I am the lawyer that flipper was speaking of... I was out in Wheaties neighborhood yesterday (Broomfield) for the NRBA conference...
Here is the post I sent to flipper....
eth•ic ( th k)
n.
1.
a. A set of principles of right conduct.
b. A theory or a system of moral values: "An ethic of service is at war with a craving for gain" Gregg Easterbrook.
2. ethics (used with a sing. verb) The study of the general nature of morals and of the specific moral choices to be made by a person; moral philosophy.
3. ethics (used with a sing. or pl. verb) The rules or standards governing the conduct of a person or the members of a profession: medical ethics.
le•gal (l g l)
adj.
1. Of, relating to, or concerned with law: legal papers.
2.
a. Authorized by or based on law: a legal right.
b. Established by law; statutory: the legal owner.
3. In conformity with or permitted by law: legal business operations.
4. Recognized or enforced by law rather than by equity.
5. In terms of or created by the law: a legal offense.
6. Applicable to or characteristic of attorneys or their profession.
This thread screams out for some clarification. As a 10 year veteran of the closing table I have presided over nearly 10,000 transactions, and during that period of time you get to see just about everything.
The essence of this thread is: 1) is a subject to sale a legal transaction? And 2) is a subject to sale an ethical transaction?
As a member of the bar, I have to face these two questions on a daily basis. One action may be perfectly legal, however the rules of ethics, or common sense just tells you it is illegal.
Former Justice Potter Stewart of the Supreme Court of the United States, in attempting to classify what material constituted exactly "what is obscene", famously wrote, "I shall not today attempt further to define the kinds of material I understand to be embraced . . . [b]ut I know it when I see it . . ."
The same thing can be said for a fraudulent transaction… in many cases you cannot define what is fraud in general... but I can tell when I see it...
In a subject to (“S2”) transaction the basic premise is that Party A will buy Party B’s property and not payoff the existing mortgage (or deed of trust). This in and of itself is not an illegal act. Both parties are running the risk of losing the property or being forced to pay the loan off in full if and when the bank enforces the due on sale clause which is present in almost every security instrument I have seen.
In essence the due on sale clause says if a party transfers any or part of an ownership interest to another party, the bank has the absolute right to hold the party in default and accelerate the entire amount due. As a real estate attorney, under certain circumstances this is fine…. Both ethically and legally. So long as I only represent the parties and not the bank it is 100% legal, and ethical… As I owe absolutely no duty to the Bank.
If I represent the bank to ensure they are in first lien position and do an immediate transfer simultaneously with the closing, or if I know this is happening and I participate, then the ethics may be brought into question.
From a personal standpoint, I have done one S2 transaction, and I will NEVER do one again. Let me paint the scenario:
I had a unlicensed, non attorney “Guru” who was a “White Knight” trying to do loss mitigation closings in my office. He brought me two contracts : 1) A was selling to GURU and 2) B was Selling to GURU. The day before closing GURU came to my office and told my paralegal that A was purchasing B’s property “Subject to” and Guru was purchasing A’s property “Subject To”…. This thing stunk out loud…..
So I had all three parties at the office at the same time and pulled out an extensive disclosure that explained everything. Party B was close to illiterate and financially desperate. I asked each of them to explain the terms of the transaction to everyone at the table. Everytime he explained it he said that his loan was being paid off… I pulled my partner in the closing room and had him explain this transaction to B. He did not like it, but he signed the disclosures…. ( I basically begged him not to). The key here is that B’s property was a mobile home which was not legal affixed to the property (it was taxed like a car and had a title) … so after A had the same disclosures and I begged him not to buy “subject to” the closing was completed…
SO… I scared the hell out of both parties, and caused the guru a lot of discomfort, and it took four hours for these transactions. I ran this by the title underwriters and the malpractice risk management department… and they all concluded that this was handled correctly… The next day, A calls and asks me when he will get the title to the mobile home…. I explained to him that when you buy subject to the lender does not have to release the title until the lien is satisfied…. So A now has a mobile home in the Sellers name and the real property is in A’s name. We disclosed this to all parties and begged them not to close- so was our closing ethical? Yes Was it Legal? Yes… Did A and B get screwed? Maybe….
When Guru came back and tried to schedule another closing we promptly asked him to leave the premises and not return.
SO…, in attempting to classify what material constituted exactly "mortgage fraud in a subject to transaction", "I shall not today attempt further to define the kinds of material I understand to be embraced . . . [b]ut I know it when I see it . . ."
The moral of the story is: These are questionable in nature and should only be done with proper disclosure and legal representation… and if it comes to my office there is an 80% chance it will not close… because I will fully and absolutely disclose what is going on.
PART !! –Do lenders enforce “Due on Sales” Clauses?? I have personally never seen one enforced. However in light of all of the changes in the mortgage industry, and the astronomical rates of fraud and default, I would advise against testing the lender. I believe that they will start enforcing it in the near future. It would be rank MALPRACTICE for an attorney or agent to advise a client otherwise. As a professional we are duty bound to advise our clients of the risks… So if you ask me will a lender enforce a Due on Sale clause? My answer is YES if you ask if I have seen it I will say no….
IF YOU PLAY WITH FIRE YOU WILL EVENTUALLY GET BURNED