When a borrower defaults under a mortgage loan, the lender might consider options such as temporary forbearance, negotiating a workout or commencing a foreclosure action. Upon weighing the various alternatives, the parties might elect to enter into a deed in lieu of foreclosure transaction, whereby the borrower voluntarily delivers a deed conveying the mortgaged property to the lender. Such a transaction could have advantages for both parties. For instance, the lender could gain control over its collateral more quickly and inexpensively than it otherwise might have with a foreclosure proceeding. For the borrower, a proposed deed in lieu of foreclosure presents an opportunity to negotiate releases from liability and to avoid some of the negative impacts associated with having a public foreclosure proceeding on its record.

However, these transactions are not without risk. One of the dangers facing a lender in a deed in lieu of foreclosure transaction is that a court might recharacterize it as an equitable mortgage, instead of a true conveyance of title. To help frame the issue, this article analyzes recent New Jersey jurisprudence in this area and potential mitigants against this risk.

Equitable Mortgages