"Due on Sale" clause and interest rates?
Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
I know that the consensus is that "due on sale" is almost never triggered in the real world.
However if someone locked in at a historically low interest rate today and then deeded the property to an LLC (or some other type of transfer), and then interest rates rose several points over the course of the next few years, is it possible that the banks would start enforcing the DoS clause in order to get out of their (now) unprofitable mortgage obligations?
Bienes,
Yes they have that right. When they call you ask them when you should stop making the payments. If they say you cant, explain if they are calling the note due, you must stop. Ask for someone else. No one will ever tell you not to pay, so just keep on payin and I am pretty confident they will move on to the next one.
You can move properties into a trust for estate planning purposes and they can not call the note due, Just an FYI.
:mrgreen:
A smart banker will realize that calling the loan due is going to likely result in a default which will give them much worse returns than the "lower than market rate" interest rate.
I'd think the bank would just sell the note at a discount if the fixed interest rate is lower than market. This would give them some cash back and the new note buyer would have an effective interest rate equal to the market rate at the sales date. Who knows though, that would also be expecting some sort of logic out of the same bankers who would rather foreclose on a property than let a loan modification go through...
I agree with Daniel. Logically, it doesn't make sense for a bank to call a performing loan, but then banks aren't famous for acting logically.
My attorneys say the threat of a called loan on a property transferred to a wholly owned entity, such as an LLC, is very low. Now, with a true change of ownership interest, e.g., a subject-to sale, all bets are off.
Still, I don't see the benefit to the banks until rates are significantly higher than now, which probably won't happen until the economy AND housing markets have fully recovered. So at that point, it will probably be easy to satisfy the bank's lien by selling the property (at a profit to boot). Even that would probably result in another dumping of homes onto the market, causing another drop in values, creating a repeat of today's situation. Even though I wouldn't put it past some of the morons in the banking industry to fail and see this, I should hope others in higher positions would read the writing on the wall and let "sleeping dogs lay".
:lol: Literally the funniest thing I've heard all day!
I also agree with everything that has been said here in that the banks are not looking for more defaulted loans and that while this will always remain a risk of doing sub2's, the instances of calling the loan due is extremely low.
I think the bank would be inviting lawsuits by calling loans transferred to legal entities for asset protection. This simply does not pass the reasonable person standard to me and I can't see it passing muster in court.
How would the lender argue that their security interested was impaired? You still signed personally for the loan and you simply are trying to protect yourself from suits.
Actually, the DOSC is triggered quite often. Once triggered, the lender has the option of calling the loan due. In this market, lenders are generally reluctant to exercise this option on a performing loan.
Bryan, this is a contract violation, and definitely will pass muster in court. Read the DOSC clause in your own mortgage note. It probably says that ANY transfer without the lender's consent is a violation of the contract and the lender's remedy is to call the loan due in full.
It is a clause in a contract that you agreed to when you took the loan. Congress legislated exceptions that permitted transfers to a living trust, but transfer to an entity is not one of the exceptions.
The lender's view is that the original loan was a consumer mortgage loan given to an individual. Consumer loans are not given to business entities; business entities get commercial loans under different underwriting guidelines. Commercial loans are not sold to Fannie/Freddie.
So, if you transfer title to a business entity, the lender wants the business to get a commercial loan and pay off the consumer loan.
Now, if the purpose of the transfer was solely for lawsuit protection, then the lender can have the transfer unwound by the court on the grounds that the transfer is an attempt to shelter assets from creditors and as such is a violation of the Uniform Fraudulent Transfer Act.
Not unreasonable at all in my view.
It is completely unreasonable because the "consumer loan" money competes with "investor loan" money to set the bid price for the real estate product purchased. Allowing "consumers" to borrow at one rate and forcing "investors" to borrow at another because the gov-mint concocted some GSEs to set money prices that were previously rationally driven by the market is what is unreasonable. Furthermore, the investor already paid the premium for the money when they purchased the property and disclosed it was for the purpose of renting it out. The lender can't have it both ways. The borrower can't be a "consumer" so that the lender can stick a call provision in the loan if they bet wrong on the way interest rates will go and also call them an "investor" so that they can crank up the initial rate. This heads-I-win-tails-you-lose crap is exactly the type of thinking that got us into the mess we are currently in.
I challenge anyone to find a case where a lender has exercised their contractual right to accelerate a loan because the property was transferred to a legal entity for the purpose of protecting their assets from suits. This defies reason. A reasonable and prudent person borrows money at the lowest rate possible and protects their assets by transferring the property to a legal entity. A reasonable person does not borrow at a higher rate on less favorable terms because the government decided to distort the lending market.
Bienes,
Yes they have that right. When they call you ask them when you should stop making the payments. If they say you cant, explain if they are calling the note due, you must stop. Ask for someone else. No one will ever tell you not to pay, so just keep on payin and I am pretty confident they will move on to the next one.
You can move properties into a trust for estate planning purposes and they can not call the note due, Just an FYI.
:mrgreen:
Thanks everyone. Would sending the bank a certified letter shortly after the deed transfer to the LLC (explaining what I'd done) help me in the future if the bank decided to call the loan due be a good idea? If they called the loan due, say, two years later, I could make the argument of "why didn't you do this two years ago"?
I asked this question just a couple of weeks ago and my attorneys advised against it. I guess it's better to beg for forgiveness than ask for permission. ;-)
You need to appreciate the difference between a consumer mortgage loan and a commercial loan. Investors who purchase in their own name can and do get consumer mortgage loans. Consumer mortgage loans to investors can be sold to Fannie and Freddie if they "conform" to the Fannie/Freddie guidelines.
If the GSE discovers that the primary borrower does not own the property securing the loan, but rather some business entity, the GSE can force the original lender to repurchase the loan. Now the lender is stuck with a mortgage note that does not meet the underwriting guidelines for the loan and won't pass audit.
The lender could decide to just hold the loan in their "portfolio". If they don't want the loan on the shelf, then the lender's recourse is to get the loan back into compliance or call the loan due. You don't have to be behind in payments for the lender to call the loan due for a DOSC violation.
Commercial loans are given to business entities and have different underwriting guidelines, lower LTV thresholds, and {generally} the property must cash flow. Individual investors can and do get commercial loans.
A few years ago, CountryWide would routinely call loans due for DOSC violations. BofA, who bought CountryWide, is hurting financially. No telling what they will do to get out of some of their more risky loans.
The only way that the lender could find about the transfer is when the insurance co. notifies them that the policy has changed hands, correct?
The only way that the lender could find about the transfer is when the insurance co. notifies them that the policy has changed hands, correct?
Lenders can also "see" the deed transfer in public record.
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Possibly, but I never changed insurers or policies. I simply added my LLC as an additional named insured under my current one.
Only if they look for it, correct? Do lenders typically do a search of all the properties they hold liens on to see if the deeds have changed? Sounds like it would take more staff and money than it's worth.
There is a reason you can get a lower cost loan as a consumer, versus as an entity. Otherwise why not take the loan in the LLC to begin with? In other words, Dave has some great points. Especially if the loan is not a portfolio loan.
No one knows for sure whether or not a the loan will be called. However, it's a pretty solid bet that once rates rise significantly, lenders will be doing a thorough analysis to determine whether or not it's worth it to call certain loans.
The lender can't "see" that title has changed hands if the property is placed in a trust and the beneficial interest in the trust is transferred to an entity. It is completely stupid to even have the DOSC with this gaping hole in being able to view the transfer. The clause is still valid, but how would the lender enforce it if they can't prove their was a non-Garn-St.-Germain-compliant transfer? Note that I am not saying the right isn't still valid. I am saying they can't prove there was a transfer by "looking" at the county records. They would have to hire a PI or some such to monitor water bills or do something else elaborate.
If calling the notes for placing them in an entity was so routine a few years ago surely one could produce ONE court case demonstrating this. Other types of transfers are not valid. We're solely talking about transferring to an entity for asset protection. I maintain my challenge for anyone to come up with one single case that demonstrates this has happened.
Anytime the gov-mint gets involved you can be sure there are really dumb things people have to do to protect themselves. I guess investors should all pay higher rates on less favorable terms and consequently be at a competitive disadvantage for their bid price so that the lender can maintain a call provision and simultaneously expose the borrower to risk to their assets. This makes absolutely NO sense and it is why I still claim it would be laughed out of court. Substance over form...
Brian, are you saying that you can place property in a trust without executing a deed transfer of the property into that trust?
However if someone locked in at a historically low interest rate today and then deeded the property to an LLC (or some other type of transfer), and then interest rates rose several points over the course of the next few years, is it possible that the banks would start enforcing the DoS clause in order to get out of their (now) unprofitable mortgage obligations?
Hi, absolutely yes. 6 years from now if rates are 9% and you are in at 4.25%, if that servicer or note holder finds that you have conveyed an ownership interest in or to the collateral security, they will most likely act in their best interest and let you know to pay it off!
Other aspects come into play in this as well, such as the age of the note,amortization, balances and how such weighs in the overall portfolio, but a loan that was made 6 years ago will not meet any favorable considerations I can think of off hand, so likely you'll need to be in a position to pay it off if needed. Good luck
I had a credit union suggest transferring the property into an LLC after securing a loan in my name. She even put it in an email. Same deal with a Wells Fargo commercial loan oficer. Her words were "how would we ever know."
It was my attorney that advised against it.
Bryan,They don't need to hire a PI, all they have to do is tell the person who looks at the tax bill that comes in 2-4 times a year to bounce the name on the tax bill off the borrowers name. Done, no real added work.
Nope...I never claimed that. The whole world can see the property transfer into a trust and the ownership can change hands hundreds of times without the lender knowing about it.
Are you claiming that the lender's security interest is somehow impaired such that the servicer would be incentivized enough to hire a private investigator to analyze which entity really owns the property? How would the lender figure out that the beneficial interest from the trust is owned by a legal entity? There are still renters in the property as the borrower originally claimed on their disclosures when they purchased the property. There is not a third party transfer to another individual or anything else in public records to show that the property is now owned by a legal entity. If there was an audit by one of the GSEs they wouldn't see the entity owned the property either.
If this was true why would Reed claim that there are companies that hire PIs to do it here:
Read The "Your enemies" passage
The tax bill should be in the name of the trust and the trustee should pay the bill. If this wasn't the case it would defeat the purpose of being anonymous. I certainly wouldn't want the people that handle tax collections to know who owns the asset if I set up a trust.
I think that was a little literary freedom calling auditors "PI"s. They are private auditor comapnies hired by financial institutions to do internal reviews of portfolios. They are auditing for compliance and spot audits on files can be done or 100%. Either way, regardless of how many files are checked, some compliance can include someone going by the property and pretexting (acting like someone else) to see who is living there, who owns the property, etc.
These companies specialize in compliance audits. A forensic accountant could do it, probably with some specific training and more study, but they would be very expensive....not likely, IMO.
I would guess that 90 out of 100 PIs (investigators that do divorce stuff, survellence, photo snappers and such) would not have a clue. And, those that could do a title search and tracking a dollar would also be very expensive.
Institutions are required to have internal audits performed and this is where most issues are found. Then you have government regulators, examinerswho can do the same thing, but any action is usually simply informing the lender what was found.....no one goes to jail unless there is something else going on.
Best way to avoid trouble is to pay as agreed, keep insurance current with the proper assignment clause and keep taxes current. That will usually keep you off any radar screen.
You can tell them that you are doing estate planning and that will usually do it, but they can also ask for a copy of the trust for the loan file. It depends on what the trust is and what is done in the trust as to changing the risks assumed by a lender. They made the laon based on risks of an individual, and a corporate entity can have additional risks that the lender did not underwrite in making the loan, so yes, if you change the composure of the loan, they can cry foul.
Each deal is unique and should be entered into with an open mind as to what the risks might be. To follow some "program" as "the way" to do a transaction is not a good business practice. This is another reason I stress a good RE education and related issues instead of getting into programs and methods advocated by those who sell them. Good luck!