Is this illegal?

Question

Is it illegal to violate a bank's due on sale clause for either buyer or seller? Can someone go to jail for violating this clause?

Jon Holdman · Answer

Its not a criminal matter, and you get sent to jail or prison for criminal matters.

It is a civil matter.  It is a violation of the contract.  The bank has specific remedies they can apply if you violate this clause.  Specifically, they can call the note due, and if it doesn't get paid off, they can foreclose.

Not a lawyer, if you want solid legal advice, only a lawyer can give that.

Bryan Hancock · Answer

The risk of notes getting called will rise big-time if interest rates jump 5 or so percent.

Bryan Hancock · Answer

Nope...that is pretty sound logic.  The cost to take the house back and sell it would far exceed the interest delta cost in most cases.  This is especially true in states where it takes forever to close on property.  Note that Texas isn't one of those states.

Mike G. · Answer

I think I'm missing something (or maybe making an assumption that's not true).  I would think if someone bought a house subject to the mortgage and took over payments, the original owner doesn't have the money to keep servicing the debt (or doesn't want to).  I would also think that the person buying the property subject-to isn't able to (or doesn't want to) lay out a lot of cash for the purchase.  Which would most likely mean that if the bank calls the note due, it's foreclosure time, and why would the bank want to do that?  I guess it would make sense if there was a lot of equity in the house, but are there other things I'm missing?

Michael Murphy · Answer

Why lend your money at 5% when you can lend at 10%?

If there is any reason to call a loan, they will take it. The resale value of that note wou;ld also be way down.

I think my lender just did this to me. I was locked at 4% on  apurchase loan.  Guess what, when rates went up recently, they didn't manage to fund my loan on time. I had to close with all cash - it was an auction property with a 30 day deadline and no financing contingency.

They are a direct lender - lending their oiwn money. I have heard complaints from other customers of them doing the same thing.

Three letter name before the word "Loan." Starts with an "A."   :cool:

SOB's.  Never again!

Cheers, Michael

Edit: Wow, 4 cross posts while I was typing that! Sorry ...

Bryan Hancock · Answer

Yes...and there is no reason to call it because their spreads are still positive.

Keep in mind that "banks" are really MBS buyers in this scenario too.  The "investors" also have gov-mint guarantees and servicers as players so things aren't as simple in the real world.

Sharad M. · Answer

So that the banks can get the money back and lend it at higher a interest rate. With the interest rates staying the same, the cost of calling the loan due is not worth the benefit.

Bryan Hancock · Answer

Well the real answer is rather complicated.  The "in theory" answer is that the lenders can lend the money at higher rates and will thus want to call the loans.  Short-term money for deposits is expensive if rates rise and thus the lenders would have negative spreads for money lent.

The real answer is that this money gets packaged and sold in the secondary market.  The mortgage servicers really have no FINANCIAL interest in calling performing loans on behalf of their investors so it is still a bit unlikely.

There is always the risk that 60 Minutes will run a show about evil investors and get the public into a frenzy about calling loans too.  Past performance of not calling loans is not indicative of future performance.  One should not have 50 loans that all have due-on-sale provisions triggered that exposes her to this event risk.

Subject-to purchases are good for entering real estate positions using short or intermediate term financing.  Refinance the loan once it seasons and you shore up some new liquidity.

Trusts with wrap sales may not be illegal, but they are dangerous if the wrap note is structured as long-term money.  That is asking for trouble long-term.

I could go on and on...there are issues with the original seller wanting "their" house back or the loan out of their name, bankruptcy by various parties to the transaction, etc.  That doesn't relate to the OP though so I will leave it for another thread.

David Beard · Answer

The banks would have an incentive to retire a low-yielding asset at par, replacing with a maket (higher) yielding asset.  Thus they might mine their systems and external sources to detect due-on-sale violations.

Mike G. · Answer

Bryan, why will the risk of notes getting called increase if interest rates jump?

Is this illegal?

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