Due on sale clause was called by bank!

[Serge S.]

I wanted to share a recent experience. I recently received a letter from one of my lenders (Flagstar bank) calling out a deed transfer I made around 2-3 years ago. I transferred a deed via quitclaim from my name into an LLC. The loan was secured in my name as it was one of my first 4 Fannie loans. They noticed that I had a named insured of my LLC added to my insurance. They first demanded that my insurance carrier change the named insured back into my name. Then I received a letter invoking the due on sale clause with a copy of the deed. They are giving me 30 days to transfer it back into my name and change the insurance accordingly. They will not accept mortgage payments in the mean time.

Wow - this is the first I've heard of a bank invoking the due on sale and it happened to me. I've made every payment on time with no issues. This gets me thinking of all the people that buy homes subject to the original mortgage. This situation would be an absolute nightmare if I had to unwind a transaction years later. I don't see how this could be a sustainable model with the due on sale threat constantly out there. All you hear is that the bank will never call the due on sale clause. Well it does happen.

[Bryan Hancock]

For those citing Garn St. Germain and other things related to trusts you should know that transferring the beneficial interest in the trust STILL does trigger the DOS provision. This helps to conceal the transfer and many believe it to be fraudulent. I'm not saying that I am one of these people, but I think reasonable people can disagree on this point.

For what it's worth John T. Reed has an exhaustive analysis of this on his website here:

"The truth" (emphasis mine) about getting around due-on-sale clauses

[Michael Rogers]

Sorry to hear about your situation.  That is too bad and I'm surprised they are calling the loan in the current low interest rate environment.  Keep us posted on how this turns out.  Have the loan servicer been willing to talk about it and give you an extension explore your options?

This is one f the things I've always wondered about for people doing "subject-to" financing.  The whole concept has always made me a little skittish.  

My theory is that once interest rates go back up to historical norms, banks will start looking to call more loans that have breached the "due on sale" clause so they can make more money.   

Prediction - I'm going to go out on a limb today and make the prediction that once the 30 year interest rate gets above about 7% banks will really start looking to enforce the due on sale clause to save money.  They could probably do some basic data mining of their portfolios and get a list of higher probability loans that they could call (cash out) and then re-lend at higher rates.  If they have a portfolio of 4% loans in an environment where they can get 8% on new money they will be ecstatic to free that old money and redeploy it at the higher rate.

[Zach Liu]

Yes for letting us know. I have been planning to transfer my most recent property to my LLC, maybe I will put it on hold. Hope it works well for you.

[Jay Hinrichs]

@Ned Carey

  I don't know about mortgages and notes in your state but in most states I work in .

the Note is simply the promise to repay and has no language in it regarding alienation

That language is in the Deed of Trust or mortgage or deed to secure debt.  And it is clearly in most of these instruments an event of default and the lender as you say ( may at their sole discretion call all sums due and payable and not accept anymore payments on the note). So you are correct the note does not have that language its in the DT or Mort.

[Jay Hinrichs]

@Elliot Smith

  depending on the down payment and your ablity if needed to   to just cash out the underlying loan is what you would be considering.

What is dangerous and who needs to be talking to the attorney is the person you buying it from... If there loan gets called and you have title the seller is fubared.. now the bank won't accept payments and its the sellers credit that gets trashed.. now if they are in foreclosure already and credit is trashed that may not be an issue but do talk to the attorney about the equity stripping laws if it is in foreclosure there is strict laws you must follow in WA OR and CA.

[Ben Leybovich]

@Serge S. - thanks for posting this!

One of the things my attorney drilled into my consciousness is the golden rule - he who's got the gold, makes the rules. The banks always win, @Ned Carey!

For my friend Serge, paying off this note is a matter of a stroke of a pen. For kids running around buying Sub2, not so much. And the thing is, it's not the investor that's on the hook; the note is on the seller, so it's the seller who'll be left hanging...

I've told many a newbie - unless you have the money in the bank to pay off the note should it be called, don't do Sub2. I know you disagree, @Brian Gibbons - thoughts? This **** is getting real...

To @Bryan Hancock's point that more of this is showing up - this is to be expected. Think about, if you are the bank, and you are holding/servicing a bunch of 30-year paper at 3.75%, and you have reason to believe that the interest rates will go up, why wouldn't you want to get houses back so they can be re-sold and financed at higher interest rates...?!?!

This is all very reasonable and has happened before. Be careful out there with this Sub2 stuff!

[Jay Hinrichs]

@Ben Leybovich

  the reason the banks won't do this en mass is they will have defaults and then have to set capital aside for bad loans  regulators will make them take assets and mark to market and all that lovely stuff. 

[Ben Leybovich]

@Jay Hinrichs

 - they don't have to do this en mass.  If Serge can get caught, so can some dummy newbie, who'll say - but I read on BP that it's cool to do it this way.

No it's not. DOS is real. Yes - banks have the option, and it ain't biblical to leave the seller hang like that...

[Serge S.]

Lesson learned, I would not be purchasing subject to deals at this juncture in time (I smell a @Ben Leybovich article why not to buy $30k subject to pigs:)  

Clearly the banks have more in consideration than just interest rates. I agree with the educated opinion that the transfer puts secondary note sales at risk. 

@Jay HinrichsI did indeed transfer to an LLC for "liability" protection. To put the specific deal in perspective, this was my 2nd home purchase in early 2009. 4/2 1985 1900 sq feet w pool on corner lot in nice B class neighborhood Mesa, AZ. Purchased the foreclosure $52k cash in Feb 2009. It had no kitchen, green pool and gutted bathrooms. Under remodeled it the first time for around $20k and finished the remodel the second tenant in. Rented for $1495 for 5 years now w 3 total tenants. I cash out refinanced with Flagstar in 2010 for a $100k personal Fannie loan, 30 yr fixed 5.85%, Low comp on this home today is $225K. My rents have some room but I am fine keeping high occupancy and stable tenants and can afford to do so with this spread.

The clear decision here is to conform with the bank. My portfolio lender will only do 10 yr fixed balloon w 30 yr amt. I don't have access to 30 year paper on non primary purchase. This is why I agree w @Joel Owensthat the commercial products are much better suited for an investor. All this drama on one SFR. They are nice little piggy banks to store equity but you need an awfully lot of them to make it worthwhile.

[Ben Leybovich]

@Serge S.

 - dude, I've already alienated 50% of BP with my PIGS articles. If I write this, there'll be 3 people left who like me - you, @Brandon Turner, and @Brian Burke...though, I can never be too sure about Burke :)

[Guy Gimenez]

The original mortgagor won't be the only one left hanging. Many sub-to deals were purchased and then wrapped to an end buyer who put down a chunk of change. Lots of potential losers here. As @Jay Hinrichs mentioned, owners who are going to let the property go to foreclosure anyway may not feel they're getting hosed...unlike those owners who have good credit and hoped to buy another property. 

Sub-to's still have a place IMO, but the Guru's may soon have to start re-thinking their sales pitch to the newbies...and I suspect those who continue to sell these on wraps may be want start picking out a good attorney as I imagine we'll soon see class actions and likely some more state and/or federal legislation. 

As for me, I'll continue to do sub-to deals in certain circumstances when it makes sense for all parties involved.

[Brian Gibbons]

@Ben Leybovich

I like you no matter what

@Guy Gimenez

I agree with you

Sub to w wrap sell is no good

Sub to then lease to own with fast pay off on existing financing  is good

Have capital or credit partners or both for sub to deals in case the loan gets called :)

[Charles Worth]

@Jay Hinrichs

If rates rise and property values are still going up it will be interesting to see if this happens more often.  Here is why I am not so sure the comment you made about them not doing this more is correct. You are right they couldn't do this to such a large extent as eventually it would hit reserves but many banks have reserves built to withstand problems in the RE market that some would argue do not exist to such a large extent anymore. As they get rid of short sales and other bad assets they have room to play. How long will it be before a bank CEO realizes he can foreclose on assets that are worth a lot more or do some type of workout where a larger loan is put in place. For every Serge there are people who can't pay and also people who do not read their mail (just like with Tax Liens). 

Second, as the market starts to get better assets will start changing hands more frequently and that is when real diligence occurs. 

It could also just be that servicers are starting to get their act together after relentless pressure from regulators and shareholders. 

[Jay Hinrichs]

@Charles Worth

  Remember that many notes are sold.. Banks sell them to servicing companies..

and on the secondary market, so maybe if they are holding them long term.. It would be interesting to know how many loans a big bank makes that they acutally hold and how much is sold.

I know as a HML I just want to get paid last thing I want is an intentional foreclosure.. But with the alienation clauses some one more switched on to the scene would need to explain how they would triage whose loans to call and whose to leave alone.. I suppose if it was a transfer like this were serge was just doing it for asset reasons .. they know the borrower.. but they cannot know the borrowers current financial condition.

with all the Sub too stuff out there most of those loans that got called that would be a cluster for sure.. as I think that the majority that do sub too really could not take down the note they are taking title sub too if push came to shove.. they are just hoping to make the delta and for appreciation... I know when I bought my PDX rental portfolio it was all sub too from about 2000 to 2008 before the anti skimming laws came into effect.. I only bought pre foreclosure sub too with significant equity.. but I saw many newbies get talked into buying sub too that had no equity.. So lots of those deals I am sure went TU when the buyer could not make it go. 

[Jay Hinrichs]

@Guy Gimenez

  agreed the sub too in the hands of an undercapitalized or a person who is a scammer is very dangerous to the public... if you think about the scammers that can talk folks into transferring their property to them. then ripping rents and walking away.. I have seen that numerous times over the years.. I think the agencies are starting to go after them. but still any seller thinking of sub too needs to really have proper representation on the sell side and vette who they are letting take title to their asset.

especially true I would imagine in your market were banks can and do get deficiency judgments on owner occ.. out here in Or CA WA NV etc.. purchase money 1st TD on owner occ no deficiency  can be had...

[Steve Vaughan]

Thank you for posting this @Serge S. Many, many folks need to see this! I have posting against bothering to transfer small, individual properties into an LLC forever. Podcast 109 put the argument into the stratosphere. LLC or no LLC? NO on small, individual properties. My arguments are: it's redundant (good liability insurance is CYA enough), you don't have the benefits of anonymity anyway after your little QCD broadcasts your intent to the world, they are harder to finance and insure, and they are a pain tax-wise. The DOS was such an outlier in my mind I didn't even consider it! I'm surprised you can't submit an Operating Agreement that shows you and your family members are the only members to the lender (if that's the case) to back off, as you haven't even 'sold' the property. Times are a changin'!

[Account Closed]

Originally posted by @Ned Carey:

Originally posted by @Dana Whicker:

Bankers might be a bit slow, but they're not stupid.  Maybe they're catching on.

Hmm I don't know about that. It is stupid to call a performing loan. The banks position does not change one iota with a transfer. The original guarantor is still liable for the note and the property is still collateral.  (OK the ability to sell that note may have changed, but that is only because the next person in line is being stupid)

But I do agree they are catching on to investor strategies. They are just being stupid in reaction to them.

Ned:  if you believe that the bank's position doesn't change because of a transfer, you have not been listening to what @Dion DePaoli has been posting on this topic for at least the last year.  Go back and read the threads again. :)

[Ben Leybovich]

@Ned Carey

 It's not stupid to call a 3.75% note if you think that you can re-write it at 6% :)

[Cameron Skinner]

@Serg S If it were me I would just quitclam deed it back in my own name.  I own several homes in mine and my wife's personal name that have conforming loans, but many more in LLCs with commercial loans.  I treat the LLCs as "disregarded entitys" for IRS purposes so no more book keeping needed.  Bam! lawsuit one tenants dog bites another.  Attorney sues my wife.  I send a brief answer to the complaint which you have to do within 20 days in FL or you automatically lose.  I then call the Attorney explain my wife is Judgement proof.  Our personal home is judgement proof in FL our cars in one of our LLCs any cash in retirement accounts or LLCs, and the only homes we have in her own personal name has loans against them.  Even though they have good equity the cost to go foreclose on them would destroy any equity.   He sends interrogatories "questions" which we answer honestly also tying to get our insurance info, I just wrote in that question I have no insurance that covers dog bites.  6 months later he dropped  suit.   Good luck     

[Tim Hoffman]

I tried to sell one of my SFH on an agreement for deed. Had the buyer get the insurance and list me as additional insured. This particular house is the only one I have at a big bank (not a local bank) and was one of the first 2-3 houses I bought. The insurance transfer was what triggered a response from the bank. They gave me 30 days to correct. I put the insurance back in my name to make the loan servicer happy. Went from an agreement for deed to a lease option with generous rent credit and all was fine again.

The loan servicer, by the way, was Bayview.  Just FYI.  After a few months I just decided to pay off the loan and continue as negotiated with the buyer.  Could not have done that if I was not properly capitalized.  

[Mark F.]

Originally posted by @Ashley Pimsner:

Transfer the property back into your name, create a land trust and place property into land trust. Make LLC beneficiary of land trust. Problem solved! A land trust helps avoid "due on sale" clause, transfer taxes, probate, and keeps your real estate holdings private. Google land trust and do your own research, but I am certain you will find that this is the solution to your problem. Look up Mr land trust Randy Hughes to get more education. Contact a real estate attorney who specializes in land trusts asap. Best of luck.

This is exactly what our attorney advised us to do to avoid due-on-sale clause issues with our LLC.

[Ryan Ball]

We got a note about the insured (our LLC) on one of our properties not matching the mortgage when one of our loans moved to a new servicer (Seneca). They sent us a couple letters informing us there was a difference but there was no mention of due on sale and I have not heard anything further about it.

[Kimberly H.]

@Serge S.

 Thanks for sharing your experience and your letter from Flagstar.

Now I'm wondering if we should just get commercial loans now while rates are still low and be done with wondering if our loan is going to be called or not.

[Jeff Rabinowitz]

Serge, states that he made the transfer 2-3 years ago. The bank has been collecting payments from the LLC all that time. Had they been notified of the change? Was there an insurance change previously that they should have noticed? Doesn't the bank have to act in a timely manner? If they have been accepting payments from the new entity for 2-3 years haven't they accepted the change de facto? Might a letter from a lawyer encourage the bank to change their mind?

[Joel Owens]

I wanted to expand on this a little more.

How banks package loans and terms is very different from non-bank lenders.

Even if you have a commercial loan at a bank they tend to have calls built in. Example if a  bank branch has 20 million in deposits and they are doing a 1,500,000 loan then that is a big deal for them.

The banks have learned from the  S & L crisis of the 90's. When interest rates rise what happens to banks where people place deposits?? The checking and savings accounts go from paying 1% a year to 2.5 or 3% a year so that the bank branch can stay competitive and bring deposits into the location. If a bunch of loans are on the books at 4.5% and savings pays 1% those margins can be acceptable. If you are having to pay 3% savings and the loans are at 4.5% fixed for a long time the bank will go under. The spread is not enough to make a profit and pay the employees, rent, etc. I have had multiple VP's and Presidents at various banks explain it the same way.

Now if a bank is in growth mode versus rate mode then they can look at it differently. I have a client right now where we are assuming a 7 million loan for a mid-development deal. The bank we are assuming from has a cap of about 6 billion but is being acquired in June from  a larger bank with a cap of 13 billion. The larger bank is going public so wants to keep growing bigger and bigger. They will hang out permanent loans for longer periods of time to keep growing aggressively.

CMBS non bank loans sell off the debt in slices on Wall - Street. They can offer 10 year fixed loans because the investors are holding for a set return and do not have to operate like a bank branch does. These loans have a pre-payment penalty because the investors on the loan are guarantee a certain return. To break the loan early without a penalty the investors would not get paid as promised. There are longer term loans out there but the interest rate keeps rising above 10 year fixed in commercial for each time you go to 15,20,25 etc. There might be a spread difference of 150 basis points so you would have to get a property for example at a 9 cap on a 25 year term loan to have the same effect as a 10 year term fixed with a 30 year amort. and a 7.5 cap rate.

So for example a 4.5 fixed rate for 10 years is a 300 basis spread with a 7.5 cap. 6 interest rate fixed for 25 years on a 9 cap is a 300 basis points spread. The spread is the same but at the 9 cap you have room for cap compression more than the 7.5 cap.

Every bank is different. Insurance loan lenders will give very long term loans at low rates but they are picky on the locations and want LTV's of 60 to 65% so your COC goes way down until rent increases kick in.