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).
Good talk guys, how about when a 2nd mortgage forecloses, does he have the right to continue to pay the 1st? Is that considered a transfer??
@k. Marie Poe we do provide proper prescribed disclosures to our sellers as written in the Texas property code
@joe gore Mindy is an RMLO. I do not know if she buys houses sub2 though. Just from knowing her seminars that she does at the rei clubs I'd bet she was only teaching people how to correctly originate, and they were expecting her to know about aub2 which isn't necessarily her expertise.
@k. Marie Poe we do provide proper prescribed disclosures to our sellers as written in the Texas property code
@joe gore Mindy is an RMLO. I do not know if she buys houses sub2 though. Just from knowing her seminars that she does at the rei clubs I'd bet she was only teaching people how to correctly originate, and they were expecting her to know about aub2 which isn't necessarily her expertise.
Grant: I'm especially interested in the requirement to disclose a sub2 transfer to all lien holders as outlined in that TX code. This is a thread about DOS and that code seems like a DOS deal breaker. But maybe not? I understand how an end buyer would have no problem with it. They just want the house and can afford the payments, they aren't analyzing the underlying liens. If you provide the seller with the information, I guess you are expecting them to do the noticing? But when you wrap the deal, you become the seller to your end buyer. Are you actually sending notice to lenders that says the property has transferred.
I just can't imagine that this notice to the lender wouldn't cause an eventual problem a small percentage of the time. It seems to me that eventually some of the notices will make to a dept. some where in the bank where they'll actually investigate and call the loan due.
Or DOS deal maker ... if lender is noticed and does nothing aren't the prevented from pursuing action?
Or DOS deal maker ... if lender is noticed and does nothing aren't the prevented from pursuing action?
I was thinking the laches defense relates only to a lender calling the loan due based on transfer. I can't imagine the note and mortgage instrument going away just because the lender didn't call the loan due.....but maybe I missed something on that.
In California, the delay defense against enforceability of a due on sale is not based on laches ( which is an “equitable defense where one needs to show not only unreasonable delay but actual prejudice as a result of the delay). The defense that applies is “waiver”.
Where a lender accepts payments on account of a transferee with full knowledge of the transfer and there is an "unreasonable delay" without any reservation of rights before attempting to accelerate under a due on sale clause, yes, the lender could lose the right to accelerate under a waiver doctrine. Mere acquiescence without a clear showing of the lender's knowledge would probably not be enough.
An example of a published case where a Court in California found for the transferee on this issue is Rubin v. Los Angeles Fed S & L (1984) 159 Cal. App 3d 292
This is a case decided after passage of the Garn-St. Germain act and illustrates that state law can still apply on issues such as waiver of the right to enforce a due on sale clause even with the passage of the Federal Garn-St. Germain act.
But the practical problem in California, which is mostly a non-judicial foreclosure state, is that once the lender calls the note due, they will proceed with a non-judicial foreclosure sale. That leaves the laboring oar with the borrower who has to file a civil suit and request for an injunction to stop the foreclosure sale which is an expensive and uncertain proposition, depending on the facts available to show a waiver.
Or DOS deal maker ... if lender is noticed and does nothing aren't the prevented from pursuing action?
I was thinking the laches defense relates only to a lender calling the loan due based on transfer. I can't imagine the note and mortgage instrument going away just because the lender didn't call the loan due.....but maybe I missed something on that.
I wasn't suggesting the note and mortgage would go away, only that the laches clock would start since lender now knows of the transfer. Also, now that I think about it, I heard a TX attorney speak a while back claiming that if you send lender a check for the monthly payment (and/or arrears) along with a letter disclosing the transfer and declaring that cashing the check would be considered a DOS waiver you are golden ... sounds like a 2fer to me. You satisfy the notification statute AND get lender to waive DOS ... two for the price of one.
Thanks, Rob. I was trying to remember "Rubin".
Also, you've nailed the primary issue for both the California real estate as well as the note investor.
For the real estate investor, it's well worth noting the value of studying the practices and policies of services to understand where their weak spots are and use those to your advantage. Personally, I like using the "universal bureaucrat-to-bureaucrat fellowship" model to my benefit when trying to get information that's otherwise unavailable.
Or DOS deal maker ... if lender is noticed and does nothing aren't the prevented from pursuing action?
I was thinking the laches defense relates only to a lender calling the loan due based on transfer. I can't imagine the note and mortgage instrument going away just because the lender didn't call the loan due.....but maybe I missed something on that.
I wasn't suggesting the note and mortgage would go away, only that the laches clock would start since lender now knows of the transfer. Also, now that I think about it, I heard a TX attorney speak a while back claiming that if you send lender a check for the monthly payment (and/or arrears) along with a letter disclosing the transfer and declaring that cashing the check would be considered a DOS waiver you are golden ... sounds like a 2fer to me. You satisfy the notification statute AND get lender to waive DOS ... two for the price of one.
Sorry David, I misunderstood. I thought "DOS deal maker" was referring to somehow eliminating the mortgage debt. I've read a lot of crazy theories since the Bubble about eliminating mortgage debt and got confused. :)
I haven't yet taken over a loan where I needed to strategize how to prevent DOS. If there's equity, if the property is refinance-able, if there are reserves......what's the DOS concern really about? IMO, it's got to be about lack of capital or lack of credit, doesn't it?
But the practical problem in California, which is mostly a non-judicial foreclosure state, is that once the lender calls the note due, they will proceed with a non-judicial foreclosure sale. That leaves the laboring oar with the borrower who has to file a civil suit and request for an injunction to stop the foreclosure sale which is an expensive and uncertain proposition, depending on the facts available to show a waiver.
Thanks for the case link. The practical problem seems kind of major. Suing to stop a nonjudicial foreclosure in order to dispute the DOS? I wonder how many deals are worth suing the lender, just to keep a loan open?
But the practical problem in California, which is mostly a non-judicial foreclosure state, is that once the lender calls the note due, they will proceed with a non-judicial foreclosure sale. That leaves the laboring oar with the borrower who has to file a civil suit and request for an injunction to stop the foreclosure sale which is an expensive and uncertain proposition, depending on the facts available to show a waiver.
Thanks for the case link. The practical problem seems kind of major. Suing to stop a nonjudicial foreclosure in order to dispute the DOS? I wonder how many deals are worth suing the lender, just to keep a loan open?
IMHO, not many.
I haven't yet taken over a loan where I needed to strategize how to prevent DOS. If there's equity, if the property is refinance-able, if there are reserves......what's the DOS concern really about? IMO, it's got to be about lack of capital or lack of credit, doesn't it?
I'm with you, if one can't payoff the loan, refi or sell then don't buy sub2. I'm certainly not a sub2 aficionado, I've only bought this way a couple times, and then it was with a fix and flip exit strategy. I just thought it was fascinating how a challenge like a statue requiring lender notification of intent to transfer title (lemons) could be turned on its head to create a DOS waiver (lemonade)...not really the point of the thread I guess.
I haven't yet taken over a loan where I needed to strategize how to prevent DOS. If there's equity, if the property is refinance-able, if there are reserves......what's the DOS concern really about? IMO, it's got to be about lack of capital or lack of credit, doesn't it?
I'm with you, if one can't payoff the loan, refi or sell then don't buy sub2. I'm certainly not a sub2 aficionado, I've only bought this way a couple times, and then it was with a fix and flip exit strategy. I just thought it was fascinating how a challenge like a statue requiring lender notification of intent to transfer title (lemons) could be turned on its head to create a DOS waiver (lemonade)...not really the point of the thread I guess.
I'm fascinated by it too. But if you have to sue the lender to stop or prevent DOS it gets a lot less interesting to me. I suppose it might be possible to get an attorney to get the lender to back down by showing proof of notice. But what about time? What is this reasonable time frame in which the lender was supposed to call it due? 1 year? 4 years?
Any money spent on suing to prevent DOS is money that could have been spent to pay off the note. It would have to be a huge note with great terms to warrant suing to keep the loan in place.
I believe the Due on Sale clause is BEST interpreted as a strategy on the part of banks to scare people away from buying a home by way of the REI market. Naturally if youre a bank you'd much prefer home buyers go through establishment financing i.e. get a bank loan they can make money on. Now if there were some REAL financial or economic reason to accelerate repayment when title changes then banks would ALWAYS insist on it. As it is DOS is dangled out there as a sort of vague threat, which of course is counter to the banks actual financial interests. Ask yourself this: If YOU had a performing note on a house would YOU want to kill that income stream just to be able to start paying out property taxes ?
I believe the Due on Sale clause is BEST interpreted as a strategy on the part of banks to scare people away from buying a home by way of the REI market. Naturally if youre a bank you'd much prefer home buyers go through establishment financing i.e. get a bank loan they can make money on. Now if there were some REAL financial or economic reason to accelerate repayment when title changes then banks would ALWAYS insist on it. As it is DOS is dangled out there as a sort of vague threat, which of course is counter to the banks actual financial interests. Ask yourself this: If YOU had a performing note on a house would YOU want to kill that income stream just to be able to start paying out property taxes ?
Uh, no. DOS doesn't help lenders by forcing more borrowers to go through "establishment financing". It gives the lender power to recover their collateral upon re-sale to someone other than the borrower they made an agreement with. The collateral is at potentially greater risk if it transfers to someone other than the borrower. Basic stuff.
Read the second page, well skimmed it. Same forum BS. Mr. Hall must have taken the guru class.
I've commented before on this, too many times, interest rates have absolutely noting to do with secondary market notes being called by a bank.
No, the attorney mentioned is not some nationally recognized expert, he's a self appointed expert to sell his crap. I'd love to get these attorneys in court and jam there crap right up where the sun don't shine. There are cases prior to St. Germaine not post the act as the one calling the note due has several avenues to enforce their actions.
Bottom line, do you deals, be prepared to pay them off if the lender/servicer calls the note.....period! If you can buy and sell within a comfortable time frame, have at it. If not, don't go there unless you have consent.
I suggest you stay away from the guru trained experts. Heck, what do I know, just been doing these battles and negotiations over 40 years, but you can take the word of some newbie with no regulatory experience, no baking experience, no legal experience and all the guru training they can pay for. :)
BTW, there is no due on sale jail, there is jail for misleading a seller, civil suits for ruining their credit, failing to perform, consequential damages and, depending on how you (the expert guru trained investor) presented the deal, fraud!
Read the second page, well skimmed it. Same forum BS. Mr. Hall must have taken the guru class.
I've commented before on this, too many times, interest rates have absolutely noting to do with secondary market notes being called by a bank.
No, the attorney mentioned is not some nationally recognized expert, he's a self appointed expert to sell his crap. I'd love to get these attorneys in court and jam there crap right up where the sun don't shine. There are cases prior to St. Germaine not post the act as the one calling the note due has several avenues to enforce their actions.
Bottom line, do you deals, be prepared to pay them off if the lender/servicer calls the note.....period! If you can buy and sell within a comfortable time frame, have at it. If not, don't go there unless you have consent.
I suggest you stay away from the guru trained experts. Heck, what do I know, just been doing these battles and negotiations over 40 years, but you can take the word of some newbie with no regulatory experience, no baking experience, no legal experience and all the guru training they can pay for. :)
BTW, there is no due on sale jail, there is jail for misleading a seller, civil suits for ruining their credit, failing to perform, consequential damages and, depending on how you (the expert guru trained investor) presented the deal, fraud!
No worries Bill. If you read the whole thread, @Dion DePaoli did a great job of putting to rest the interest rate argument. And gives a informative mini-seminar on the issue of laches. Great reading. One of the better threads with truly useful info. Too bad about the usual forum BS though.
In the early 1980s, with interest rates on new loans at 18%, banks attempted to enforce due on sale clauses in older loans so that they could lend the funds out at higher interest, to paraphrase wikipedia. Now this could be termed the 'micro-economic' incentive for a bank to accelerate a loan's repayment.
At the same time there is a 'macro-economic' incentive to call a loan due in a RISING real estate market or speculative 'bubble market' where interest rates might even by DECLINING. By forcing as many early loan repayments as possible in a rising real estate market , banks are able to loan out a higher total volume of money per the same number of houses. In this way, and as a macro effect, the banking industry as a whole stands to increase its total loan revenues.
This has been an interesting thread to follow.
However, the 'why's' and 'how's' of the reasons why a bank may or may not activate their due-on-sale clause seem less revalent than the fact that it may.
Just my .02.
This topic is very timely for me.
My primary residence is for sale right now. My agent called me and told me that a local real estate investor wants to view my house on Monday if I am open to carrying the paper for 24 months.
The offer, tentatively, looks like this:
list price - 850k
sale price- 850k
250k down - 50k for comm/closing and 200k to me.
600k, interest only for 24 months at 6% or 7%. (no points, of course)
My mortgage is $399k at 3.0%
The guy "could" pay cash (supposedly verifiable) for my house, but obviously doesn't want to tie up that much capital in a non-income producing property. The offer came about because he was at my realtor's brokerage closing a commercial deal and he heard about my circumstance (plenty of equity, don't really need all of the cash right now).
He wants to be a "bigshot" and live in a big house, in a nice neighborhood (in a crappy town, but i digress) without doing it legitimately (declare income, pay taxes, qualify for a big loan). I'm guessing that he will simply pay me off and then put it back on the market in 24 months, because I really doubt that his "philosophy" will change during that time...
I fully understand that my mortgage company "could" call my loan when they are notified of the sale during title. The question is, would they?
Can't I "get way with it" for 24 months????
DL
p.s. I hope that this doesn't qualify as a "hi-jack" but I'd really like the opinion of several people whom have participated in this thread.
Several posters have commented on this issue within the framework of securitization and the secondary market. I can tell you having worked on a half dozen ABS deals for an issuer nobody is looking at contract level data in a pool balance. The investor is looking at a prospectus, the trust is just receiving the electronic chattel paper, and the issuer is not going to be reviewing chain of title as they create pools. There are certain provisions of Dodd Frank that now require an issuer to review contract level data on a small sample of underlying contracts in a pool. The possibility that chain of title issues would be revealed in a securitization transaction seem rather remote in my opinion.
Mark, to say "nobody" is looking at that level of data is simply not true. Perhaps in your ABS deals certain levels of due diligence were not common but I would suggest that is likely attributed to the collateral in the ABS which you didn't specify. Not all ABS is the same.
In MBS, more specifically RMBS that level of data due diligence is not only common it is what billions of dollars of lawsuits are being kicked around about. Having been a senior portfolio manager for fixed income broker dealer overseeing all of our whole loans, I can tell you for sure it is indeed looked at. Dealing with whole loans in today's market it is a common data scrub point, I couldn't even imagine how it could not be.
Occupancy in general has always been a data concern. Loan fraud from a borrower taking a primary residence designation on an investment property is not new and adds risk to the loan. Not having a borrower vested on title throws the whole file out of wack for the representations and warranties made for the file. Scrubbing for occupancy will flush out the title change. Occupancy tends to carry relative weight in pricing concerns for the asset which I think most folks understand.
In addition it is pretty simple and easy to illustrate that level of due diligence is being conducted, all one has to do is look to the firms doing RMBS due diligence. For the sake of the readers, HERE is a pretty well known firm that does such things for RMBS. If you read the upper paragraph you can actually see where it talks about ownership. "Obtain updated collateral/property values, updated LTV and CLTV, additional liens, and risky borrower behavior including ownership and occupancy changes to improve pricing decisions"
My favorite part is the use of the word "risk" referring to "ownership and occupancy changes". Moral of the story, for RMBS this is a standard data point.
I fully understand that my mortgage company "could" call my loan when they are notified of the sale during title. The question is, would they?
Can't I "get way with it" for 24 months????
DL
p.s. I hope that this doesn't qualify as a "hi-jack" but I'd really like the opinion of several people whom have participated in this thread.
That is the sort of the point of the thread. Why they would has many factors to it that are out of the control of the borrower and are not directly related to payment continuity.
That said, given the Buyer's alleged cash capacity it would seem that the risk to both of you is manageable. You would want in your loan documents a right to accelerate if you are accelerated, I suppose.
I guess from a security standpoint for yourself, why wouldn't you just do a lease option and avoid the risk altogether? Seems like that would be better for you.
Who is to say the cash a Buyer has today is the same cash they have 24 months from now, if not next month? If he doesn't have it, then what? What if for some reason, as you allude to, he can not qualify for a loan and he spent his cash or is short in the amounts needed?
You really would need to secure the cash yourself in order to pay if called and then pursue him as needed. I would be inclined to simply offer a lease option or have him cash out your mortgage and hold the rest, if it pleases you.
Several posters have commented on this issue within the framework of securitization and the secondary market. I can tell you having worked on a half dozen ABS deals for an issuer nobody is looking at contract level data in a pool balance. The investor is looking at a prospectus, the trust is just receiving the electronic chattel paper, and the issuer is not going to be reviewing chain of title as they create pools. There are certain provisions of Dodd Frank that now require an issuer to review contract level data on a small sample of underlying contracts in a pool. The possibility that chain of title issues would be revealed in a securitization transaction seem rather remote in my opinion.
Mark, to say "nobody" is looking at that level of data is simply not true. Perhaps in your ABS deals certain levels of due diligence were not common but I would suggest that is likely attributed to the collateral in the ABS which you didn't specify. Not all ABS is the same.
In MBS, more specifically RMBS that level of data due diligence is not only common it is what billions of dollars of lawsuits are being kicked around about. Having been a senior portfolio manager for fixed income broker dealer overseeing all of our whole loans, I can tell you for sure it is indeed looked at. Dealing with whole loans in today's market it is a common data scrub point, I couldn't even imagine how it could not be.
Occupancy in general has always been a data concern. Loan fraud from a borrower taking a primary residence designation on an investment property is not new and adds risk to the loan. Not having a borrower vested on title throws the whole file out of wack for the representations and warranties made for the file. Scrubbing for occupancy will flush out the title change. Occupancy tends to carry relative weight in pricing concerns for the asset which I think most folks understand.
In addition it is pretty simple and easy to illustrate that level of due diligence is being conducted, all one has to do is look to the firms doing RMBS due diligence. For the sake of the readers, HERE is a pretty well known firm that does such things for RMBS. If you read the upper paragraph you can actually see where it talks about ownership. "Obtain updated collateral/property values, updated LTV and CLTV, additional liens, and risky borrower behavior including ownership and occupancy changes to improve pricing decisions"
My favorite part is the use of the word "risk" referring to "ownership and occupancy changes". Moral of the story, for RMBS this is a standard data point.
I assumed there would be a rebuttal.
How do these due diligence firms "scrub for occupancy"? Are there data bases that compare tax mailing addresses with other addresses?
@k.
@Account Closed Yes there are date services like Data Quick That Dion mentioned, as well as realist, realquest by Corelogic/First American, Hains Criss Cross etc. They collect information from the public records and consolidate it and repackage it in various products for various real estate industries.
I'm sure you have run into these types of services and just never thought of them in this capacity before.
Ha, I got the @ thing to work for you but I had to trick the system to do it!