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).
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:
If this was a California statute I'd sure want to know about it. @John
@John Jackson Since you're doing lease options and there is no deed transfer, you're exempt from these disclosures, right? But what about @Grant Kemp? As a RMLO on the sub2 wraps, are you using this disclosure and informing the lender?
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.
Matt: it sounds like maybe you didn't read the thread? You may want to go back and read the other posts, especially Dion DePaoli's. Lenders have all kinds of other reasons to call a loan due that have nothing to do with interest rates. This entire thread has pretty much been about the trouble with presuming "lenders are just happy to get paid on time". Happy reading!
My ultimate issue I take with these are it seems they are targeting end primary buyers. Those buyers, I think one could argue, are disadvantaged in some fashion. A capable buyer purchasing a primary residence would not knowingly take such a risk of loss of capital injected or loss of property given the alternative to not. A primary buyer can not get a conventional loan in first lien on a Sub2 property. So that leaves us with either a cash buyer or Seller Finance.
To that degree, it begs the issue of issuing proper credit and is the consumer really knowledgeable of what is happening or worse, what could happen?
Why would a primary buyer risk capital loss or property loss in this situation?
An investor end buyer, I can live with to some degree. That is, with the idea that loss is likely imminent. A primary, no so much, they are protected. The loan, IMO, is predatory in nature since these would seem to rely heavily on a disadvantaged primary buyer, unless the buyer is indeed an investor. And that will get you into trouble.
A side point to this train of thought, let us remember the rule Garn–St Germain is really not all that old. As such, there is still some outstanding legal concepts that will get flushed out as litigation concepts are brought up. One of those, I believe I am touching here. Believing that a set of disclosures is going to save you from ramifications of these types of practices I think is naive. When the rule was designed, it's not clear that it set out, like Dobb Frank did, to protect the consumer/primary buyer. So we have some language floating around that is ambiguous and may still need to be developed which can happen in any state once the matter is heard in court.
To further illustrate that point, if you go read the statue above, at the bottom it provides exception to the disclosure to the lien holders if title insurance is obtained by the buyer. Please note how ambiguous the sentence actually is:
(10) where the purchaser obtains a title insurance policy insuring the transfer of title to the real property; or
While I will admit, I have not examined many Wrap title insurance policies, however, I think we can objectively see or hopefully see, that we would explicitly have to review said title policy to ensure the transaction is properly insured. If the policy carves out the exiting mortgage, is title really insured from past claims? How could it be if the past Mortgagee could make a claim on the title granted by way of the existing mortgage? Seems sort of counter-intuitive. Was that exception designed for this or a "stale mortgage" of distant past and no resolution in order to provide a way to not produce zombie title issues or unresolved clouds? I would argue the latter.
I think also within this same guise is a misunderstanding by many thinking that Insured Title is the same as Marketable Title. This puts us into a whole other set of issues with all of the other transaction documents used.
I realize some of this in now tangent on these matters. Sorry to the OP for hijacking the thread. DOS is sensitive now-a-days is all I can say.
Back to the best point made above in re-wording of my responses, K. Marie stated, there is a notion that the Sub2 promoters want the masses to believe that in the end, all that is needed is a performing loan, the bank just wants it's payment. That idea is off base and is a complete miss while being an over simplification of the complex issues that surround our mortgage industry and real property industries and laws. It just is not that simple. The list of reasons and incentives are both growing everyday to use DOS as a Mortgagee, not because of want, but because of legal mandates to do so both in the state and federal laws in order to protect their interests as well as the contracts and laws that revolve around the sale and delivery of mortgages or mortgage investment vehicles in the market such as RMBS. Take a look at the news paper and look to all of the high dollar mortgage banking lawsuits and you will see some of the billion dollar reasons to pursue such things.
Just because the houses of cards has not fallen yet, doesn't mean it will not and the more of these that get stacked on to the already fragile pile, I would argue, like the same house of cards, is just more reason to suspect it will sooner rather than later.
@Bill Gulley It makes sense, if this is a general trend. Rates are likely to stay low for a while yet, but eventually they will have to go up. The banks want property back to resell at higher financing. We've seen this game before...
Study history, people. Sub 2 and all the rest of that junk simply makes it easier for the banks to make the decision to go after the property. But, it won't stop there. Banks don't want to hold 3.5% 30 year ams - they should be looking for ways to get out of those and get financing at twice that. It sounds like the game has began...
@K. Marie Poe in TX on a LO the seller must provide the mtg info and then submit an Auth to Release, or could also use a LPOA so the bank has permission to talk to the buyer.
§5.016 is for a wrap or contract for deed, but does not apply to a lease option.
Something for the people who are interested in the other side of the equation. This is not me speaking. Just an article by William Bronchick, J.D. Author and Attorney.
The "due on sale" clause is probably the most talked about, most feared, and most misunderstood topic in real estate investing.
This article will dispel any misunderstandings you may have about the "due on sale" clause and suggest a simple, yet effective strategy to get around it.
Before we discuss how to get around the it, we must understand what it is and where it came from.
The "due on sale" (aka "acceleration clause") is a provision in a mortgage document that gives the lender the right to demand payment of the remaining balance of the loan when the property is sold.
It is a contractual right, not a law. This means that if title to the property is transferred, the bank may (or may not), at its option, decide to "call the loan due."
An "assumable" loan is one that is secured by a mortgage which contains no "due on sale" provision. FHA-insured mortgages originated before Dec. 1989 and VA-guaranteed loans originated before Feb. 1988 do not contain such provisions.
Nearly all loans originated today contain a standard "due on sale" clause which usually reads something like:
Banks began inserting "due on sale" clauses in their mortgages in the 1970s when interest rates rose dramatically.
Home buyers were assuming existing loans rather than borrowing new money from banks because the interest rates on existing loans were lower.
The banks used the clause as a way to kill their own worst competition. They argued that the reason for the restriction was to be able to police who was living in the property--the collateral for their loan.
This argument holds little water since most banks haven't been enforcing "due on sale" violations since the early 1980s when interest rates were high.
In fact, Black's Law Dictionary defines the "due on sale" clause as a device for "preventing subsequent purchasers from assuming loans with lower than market interest rates."
This idea was also confirmed by the court in Community Title Co v. Roosevelt Savings & Loan 670 S.W.2d 895 (Mo.App. 1984):
The home owners fought the banks in court claiming that the enforcement of the "due on sale" was "unfair trade practice" and an "unreasonable restraint on the alienation of property."
In state courts, many home owners were winning the argument. [See, e.g., Wellenkamp v. Bank of America, 21 Cal 3d 943 (1978).]
The banks ultimately won in a United States Supreme Court case, Fidelity Federal Savings and Loan Association v. de la Cuesta, 102 S.Ct. 3014, (1982).
Congress thereafter passed the Garn-St. Germain Federal Depositary Institutions Act (12 U.S.C. 1701-j) which codified the enforceability of the "due on sale" clause, despite state statute or case law to the contrary.
Many people are under the mistaken impression that transferring title to a property secured by a "due on sale" mortgage is illegal. This is because most lay people confuse civil liability with criminal liability.
To be "illegal," you must be in violation of a criminal law, code, or statute. There is no federal or state law which makes it a crime to violate a "due on sale" clause.
If the lender discovers the transfer, it may at its option, call the loan due and payable. If it cannot be paid, the lender has the option of commencing foreclosure proceedings.
So the real question is: Are you willing to take a property subject to a mortgage containing a "due on sale" clause with the risk of getting caught?
The game for us is how to transfer ownership to the property without getting caught by the lender.
You could simply get the owner to sign you a deed and not record it, but this method is problematic. (For example, what if the seller gets a judgment against him?) Enter the "trust assignment trick...
The Garn St. Germain Act carves several exceptions in which the lender may not enforce the "due on sale" clause:
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation or on a residential manufactured home, a lender may not exercise its option pursuant to a "due on sale" clause upon:
The Federal Home Loan Bank Board, which was disbanded in 1989 and replaced by the Office of Thrift Supervision, takes the absurd position that the Act only applies to owner-occupied homes. [See 12 C.F.R. 591.]
However, the clear language of Garn Act specifically states that it applies to residential one-to-four family homes. There is no mention that it must be "owner-occupied."
Although never enforced or challenged, such a direct conflict with the Congressional statute would probably be struck down in court as being "ultra vires."
A land trust is a form of a revocable, living trust which is exempted under the Garn Act. A land trust, like a living trust, is create by two legal documents:
The trustee holds title for the benefit of the grantor. (In this case, the grantor is also the "beneficiary.") If you place title to your property into a land trust, you have not violated the "due on sale" (so long as there is no change in occupancy).
Let's say that you come across a seller who is willing to give you title to his property. The only "glitch" is that the loan is not assumable because the mortgage has a "due on sale" clause. Here's the process for getting around it:
STEP 1: Sammy Seller signs a trust agreement with you as trustee of his trust. Sammy is named as the "beneficiary" of the trust.
STEP 2: Sammy Seller transfers title to the trustee (no violation of the clause)
STEP 3: Sammy Seller quietly assigns his interest under the trust to you (similar to a transfer of stock in a corporation). This assignment is not recorded in any public record. Sammy moves out and you move in.
STEP 4: You are now the beneficiary of the trust. Your trustee makes payments to the lender.
Keep in mind that the assignment of Sammy Seller's interest under the trust to you does trigger the "due on sale," but who is going to tell the lender? In reality, the lender will discover the transfer of an interest in real estate in one of three ways:
If you notify your insurance carrier of a change in insurance beneficiary, the lender, who is also a named beneficiary, receives a copy of the change.
However, if you transferred title into a land trust, the new beneficiary under the insurance policy will be the trustee of the land trust. The lender will probably not object, since it will assume the seller has implemented an estate planning device.
If the beneficiary of the trust is assigned, the lender will not be notified since the insurance beneficiary (the trustee) has not changed.
This strategy is not much different than simply transferring title directly from seller to buyer (called taking a deed "subject to"). However, the chances of the lender discovering the change of ownership are greatly reduced.
This is especially true where the lender has contracted to use a "servicing" company to deal with most facets of the loan. If you have had any experience with servicing companies, you know that most are so poorly managed that they don't know which way is up
I would wager that a survey of 100 servicing company employees would reveal that 98 of them wouldn't know the meaning of a "due on sale" clause.
From a legal standpoint, an agent who does not disclose the transfer to the lender has committed no breach of ethics. In fact, some of the standard contracts approved by the California Association of Realtors contain provisions contemplating a "subject to" transfer. [See, e.g., form LRO-14, Residential Lease with Purchase Option.]
The Official Utah Division of Real Estate forms also contain provisions for transfers in the face of a "due on sale" provision. [See Seller Financing Addendum to REPC.]
Form 3248, the "official" real estate contract used by New York Attorneys (jointly prepared by the New York State Bar Association and the New York State Land Title Association), contains a specific paragraph contemplating the buyer taking "subject to" an existing mortgage.
The state bars have no problem with lawyers helping clients conceal a transfer either. In Matter of Sabato, 560 N.E.2d 62 (Ind. 1990), the court found no ethical problem with an attorney helping a client circumvent a "due on sale" provision using a land trust as described above.
In Alaska Bar Association Ethics Opinion #88-2, the committee declared "circumventing a contract term under these circumstances is not fraud or fraudulent conduct. The attorney's participation would amount to concealing a "breach of contract."
The Illinois Bar also concluded that "the breach of the contract of sale in contravention of the 'due on sale' clause is not a crime." [See Advisory Opinion No. 728.]
The Virginia Bar reached a similar conclusion in Opinion 471 (1983).
Thus, if it is not illegal or fraud for an attorney or broker to conceal a transfer of ownership, it is certainly not for a lay person.
It is not a bad idea, however, for any party or real estate agent to disclose the existence of a this clause to all parties involved in the transaction so that they are aware of the risk.
Utah Rule R162-2f-401a states, "Real estate licensees have an affirmative duty to disclose in writing to buyers and sellers the existence or possible existence of a ""due on sale"" clause in an underlying encumbrance on real property, and the potential consequences of selling or purchasing a property without obtaining the authorization of the holder of the underlying encumbrance." [Note that the rule does not prohibit such transactions.]
In Ethics Opinion No. 96-2, the Alaska Bar ruled that an attorney has no duty to disclose the existence or the implications of a "due on sale" to parties to a transaction whom he was not representing.
Personally, I disagree with this ruling; I think an attorney should disclose, even if it runs him the risk of giving out unsolicited legal advice.
Some title company representatives and attorneys have refused to close "subject to" transactions, quoting 18 United States Code Section 1001, which generally states that:
"Whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully:
shall be fined under this title or imprisoned not more than 5 years, or both."
It is a bit of a stretch to apply this law to concealing a transfer that triggers a "due on sale" clause.
Taken to its illogical extreme, this statute could land you in jail for saying "I'm next" while on line at the post office when you really aren't. In fact, criminal statutes are always narrowly construed to protect the rights of citizens.
18 U.S.C. Sec. 1010 makes it a crime to make any false statement in regard to a loan insured by HUD. This law has been used to prosecute borrowers and their brokers who lie on their loan applications or "fudge" down payments for FHA loans. It has never been used to prosecute "due on sale" violators.
In fact, the HUD-1 Settlement Statement (lines 203 and 503) that is used for virtually every loan closing has a blank which states, "loans taken subject to."
How could a HUD-promulgated closing form contain such a blank if it were a crime to take property subject to an existing loan?
Remember that the "due on sale" is triggered by "transfers" other than a deed. A lease of three years or more or a lease with option to purchase (of any term) also gives the lender the option to call the loan due.
Real estate agents routinely engage in lease option transactions and generally make the lease option a compensable part of their listing agreements.
In fact, REALTOR.com, the official web site for the National Association of Realtors, contains thousands of listings for properties available by lease option terms.
It would be fair to assume that the large majority of these properties have underlying loans that would be triggered by the seller engaging in a lease option transaction.
Thus, if a lease with option triggers the "due on sale," and agents assist sellers in doing lease options, then wouldn't hundreds of thousands of agents (as well as REALTOR.com) be engaging in fraudulent transactions?
To take it one step further, consider that major title companies routinely assist in closing "wrap around" transactions that also trigger "due on sale" clauses on underlying loans.
So, these companies, their employees, and their attorneys would also be guilty of conspiracy to commit fraud. Furthermore, attorneys, escrow agents, and other parties to a transaction would also be guilty of conspiracy to commit fraud.
"Occam's Razor" is a scientific precept that postulates a simple theory: given two explanations, the simplest one is probably the right one.
People have been taking over properties subject to existing mortgages for at least thirty years, and there have been no reported cases of criminal prosecution for hiding the transaction from a lender.
So, are hundreds of thousands of investors, borrowers, agents, title company employees, and attorneys breaking the law and getting away with it, or is the practice of hiding a transfer from the lender a perfectly legal transaction? You decide!
In theory, a lender could sue the borrower for fraud for deliberately making a misstatement regarding his loan. Of course, this makes no sense, because a lender would do better simply calling the loan due and foreclosing the property.
Furthermore, a case for fraud requires someone to lie in the first place; keeping your mouth shut is the easiest way to avoid the issue.
In theory, a lender could sue you, the buyer, for inducing the seller/borrower to breach his mortgage agreement (called "tortious interference with contract"). This case would be pretty hard to make, since the standard mortgage agreement does not state that the borrower has to notify the lender if he transfers title or any other interest in the property.
Oddly enough, I did find one reported case in which the lender tried to make such an argument: Community Title Co v. Roosevelt Savings & Loan 670 S.W.2d 895 (Mo.App. 1984).
In that case, a lender (Roosevelt Savings) sued a title company that advocated, educated, and performed closings using a contract-for-deed. Some of the properties that were closed had Roosevelt's mortgages, which contained "due on sale" provisions.
The court correctly reasoned that the title company was not liable, since the borrowers could have found some other means of violating the "due on sale." (In legal terms, there was no "but for" causation.)
Likewise, it would be just as easy for you to prove that the borrower was inclined to walk away from the property and default on the loan...Why else would he hand you a deed subject to his mortgage?
Of course, all of this discussion of "fraud" requires a material misstatement of fact in the first place. If anyone made a misstatement, it was the borrower. (OK, so it was your idea--so what?)
If the borrower and you simply transferred title without making any statements to the lender (as I described above), then there can be no fraud.
The United States Supreme Court recently declared that is not fraud to violate a "due on sale" if the borrower simply transfers title without saying anything to the lender. [See Field v. Mans, 1995.S.Ct.207 (1995).]
Furthermore, the court in Medovoi v. American Savings & Loan, 89 Cal.App.3d 875 (1979) declared a lender could not sue the buyer for fraud for deliberately concealing a transfer, since he has no legal obligation to tell the lender of the transfer.
Attorney Robert Bruss, a well-respected nationally syndicated real estate columnist, advocates the practice transferring properties "subject to" existing loans without notifying the lender. In his 1998 article, "Nothing Down Home Purchases," Bruss says,
In his article, "The Six Pillars of Assumption," he also advocates the use of a trust to "dupe" the lender.
Attorney Jeffrey Liss, J.D., LLM, a Harvard Law School Graduate and well-respected member of the Illinois Bar, wrote an excellent article called "Drafting Around the Mortgage 'Due on Sale' Clause in the Installment Sale of Real Estate" that was published in the Chicago Bar Record.
In this article he points out that,
Buying a property subject to the existing mortgage loan is a risk versus reward gamble. The reward is that you avoid loan costs, personal liability for the note, and can conserve your cash.
You can also take advantage of favorable interest rates, since an owner-occupied loan is likely going to have a lower interest rate than if you originated an investor loan. You can also get away with a lower down payment.
The legal risk was addressed above, but what is the practical risk? That is, what is the real risk of the lender calling in the loan?
Nowadays, the risk is pretty slim. As long as the interest rate on the existing loan is within a few percent of market interest rates, the lender is not likely to accelerate a performing loan.
The reason is simply profit; it costs money in legal fees to foreclose a mortgage, and the lender would rather get paid than have another non-performing loan on its books.
Of course, if interest rates rose dramatically, lenders may start enforcing the "due on sale" clauses again.
Interest rates don't jump several points overnight, so pay attention to the market if you have several properties acquired in this fashion. Consider refinancing the loans or selling the properties if market interest rates move upward.
Bill Bronchick has an agenda to sell his trust-related training courses. There's nothing wrong with that, however one ought to be aware of a guy who has a horse in a race, and which horse is his.
I've learned about the lender/Beneficiary's concern for an owners' use of laches as defense. Thank you. The point about paper trading is well founded, too.
I play on both sides of the game, meaning I'm both a lender and occasional property buyer. As an lender, I strictly originate loans to fiduciaries and have highly modified, proprietary notes and trust deed docs, anticipating the scenarios that we've either observed or encountered.
As a real estate investor, I've done plenty of sub-2 deals. I'm quite mindful of the risk as I had the loan on my own prior residence called by the lender. The property was purchased pursuant to a court ordered sale (signed by clerk of court, per order) and that still fell outside the Federal code, so the bank's beef was valid. When the mortgage banker I used could not perform as promised, I went to the bank, who happily refinanced their (securitized) mortgage at an even lower rate. Everybody happy.
Should a bank ever call their loan again, I'd probably just write a check, as it's not worth the aggravation. For what it's worth, I've done some pretty weird stuff, like acquiring a decedent's property that's in default sub-2 via adverse possession. I've done that play multiple times.
Lastly, it should be noted that lenders and servicers may have different motives. A big, dumb bank or securitized pool is not particularly on top on their yield spread on a given note; a servicer would rather keep a performing loan to term. A smaller or more savvy note buyer might see an opportunity to take down a pool and ID well-secured loans in breach, and call to force payoff, hence liquidity.
Just my 29 cents, adjusted for inflation.
I believe that article was written pre 2008 crash. When the article talks about "Nowadays, the risk is pretty slim", that is a different Nowadays. I think this thread is addressing the now Nowadays.
@Account Closed Im only asking out of curiosity and to add to my knowledge arsenal, but in today's market if the rates are still low, would it make much sense to a large institutional lender to call a loan that has an interest rate comparable to the current rates? Would it cost them more to go through that process? Or do you think interest rates are going to rise in the near future and create an incentive large enough for lenders to start calling more often?
@Rick H. How do you feel about subject to in today's market?
Ve'Ron - If you re-read and follow the thread from start to finish, you'll see that major argument for calling loans as introduced by Dion is not rising interest rates but protection of lenders' rights as loans are sold to new lender/investors.
Under the theory of 'what doesn't kill you makes you stronger', as a called-due-to-transfer survivor from my early days, I'm not worried about the risk. However, it's there, omnipresent and real. Will it happen to you? It's the Dirty Harry to the 'punk' question. (Of course, you most certainly are not a punk).
My caveat: if you are ok with the risk and not putting other people's money in jeopardy and prepared to peddle fast if a loan is called, by all means, do what makes sense to you.
My ultimate issue I take with these are it seems they are targeting end primary buyers. Those buyers, I think one could argue, are disadvantaged in some fashion. A capable buyer purchasing a primary residence would not knowingly take such a risk of loss of capital injected or loss of property given the alternative to not. A primary buyer can not get a conventional loan in first lien on a Sub2 property. So that leaves us with either a cash buyer or Seller Finance.
That's the other reason I wouldn't do a wrap. The best resale price will always be to an owner/occupant buyer. Most likely a credit and income challenged buyer. Putting aside the challenges in the new consumer loan regs, I don't have the stomach for working with such buyers/borrowers. If I did, I'd change my business model and become a lender and originate new loans. You know, old school lending...where I would loan money in 1st position and secure the loan with collateral that supports the loan amount. Subprime lending still has a place and is lucrative. But being the last in line at the end of of a chain of open loans and title changes? Yuk.
Let us extinguish, once and for all, the defense of low interest rates as well. For those who have actively been purchasing whole loan mortgages please feel free to chime in.
My experience in brief includes the analysis of over a couple billion dollars of distressed loans over the last couple of years. It's safe to say I have seen slices of the mortgage market that most do not get to see. Remember the incentives from a couple of years ago for lenders to actively modify loans, opposed to pursuit of foreclosure. What took place for those modifications was the modification of the rate of interest in an effort to create an affordable solution for the borrower. Very less likely, if not present at all, was principal forgiveness. In fact, that same idea helped carve paths for well capitalized private whole loan investors to purchase loans and relieve principal as the first line of attack.
The point is, as I made above more than once, the notion that the current prevailing rates are 'still' lower than the rate of interest on many of these distressed loans is simply hogwash. I have literally seen hundreds of loans that have been modified to rates of interest at 1% to 2%. The prevailing prime rate right now is around 4.0%. So, the prevailing rate FOR A PRIME BORROWER is double what the distressed borrower likely has to pay. If interest is a gauge of risk, which it is, then we are off balance.
Now, I will admit, as I mentioned above, many loans did not experience principal forgiveness, so we can assume in some manner that does off set the overall impact that I am getting at here. That is, since the principal balance remains high, which is mostly unsecured, and the rates are low, effective yields can still mirror each other as a function of the math.
That said, as the nuts and bolts of this discussion are flushing out, it's not simply about the rate of interest nor the anticipated yield. Frankly, it is just not that simple. I think those who subscribe to the idea that we have some time since "Rates are still low" or "Rates are still close to zero interest" (which you are talking about the wrong rate of interest there) do not understand the mortgage market well. Because those statements are not true. Further, the gap is shrinking and it's shirking quickly. The average rate of interest in 2003 was 5.8% +/-. The average rate of interest for 2013 was 3.98% +/-. So we have a 2.0% gap between those averages. In January of 2014 the average rate was 4.4% +/- so you can get an idea of how quickly the gap can close.
Hopefully you see the point I am illustrating. The gap, if you will, is not as large as one would believe hanging there hat on the idea of lower interest rates right now. We do not have to increase up to 10%. We are within striking range of originations pre-crash already. Now factor in the modification rates and we can see, as I have said, the rate incentive is already here.
For one additional point to that. Browse the forums here where private lenders, hard money lenders and cash flow investors are talking about their expected yields. Generally speaking, the target rate is around 8.0% to 9.0% for moderate risk. From this idea, we can extrapolate, the risk reward ratio is actually being surpressed right now. Arguably one of the barriers of entry for private capital into our mortgage market. So, the capital demand for a higher rate of yield is standing right behind the door already. It's not coming, it's here. That said, it has been standing there for a couple of mins. When will it bounce in full is a matter of speculation.
None of this is to create some sky is falling scare. However, it is about time we stop listening to the so called "experts" and take a mature and educated look at the driving forces that will influence this investment strategy. The justifications relied heavily on by the guru promoters are at best fleeting, if not all together wrong.
@Account Closed Im only asking out of curiosity and to add to my knowledge arsenal, but in today's market if the rates are still low, would it make much sense to a large institutional lender to call a loan that has an interest rate comparable to the current rates? Would it cost them more to go through that process? Or do you think interest rates are going to rise in the near future and create an incentive large enough for lenders to start calling more often?
Honestly, it's hard to know why banks do what they do. As we are being educated here by Dion, interest rate is not the only reason for a dos call. And maybe interest rate nowadays is the lesser of several reasons.
@Dion DePaoli You make perfect sense. Thanks for educating us. On another note, how do you suggest we as investors, problem solve and help people who are in those situations?
@Dion DePaoli The interest rate argument is now put to rest in my mind. Your posts outline all kinds of other things going on in lending that I wouldn't have a clue about it if you weren't here writing about it. Thank you for the truly edifying and useful information on this topic.
@Dion DePaoli You make perfect sense. Thanks for educating us. On another note, how do you suggest we as investors, problem solve and help people who are in those situations?
For the sake of clairty in the post and everyone's capacity to address it, detail what you mean here for us (and me).
What is the problem we are "helping" with?
@Grant Kemp Someone a couple of posts above called you to this thread but the @ sign didn't work.
I would love if it Grant would chime in. He's doing a lot of sub2 wraps and he's a licensed mortgage originator facilitating sub2 and wraps. But we seem to lose Grant on any thread where The Realist or The Regulator have posted. I can't say I blame him, he's probably got better things to do than defend himself. Even so, hearing from those actually doing the deals makes for a better discussion.
@Dion DePaoli how do we help people who have little to no equity, current on pmts, and for some reason had to move and are now left with a mortgage on a house that is not occupied?
I'm sorry, I see I've been called a few times to the thread.
@k.
@Account Closed I'm sorry if it seems I've dropped out on convos where certain people are posting, if you look though my posting in general has dropped pretty significantly due to how stinkin' busy we are right now buying houses.
Anyway, I haven't had the time to read through the entire thread here but it seems like there's a lot of good information coming from a lot of knowledgeable folks. At the end of the day, my story remains the same. Due on sale is something that should be fully disclosed and explained to all parties of the transaction, and anything less than this is taking advantage of folks. While I have not seen a due on sale clause called on any of my properties, that does not mean it won't happen in the future. I haven't seen an increase in DOS in the market, but it shouldn't be ignored if others are seeing an increase in the calls. We should always have our ears to the ground to see how the market is going.
As with anything in life, you have to weight the risk to reward and make a business decision. If you feel that DOS is too much risk then don't do a sub2 transaction. If it's a risk you're comfortable with, then do the transaction. Just make sure your seller and buyer have a full understanding of exactly what that entails and if they're on the same page as you then you've got a deal.
I'm sorry, I see I've been called a few times to the thread.
@k.
@Account Closed I'm sorry if it seems I've dropped out on convos where certain people are posting, if you look though my posting in general has dropped pretty significantly due to how stinkin' busy we are right now buying houses.
Anyway, I haven't had the time to read through the entire thread here but it seems like there's a lot of good information coming from a lot of knowledgeable folks. At the end of the day, my story remains the same. Due on sale is something that should be fully disclosed and explained to all parties of the transaction, and anything less than this is taking advantage of folks. While I have not seen a due on sale clause called on any of my properties, that does not mean it won't happen in the future. I haven't seen an increase in DOS in the market, but it shouldn't be ignored if others are seeing an increase in the calls. We should always have our ears to the ground to see how the market is going.
As with anything in life, you have to weight the risk to reward and make a business decision. If you feel that DOS is too much risk then don't do a sub2 transaction. If it's a risk you're comfortable with, then do the transaction. Just make sure your seller and buyer have a full understanding of exactly what that entails and if they're on the same page as you then you've got a deal.
Hi Grant and thanks for chiming in. The reason some of us summoned you is because you are doing sub2s in TX, both as a buyer and as an RLMO. The TX statutes Dion posted earlier requires that all lien holders and the buyer in a sub2 transaction be notified of the transfer, and details how and what must be in the disclosure. Are you doing these disclosures as part of your purchases and loan files?
This requirement would seem to be a possible deal breaker:
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.
@Dion DePaoli how do we help people who have little to no equity, current on pmts, and for some reason had to move and are now left with a mortgage on a house that is not occupied?
Well first line of defense in a nutshell is a short sale. The borrower is entitled to reasons of denial, in some detail. A short sale denial can be appealed. If a borrower fells they are wronged, they should contact the CFPB, that is what they are there for.
That is not a recommendation for an investor or an unlicensed [mortgage] person to attempt to assist with the interactions of the servicer. Not having a license in that situation can get you into trouble.
It's on the borrower to make a reasonable case for relief and properly fill out and return the required paperwork. Just because a particular short sale is not approved does not mean that all short sales will be denied. From a Mortgagee perspective, the denial of a short sale usually has something to do with lack of borrower following protocol or insufficient value/price of property. That latter part is what usually investors don't want to hear.
Some borrowers may not want to hear this, but offering to pay a portion of the deficiency can also show borrower intent well and help build their case for the short.
As I mentioned, the last line of defense is simply file a complaint. Make no bones about it, that will get the Mortgagee/Servicer interested in resolutions.
For the sake of practical reason, let's not confuse "helping" a distressed borrower with attempting to profit from said distress.
In consideration of all of the inputs to something like a wrap, denial usually would come in the event that the Wrapper wanted their price approved so they could profit by selling to a new end buyer. A Mortgagee will not go for that.
There was a lady here in Dallas trying to teach people about subject2 and wraps and the ones that paid the 20 bucks to attend said she could not get out of the rain let along know anything about subject2 or wrap. I think someone said her name was Mindy so beware of these gurus teaching asked them for references that you can verify.
Joe Gore
In a RISING real estate market banks MIGHT have a slight economic incentive to exercise their right to accelerate loan repayment when title changes. However it must be kept in mind that forcing houses into foreclosure has a decidedly NEGATIVE effect on a rising market. Forcing more houses onto a particular real estate market ( the Chicago real estate market in this case apparently ) DEPRESSES that market. The effect is to collectively REDUCE the total quantity of money banks can loan on that particular market and thus acts to REDUCE the banks cumulative loan revenues.
In a RISING real estate market banks MIGHT have a slight economic incentive to exercise their right to accelerate loan repayment when title changes. However it must be kept in mind that forcing houses into foreclosure has a decidedly NEGATIVE effect on a rising market. Forcing more houses onto a particular real estate market ( the Chicago real estate market in this case apparently ) DEPRESSES that market. The effect is to collectively REDUCE the total quantity of money banks can loan on that particular market and thus acts to REDUCE the banks cumulative loan revenues.
Robert, some of that indeed is a logical argument, however we must not confuse the investor who eventually holds the loan with the originator who makes the loan. To some degree, the argument you pose would substantiate we should never foreclose for fear of downward pressure on real property values, yet we still foreclose.
Some interesting data points from Black Knights (not Batman) Mortgage Survey as of May 2014:
So I would argue, that while your comment has some truth, we seem to have "made room" to work through some more foreclosures. Kicking the can down the road, does indeed seem to work, just not for the public.
I did not follow your point about reducing total quantity of money banks can loan having affinity over reserves. Reserve levels dictate, to some degree, how much a bank can lend, whereas a bank must hold back reserves to cover default. I think in some fashion you are implying the action or function is geocentric and that is not true for commercial banks from a regulatory standpoint outside of having the capacity to lend in a given market.
In addition, let us not suppose that a bank benefits from a rising market of real property values in the same manner that they are damaged in a declining market. Banks do not realize appreciation. Certainly, financing originations, while gigantically large amounts of money is deployed, is not infinite. So, in the same argument you have in some relation to reserves, we could almost switch that around and say based on the reserves limitation, it's in the banks best interest to put forth more foreclosures in and effort to influence the market value allowing for the bank's originations to stay targeted to the highest best execution for deployment of their funds.