If I get 30yr fixed mortagage for an investment property (rental), and in this very turbulent economy, say for example the bank is going through tough times, is it possible (in theory at least) that the bank call my loan for no reason??
And if so what is the standard procedure they go through? They ask me to pay every last penny or they foreclose the property??
Loans are lent as borrowers cannot hold that kind of money that Banks always do. I am quite sure they do not have a clause that says " We will ask you to pay the principal without any reason if the bank is unable to raise capital" or something similar to that. Well, thats why there are foreclosures that says they can come after you if you DEFAULT.
Moreover, if Banks/financial institutions can do that at their will, there will be NO Borrowers, IMHO.
No they can not call it due for no reason. That is what happened in the late '20's. The banks all started calling their loans due and there was nothing in place to prevent them from doing that. The lending laws have changed since then.
That's the reason many baby-boomer's have a mindset of get your loan paid off as fast as possible because their parents went through the Depression and knew what it was like to have a loan called for no reason. So they ingrained it into their children's head that it is bad to have a mortgage.
Well if you have a DEMAND note then, yes, they can call your note due for NO reason.
Fortunately in this day only commercial and some hard money notes are demand notes. Either way you should read the fine print on your loans because some of them can be called due with no default. One of my bankers smiled when I asked him about it in my loan docs, and he said that the banks understand that it can devastate the economy if they start doing it, but that they leave that lingo in there just in case.
I know investors from the 80's that went through the whole Savings and Loan disaster stuff that had their notes called due with no default on their part. Its rare but in hard economic times it does happen.
Thanks to everyone who added your inputs about the History of " Due for No Reason" clause. I have not heard of that till you all could respond to one of our member's question. Glad that I learned something today! :)
There are a lot of assumptions made in the above posts. Let us get down to basics.
The most normal investment property loan has always been a 20 year commercial loan that is not callable with interest re-adjustments after each 5 year period.
The new hot loan (from the lender's point of view) is a balloon loan; whereas, the loan is due at some period of time earlier although it is amortized over the 20 year period. IOW, the payment would be the same as if it was a 20 year loan, but the loan might 'expire' in 7 or 12 years before the balance is ever paid off with the balance due at that time.
Now, when the banker is 'selling' you on the loan, he will say that the bank will probably just renew the loan when it comes due (and maybe they will); however, it has the same effect of calling it as they can choose not to renew.
Read the loan docs very carefully to ensure you understand the product they are pushing.
Thanks Heathen. So what I understand from your post is that:
- It has always been a Balloon type of Loan that the Lenders underwrote back in the days which they were able to call when the Great Depression struck the Country?
- Mine is a 15-Yr Balloon (2nd loan on my house) which becomes due in 15 years but the monthly mortgage is amortized for 30-yr. So the monthly payments is actually one that I MIGHT have paid if it were a 30-Yr Fixed
Interesting... So if the banks want to do a massive wealth transfer à la the Great Depression, they can call in all of their 'expired' balloon loans, bankrupt half the country and take possession of half the country's real estate?
Uh, no. If the balloon loan " expires" , that is to say, comes due, the bank will expect to be paid off there and then. If not, they will foreclose right away.
Now, I've read some info that contends there are a lot of borrowers that are actually late enough on their payments that the banks really should be foreclosing. So, maybe there is somewhat of a backlog of coming foreclosures. But there is no pool of " expired balloon loans" .
Well they can't call your loan from what I read here. But it certainly appears they can cancel them!
I am talking about HELOCS. Lots of people got these credit lines for a " rainy day" . (And I am not talking about those who abused credit use.) Well it ain't rainin' now. It's a helluva storm for some people in some markets and their
HELOC loans they never used? " Gone With The Wind" . CANCELED. I've heard tell of this of people who were financially capable and responsible in areas like Las Vegas. Do the lenders refund the FEES they made on these loans. NOPE. It's just, " Frankly madam, I don't give a ...." .
Not as I understand the history. During the Great Depression loans were called that were not being paid, but had a loan call provision. They are not as popular in loan docs today as they were then. There were also a lot of stock margin calls, which bared their ugly head again in the late 80s and early 90s during the dot com blow ups. It usually comes down to over-extending and poor business.
Now, I am not the great student of history as some are around here. That said, I believe my memory from my college studies is fairly accurate. The Great Depression was a culmination of a number of factors. One of them was what he saw during the dot com explosion. Twenty years ago, that was really the only thing going on, so the country survived swimmingly with only a few of the most greedy taking a bath. Today, we face a similar culmination as our grandfathers saw 80 years ago. Business financials are key for the investor today.
The falling dollar, unemployment on the rise, the mortgage crisis, lack of faith in our government officials, tightening money supply by the lenders, etc. etc. etc. all lend themselves to a scary future outlook.
Again, I firmly believe that solid business management will see us through. The days of the flip and quick wholesale may be temporarily over (though some here are still doing well), but the buy and hold strategy still prevails. A good entrepreneur will always see the upside to make tons of cash - gold, today for example. Or, to stay in the REI world: foreclosures, short sales, sheriff's sales, and REOs.
This is why education is key and BiggerPockets is continuing to grow.
So, if you get nothing else from this thread it should be this. Be prepared for when the 15 years are up. Either pay ahead or stash money away. All may be just swell when that time comes, or it may not. You have a bunch of time to prepare. If you prepare well and they re-finance OR you can re-finance eslewhere, you will be that much closer to financial independence - all of our goal.
Forgive me for playing the semantics card, but how could they cancel a loan with no balance? They had given you the option to borrow based on their available cash and your financials at the time and then they simply withdrew their option since you were not exercising it and their cash position changed.
So, the answer was/is to borrow the full line of credit, before they withdrew the option (or cancelled it, to use your term). Mina was the first here at BP to inform us of her HELOC freeze. I did not have a HELOC, but a business line of credit. We borrowed the full amount the day after I read her post and put it in savings at E*Trade savings, which was giving the best interest rate for liquid money (immediate withdraw available) that we could find at the time. We are taking about a 3.5% hit as we borrowed at 6.25% and are getting in the high threes in return, but the cash on hand is a good thing.
It is raining, my friends, and it has been raining hard. Build an ark anyone?
My personal opinion is with the banking industry in the situation they are currently in why would any bank in their right mind call a loan due if it's being paid on time? They have their hands full with all the foreclosures, the last thing they want to do is go chasing down a note that is performing.
Agreed. But if loan rates start heading up, the situation may change. In the late 70s and early 80's mortgage rates were in the mid teens, thanks to rampant inflation. Inflation is trending up. The fed will have to raise rates at some point to try to fight it. It may take five years, but the banks will eventually work off this bubble of foreclosures. If rates are up significantly when that occurs, I think they will turn their attention to loans that have become callable, like subject to's.
Thanks for that compliment. But do keep in mind that even expert economists have difficulty predicting the future. And I would make no claims about being an expert economist. I'm really just making a guess about what might happen based on my limited observations.