us that the foreclosure process would begin August 2022. 

Communication ceased between the lending team and me, as I was advised by legal counsel to prepare for the foreclosure process. After not receiving any documentation/notifications regarding the foreclosure process after 2 months, we reached out to lending side for an update. The first update I received was on 12/16/22, upon noticing that subject property was listed for sale without my knowledge. It was then that I was told that the original, pre-signed deed in lieu was successfully recorded. I just found out that this deed in lieu was recorded on 11/16/22. 

I feel as if I should have been informed by lending side that it would no longer seek to move forward with the foreclosure process. The reason I even entertained entering into the foreclosure process was to have additional time to gather the funds to pay off the mortgage.

Is there any recourse here? I am seeking to challenge this deed in lieu based on what I stated above. Also, as I've researched this specific topic, I'm noticing that it appears I, as a borrower who defaulted, should have asked the lender if it would accept a deed in lieu, not the lender giving me the document at the time of refinance closing. The only documentation I signed on 12/20/21 was the actual deed in lieu that was given to me. I also received a Notice of Default dated for 5/5/22. 

I'm also currently in a Chapter 13 Bankruptcy. I'm not sure if this is relevant to the matter.

Since I'm fighting this action independently, I'm seeking instruction on how to begin the process of challenging this. What would be my first step? What form would I have to file against the lending team to start the process?

Any and all feedback/wisdom is greatly appreciated in advance.

[Tom Gimer]

@Kevin Sobilo Interestingly enough, I had this issue come up a couple of years ago and consulted with underwriting about it. This situation would be a red flag / kill the deal / don't insure the transfer in several states we cover due to a violation of the borrower's equity of redemption. However in PA there was no caselaw on point and no statutory law. Despite an apparent green light, we killed the deal internally.

Anybody reviewing a DIL checklist will pause at the "was the deed signed voluntarily" and review all of the the docs and conclude there is not a chance that a DIL signed at origination of the loan has been executed voluntarily. So in the instant scenario I would fight... and on more grounds than just the lender misled me by not giving me proper notice concerning the DIL vs. foreclosure sale. I think an additional argument is the lender stole any equity there was in the property by recording the DIL rather than foreclosing and giving the borrower the benefit of a commercially reasonable competitive bidding scenario and the opportunity of perhaps recovering some or all of that equity... and thus the entire transaction is now subject to judicial review.

Maybe PA will catch up and forbid this practice as other states have done.