Lenders, do you have borrowers pre-sign DIL?

[Eric M.]

I have heard of the technique of avoiding potential FC problems by having a borrower essential pre-sign a Deed in Lieu which basically says, if the loan defaults this Deed in Lieu becomes enforceable.

Sounds too good to be true and my attorney doesn't like this approach. He feels it would not hold up if challenged because it circumvents the FC process.

Wondered if anyone does this and how it actually works in reality.

Don't borrowers freak out that you are setting them up to take the property?

[Chris Martin]

Originally posted by David Beard:

Thanks. Yes, I've already googled the topic. I'm interested in what is happening in practice with those that are actually involved in private/hard money loans, either as the lender or borrower. J, your attorneys seem to be contradicting the first couple of posters. Any more actual experience with the viability of either pre-executed deeds or cognovit notes? I assume the pre-executed deed would be preferred by the lender. Are these SOP for HMLs?

Note: My post relates only to NC. It may or may not apply elsewhere.

To clarify, the complication is that these are not "pre-executed" deeds in that they are not "executed" or "recorded". The deeds are held "in escrow" and the "trigger" to recording the deed is the borrower's default. The intent of this action is to by-pass the power of sale provision related to Mortgages and Deeds of Trust. When I started lending via SDIRA, I asked my attorney if I should follow this practice of having the closing attorney hold a deed in escrow. The short answer response (after he said (paraphrased) 'if you want to do this, find someone else because I won't do it') was that the practice would be considered "against public policy" and contrary to state statute regarding the "power of sale" provision in a deed of trust. There is probably case law related to this matter, but my take-away was that the case (if contested) would wind up as a judicial foreclosure with a high legal price tag. My mind was made up that the tried-and-true power of sale provision was necessary and sufficient, especially for a $70,000 loan on about 50% ARV.

Note 2: also realize that we are talking about loans that are not a "residential mortgage" and therefore are not subject to SAFE. That's a different beast, and the practices described in this thread would most likely be deemed deceptive trade practices per all the recent legislation....