DUE-ON-SALE-O-METER

105 Replies

Was just told today by a Chicago area attorney who works with a lot of investors that he has seen a sharp increase lately in banks calling notes due.

Very curious if anyone else is seeing this.

That is interesting. Do you have more details? Are the notes being called, subject to deals, or for other reasons?  Are these new subject to deals or are they going after older deals?

We were discussing subject to deals, but he was not specific.  

I heard One West Bank is calling notes do base on subject2, transferring the deed to an LLC or trust with a lien on it.


Joe Gore

@Ned Carey

Did get a little more information.

He said it is a general trend, not pertaining to any certain type of deal, and that he is seeing it when banks sell off loans to other servicers.

And maybe it's his personal agenda, check with other attorneys and filings, but he could be right, such do follow regional trends. :)

Originally posted by @Rick Hungate:

@Ned Carey

Did get a little more information.

He said it is a general trend, not pertaining to any certain type of deal, and that he is seeing it when banks sell off loans to other servicers.

If the lenders are calling loans due, and it's not pertaining to any certain type of deal, then what's triggering the DOS? Pretty much the only transfer that isn't exempt is sub2 purchases. Is the attorney referring to calling the loan due based on other breaches or defaults in the mortgage? Or because of transfer of title?

@K. Marie Poe

He was definitely talking about ownership transfer triggering the due-on-sale clause.  In some cases this could just be an individual transferring property into llc or something like that though.  Sorry, do not have more specific details, but if no no else is seeing this, it would hardly seem a cause for concern.

This is indeed happening and I would tell those pursuing the Sub2 and Wrap guru agenda to be warned. I suppose there is a fair amount of irony to it. The folks pushing these continually say something to the likes of "a bank will not call when the note is performing". - Well that is simply not true.

As many of these loans at some point in recent history were distressed, they likely traded into the hands of firms with intentions to re-establish the performance and thereby profit by reselling the loan with a seasoned and established re-performing payment history.  In addition, cash flowing whole loan securitization is moving right along again in the private market (non fannie/freddie).  

When the loan enters trade, the buyer will will check title.  When the borrower is no longer on title, the asset will be kicked from trade.  The reason the loan is kicked is revealed to the Seller.  In other instances, many firms are looking to put these performing loans back into securitized trusts.  As such, they conduct due diligence prior to pooling the loan into the trust.  A Borrower not on title would cause the loan to be kicked out of that population as well.  

I am guessing not too many folks who like to talk about wraps or sub2 ever mention the legal idea of "Laches" which I am guessing not too many folks even know what it is.  (Bill, I assume does)  In some of the cases, the legal idea of laches will play in.  Becoming aware of claim and not acting on it may prevent the claim from being raised in the future.  Factor in loans that may have previously been modified to below market rates, along with geography which is seemingly appreciating and you have an obligation and desire to call these notes due.  

The implications, that no guru even begins to understand or wants to talk about, putting a borrower into a situation where they can raise a defense of laches or waiver can also mean the lender is no longer entitle to deficiencies.  Not to mention, the Mortgagee's likely violation of their financing arrangements.  From a Mortgagee's perspective it looks like someone (the wraper) is skimming, which is what they have done, regardless of the amount of lipstick applied.  

Said it before, will say it again Wraps/Sub2 = BAD IDEA - these are not being done by folks who understand the asset class and horrible advice is being passed around like it is proper in guru seminars and websites.  I recently commented in a thread where a self-proclaimed expert implies that a borrower's escrow account can be assigned to a wrap borrower.  Not even remotely true.  I still laugh when I say it as it is such a ridiculous idea.

All that said, both sides of the battle will inch along, continuing on their paths until such time that all parties begin to bump heads in mass.  There will be only one winner in that game and it will not be the folks who participated in the wrap/sub2 deal (all 3 of them).

@Dion DePaoli  

The implications, that no guru even begins to understand or wants to talk about, putting a borrower into a situation where they can raise a defense of laches or waiver can also mean the lender is no longer entitle to deficiencies.

If I am understanding you that is a good thing for the original borrower and the new owner.  Why wouldn't a guru want to talk about that?

The problem is all the guru techniques to hide the fact the title has changed may prevent laches as a defense.

Originally posted by @Ned Carey:

@Dion DePaoli  

The implications, that no guru even begins to understand or wants to talk about, putting a borrower into a situation where they can raise a defense of laches or waiver can also mean the lender is no longer entitle to deficiencies.

If I am understanding you that is a good thing for the original borrower and the new owner.  Why wouldn't a guru want to talk about that?

The problem is all the guru techniques to hide the fact the title has changed may prevent laches as a defense.

My understanding of Dion's point about laches is that lenders and institutional note buyers have practices in place in order to check transfers so as to prevent the the laches defense. It supports his point, and one that seems to need a lot of repeating, that a performing note has little to do with a lender's need or reason to call it due in full after a transfer. There is a lot of language on this board and others re DOS that strongly suggests that lenders only "care" about getting timely payments. As if the average sub2 buyer or guru knows what lenders "care" about.

That being said, now I'm thinking about laches from the borrower side.....

@Ned Carey  Not speaking for Dion, but I took what he said to mean that when a potential buyer of a note kicks it back because title has changed, that the holder is now "on notice" of the transfer, so he will feel compelled to call the loan, for fear of letting it ride and not being able to call it later.....if the theory of laches applies.  It makes sense that the more notes are offered for trade, the more likely these sub2's will be discovered.

@Ned Carey I agree with you. The general sales pitch from a guru seems to omit this idea in irony. In my experience, I have only seen one person recommend putting the Mortgagee on notice of the transfer and he is floating around here somewhere with his examining eye. Outside of that, not one guru or expert on Sub2/Wrap has brought the point to the front. Brings to light the level of expertise, right?

I honestly have not ran into a Sub2 expert that I think really understands enough about mortgages (or dot) and the market for me to take much of what they say seriously.  I think it also speaks to the intent of the transaction or sales pitch which is to get through the transaction, pocket the arbitrage and move on, opposed to really trying to teach or make structurally prudent transactions.  

The cards have ALWAYS been held by the Mortgagee, that is the point of a mortgage, we just like to kid ourselves that we can drive the car in some meaningful way from time to time.  Alas, when the Mortgagee wants to drive, when it suits their needs or desires, rest assured, they will drive.  Simply look to the creation of the Garn–St Germain act as proof, even under this same idea.  

I don't think anyone on BP understands the in and outs of a subject2.


Joe Gore

@Wayne Brooks  and @K. Marie Poe are both right.

Notice occurs when it is discovered.  It can be discovered at any time when, for any reason, title is pulled.  That happens when a loan trades from Buyer to Seller or when the loan is being pooled into a trust.  Commonly the gurus look to the Sherlock Holmes ideas, like a Mortgagee looking to the amendment to an insurance declaration or tax records.  Those are certainly possible but not as "in your face" as an actual title report which clearly shows title has changed.  

The guru sales pitch lives on because for the most part, the public does not understand how mortgages are financed with exception of the very basics of banking.  Too bad, those types of loans are actually the minority.  The bulk of loans are originated with intent to securtize, that is how they get financed.  (You would have thought we learned that from the crash, but I digress).  We have opened up new divisions of regulation to look into these trusts, look to Dobb Frank (the parts the Gurus who actually 'read', didn't even imply were present).  Issuers, those who issue the bonds for the trust are on the hook for the contents of the trust.  The name on the note is supposed match the name on title, it's really a no brainier.  Perhaps the deficiency idea is a little less understood but it is a real and largely present issue as well.  

If a Mortgagee were to be smarter than the Guru's claim, said Mortgagee might be inclined to specifically look for DOS defects as a practice. Said Mortgagee/Investor could purchase the loan, use the DOS and accelerate, foreclose and pursue deficiency. Not all that crazy as property continues to return to pre-crash levels and rates continue to slowly inch up. As I said, many of the mod's in the market have pushed those rates down to 1% and 2%, so even from a rate stand piont, it benefits the lender, which is the same reason the legislation was created to begin with.

But Mortgagees just are not that smart.......are they??

This post has been removed.

@GrantKemp does a lot of these sub2 transactions. I'd love for him to come on this thread and give his opinion.

@k. Marie Poe, @Wayne Brooks   @Dion DePaoli Thanks all

I never considered the resale of the mortgage as a trigger to discovery, that makes total sense. However aren't most loans packaged and resold earlier in their life? Would the risk of this decline over time? 

I have only seen one person recommend putting the Mortgagee on notice of the transfer and he is floating around here somewhere with his examining eye.

Well there are at least 2. Actually an old school Guru, John Hyer, was the first to suggest, laches and putting them on notice to me. (Although interestingly he doesn't teach sub2, he was just commenting on it) He is a CPA and Lawyer so his lawyer side was punching holes in the sub2 gurus strategies.

Several years ago I started describing institutional lender behavior that was inexplicable to me as "practices and policies we are not privy to".  Forget what I'm privy to.  I can barely understand the practices after they are explained to me. 

It's good to be reminded that securization is alive and well.  And that loans are subject to scrutiny because of it.

@Dion DePaoli  About putting the lender on notice in a sub2 transfer: Is the idea behind that to preserve the borrower/wrapper/buyer's laches defense? Isn't recording a deed in a sub2 transfer sufficient notice?

@Grant Kemp   Someone a couple of posts above called you to this thread but the @ sign didn't work.

@Ned Carey it is true that often within 24 months of origination many new loans are pooled into securities. Right now most of our market (new origination) are with Fannie, Freddie and Ginnie (FHA/VA). Those would presumably carry less 'risk' (I hesitate to use that word but you get the idea, I don't condone these) once they are bundled. However, we have been tearing down the defaulted and delinquent mortgages in the market for several years now and many private institutional investors have long been purchasing the whole loan only to later exit that loan by way of pooling the loans and selling them off. Let's just say there is a lot of those and as they continue to work through the gauntlet and as the market for private issue bonds regains it's momentum, this idea will grow and intensify. It is an obvious and easy to detect loan defect that will affect the current (at the time) investor from disposition the loan according to it's master plan, as such it will eventually get dealt with.

We didn't think we would sail off into the sunset with the Sub2/Wrap in place did we? - Gosh, I hope not, that would be pretty naive.

@K. Marie Poe (not sure why that doesn't work) - Let me be clear before I address your question.  I think Wraps and Sub2 are HORRIBLE ideas on so many levels.  Just think of the asset that is considered for a Sub2.  When given the chance, a Borrower will sell or rent their property properly not pursue these types of transactions.  It's only when there is a barrier to properly disposing of the obligation or maintaining the obligation do these transactions seem to arise.  To that degree, I think that idea, speaks to itself.  No amount of lipstick changes that in my eyes.

Objectively speaking, if there is no fear with regards to completing these transactions then there should be no fear of giving notice. That notice "might" be a tool in the defense of any future claim related to the contract in the future. From a Mortgagee perspective, Lachs would be the concern that would help motivate acceleration, more of a "what if" type thing. "What if we don't use DOS and hold this too long and then we loose our claim?" That type of idea could leave the Mortgagee in a situation that they don't want to be in where they don't control the loan or lost some control of the loan.

Currently, I don't know of any institutional investor in the secondary market that would accept the purchase of a loan where the borrower is not properly vested on title.  In addition, many whole loan contracts have reps and warrants that actually state the loan is proper.  So there are more obvious and clear ways for this to backfire in my opinion than there are for this to ever go right in perpetuity for the parties.  It will work out for the Mortgagee not the others.

I suppose the argument could be raised in any Sub2 that the recording of the deed is notice.  Not sure how well that sticks since it is not practical nor a matter of practice for Mortgagees to continually check the title to their mortgaged properties.  A matter for the courts to figure out.  What we do know, an in your face sort of knowledge of the event can certainly be used as a benchmark to establish the amount of time the Mortgagee has or would know of the conveyance.  We do not know precisely what amount of time would create a forfeit of the Mortgagee's right to raise the claim either.  Could be short or long some states and will depend on those states, in some it could be shot down all together also and not be allowed as a defense.    




Since this is such a hot topic and since Texas seems to be a state of much interest let's take a look at the state regulations on the matter.  In case you believe I copy and pasted that incorrectly, LINK

Texas state law REQUIRES disclosure to ALL LIEN HOLDERS:

Sec. 5.016. CONVEYANCE OF RESIDENTIAL PROPERTY ENCUMBERED BY LIEN. (a) A person may not convey an interest in or enter into a contract to convey an interest in residential real property that will be encumbered by a recorded lien at the time the interest is conveyed unless, on or before the seventh day before the earlier of the effective date of the conveyance or the execution of an executory contract binding the purchaser to purchase the property, an option contract, or other contract, the person provides the purchaser and each lienholder a separate written disclosure statement in at least 12-point type that:

(1) identifies the property and includes the name, address, and phone number of each lienholder;

(2) states the amount of the debt that is secured by each lien;

(3) specifies the terms of any contract or law under which the debt that is secured by the lien was incurred, including, as applicable:

(A) the rate of interest;

(B) the periodic installments required to be paid; and

(C) the account number;

(4) indicates whether the lienholder has consented to the transfer of the property to the purchaser;

(5) specifies the details of any insurance policy relating to the property, including:

(A) the name of the insurer and insured;

(B) the amount for which the property is insured; and

(C) the property that is insured;

(6) states the amount of any property taxes that are due on the property; and

(7) includes a statement at the top of the disclosure in a form substantially similar to the following:

WARNING: ONE OR MORE RECORDED LIENS HAVE BEEN FILED THAT MAKE A CLAIM AGAINST THIS PROPERTY AS LISTED BELOW. IF A LIEN IS NOT RELEASED AND THE PROPERTY IS CONVEYED WITHOUT THE CONSENT OF THE LIENHOLDER, IT IS POSSIBLE THE LIENHOLDER COULD DEMAND FULL PAYMENT OF THE OUTSTANDING BALANCE OF THE LIEN IMMEDIATELY. YOU MAY WISH TO CONTACT EACH LIENHOLDER FOR FURTHER INFORMATION AND DISCUSS THIS MATTER WITH AN ATTORNEY.

(b) A violation of this section does not invalidate a conveyance. Except as provided by Subsections (c) and (d), if a contract is entered into without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason on or before the seventh day after the date the purchaser receives the notice in addition to other remedies provided by this section or other law.

(c) This section does not apply to a transfer:

(1) under a court order or foreclosure sale;

(2) by a trustee in bankruptcy;

(3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest;

(4) by a mortgagee or a beneficiary under a deed of trust who has acquired the real property at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the real property by a deed in lieu of foreclosure;

(5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust;

(6) from one co-owner to one or more other co-owners;

(7) to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors;

(8) between spouses resulting from a decree of dissolution of marriage or a decree of legal separation or from a property settlement agreement incidental to one of those decrees;

(9) to or from a governmental entity;

(10) where the purchaser obtains a title insurance policy insuring the transfer of title to the real property; or

(11) to a person who has purchased, conveyed, or entered into contracts to purchase or convey an interest in real property four or more times in the preceding 12 months.

(d) A violation of this section is not actionable if the person required to give notice reasonably believes and takes any necessary action to ensure that each lien for which notice was not provided will be released on or before the 30th day after the date on which title to the property is transferred.

Added by Acts 2007, 80th Leg., R.S., Ch. 1056 (H.B. 2207), Sec. 1, eff. January 1, 2008.

Originally posted by @Dion DePaoli:.


@K. Marie Poe (not sure why that doesn't work) - Let me be clear before I address your question. I think Wraps and Sub2 are HORRIBLE ideas on so many levels. Just think of the asset that is considered for a Sub2. When given the chance, a Borrower will sell or rent their property properly not pursue these types of transactions. It's only when there is a barrier to properly disposing of the obligation or maintaining the obligation do these transactions seem to arise. To that degree, I think that idea, speaks to itself. No amount of lipstick changes that in my eyes.

Objectively speaking, if there is no fear with regards to completing these transactions then there should be no fear of giving notice. That notice "might" be a tool in the defense of any future claim related to the contract in the future. From a Mortgagee perspective, Lachs would be the concern that would help motivate acceleration, more of a "what if" type thing. "What if we don't use DOS and hold this too long and then we loose our claim?" That type of idea could leave the Mortgagee in a situation that they don't want to be in where they don't control the loan or lost some control of the loan.

Currently, I don't know of any institutional investor in the secondary market that would accept the purchase of a loan where the borrower is not properly vested on title.  In addition, many whole loan contracts have reps and warrants that actually state the loan is proper.  So there are more obvious and clear ways for this to backfire in my opinion than there are for this to ever go right in perpetuity for the parties.  It will work out for the Mortgagee not the others.

I suppose the argument could be raised in any Sub2 that the recording of the deed is notice.  Not sure how well that sticks since it is not practical nor a matter of practice for Mortgagees to continually check the title to their mortgaged properties.  A matter for the courts to figure out.  What we do know, an in your face sort of knowledge of the event can certainly be used as a benchmark to establish the amount of time the Mortgagee has or would know of the conveyance.  We do not know precisely what amount of time would create a forfeit of the Mortgagee's right to raise the claim either.  Could be short or long some states and will depend on those states, in some it could be shot down all together also and not be allowed as a defense.    


I have zero interest or motivation to do sub2/wrap. I'm in agreement with you that they are a horrible idea, but my reasons are probably different.  Too complicated and too many players for my taste.  Your comment about only one player coming out ahead in a wrap and it's never the seller, wrapper or buyer made perfect sense to me!

I use sub2 as as a way to control the property during the problem solving period. You are correct that "given the choice" a sub2 seller would sell or rent. I'm sure you're aware of the many circumstances that make it difficult or impossible for the borrower to sell or rent. Even with "short sale" and "deed in lieu" being household words now, many borrowers get nowhere when trying to communicate and work something out with their lender to be rid of the property. In my last two sub2 deals, both borrowers had tried to get their lenders to take a deed in lieu with no success. One actually asked the lender to please go forward and foreclose (it had been defaulted 3 years) and the lender said there was no plan to foreclose. The borrower's frustration level was huge. Both borrowers had continuing liability for owning properties they didn't live in, couldn't rent and couldn't sell. They both were being sued by their HOA for back fees.

I don't presume to be doing the sellers a favor or helping them out of a bad situation, even though they may think that.  I do it because I like working all the pieces of the puzzle and it makes me money.  The "barrier to properly disposing of the obligation" seems insurmountable to some borrowers.  Understandably so, IMO.  Sometimes it's frustrating and bumpy for me and I have resources and cash.  

All that to say I'm glad sub2 is a tool in my toolbox.

Originally posted by @K. Marie Poe:

All that to say I'm glad sub2 is a tool in my toolbox.

 Not really quote you there, was the only way to get you pinged again.

Curious, have you resold that property or do you simply hold and rent the property?


The potential for a due on sale is always there if it's in the loan terms (most of them). Right now with interest rates near zero, the lenders are usually just happy to get paid on time. BUT if interest rates go up, I can see lenders calling DOS's to force a refinance at a higher interest rate. All banker's have to do is a simple records search, and start scooping up piles of money through higher interest rates. Personally I don't think the Government will ever raise interest ratesmuch, because they wont be able to pay the interest on the national debt. But if I'm wrong, and you transferred title, look out.

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