In California, if the loan(s) are purchase money loans, then its a "single action" state. The lender can make no further claim on the borrower.
If the borrower has taken out home equity, either by refinancing or by a home equity loan, there is the possibility the lender can start a collections action against the borrower for the "cash out" money.
In addition, there are potentially very serious tax consequences, depending on the nature of the loans, if its principal residence or not, and if the borrower has take cash out.
We have an accountant and lawyer available for consultations.
We take our clients to see the accountant & lawyer. This mitigates our potential liability if there are tax consequences, and we missed them.
This has become a very nasty and complex area, with potentially horrific consequences for investors (having losses on foreclosures taxed as income), and the clients need to obtain professional advice about situation, including a possible bankruptcy.
Please protect yourself. Take your client to an accountant and a lawyer.
On the pro side for the seller the blemish is not as bad as a foreclosure nor as time consuminig as working out a short sale. On the con side if there is equity it will be gone.
If a sale can be made that exceeds the value of the loan the seller will not be "short" and can walk away without the blemish and with some of equity.
To Duncan's assertion from Countrywide that a deed in liu is as bad as a foreclosure, my information came from the California Credit Counselling Service not from a lender.
Pros: The problem (the house, and the loans) goes away.
Cons: It's not a quick as one might like. Be very careful. In California, the Bank MUST agree to be "given " the house. If the lender has to agree, it can take some months. Call the lender. Countrywide state that deed in lieu will have the same effect on your credit as the compelet foreclosures. Countrywide also insists that the house be lsited as a short sale of 60 days before considering deed in lieu. If the house has a first and second loan, lenders may not agree to a "deed in lieu; we've tried with no success".