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.

[Brian Louderback]

Wow just goes to show that it can and does happen.....

I knew when i asked my bank and they said no to me transferring the deed into my LLC's name that i wasn't going to do it. But so many people told me that the bank would never issue a DOS on a performing mortgage...

[Shawn West]

Couldn't you just refinance with another institution which would pay off that loan and create another under your LLC? Or am I completely wrong on this ability?

[Aaron Mazzrillo]

Originally posted by @Jay Hinrichs:

@Aaron Mazzrillo

  ps  we had a drought in orygun in feb.. steelhead were spooked river gin clear.. by the time it finally rained they had all moved up and the season is over... frustrating. it was so red hot to start

 I'll be on the Trinity River soon. Fly only water opens up and I plan on being there opening day... and then some.

To stay on topic: As for due on sale, never buy a house subject 2 if you're not prepared to pay the loan off or have other means to take that loan out. That is why you always need an equity spread - let's repeat that - YOU ALWAYS NEED AN EQUITY SPREAD - you just never know when you may have to sell. And that doesn't just apply to sub2 deals. As an investor, buying below market is the number 1 priority.  

I bought one house last year sub2. It is a $160K house and I took over a first loan with a $50K balance and a second with $40K balance. The first is on 20 year amortization, but already 11 years old. If either that note was called by the lender, I could put it on my credit card. Considering I only paid $120K for the property (gross), I could sell way before the lender could foreclose if that is what it came to.

[A.J. Chesney]

Originally posted by @Aaron Hall:

@A.J. Chesney, you could refi in the 30 days but you would fall into the same scenario. The LLC doesn't have the means to acquire the property so he would have to get a loan as himself. Then he would have a loan in his name, have spent money on the refi @ a different rate than what he has now.

This doesn't put him ahead neither in name on title nor financially.  As he mentioned earlier he is also in the middle of working on other parts to his plans.  Normally another refi would make thing more complex in the short run and not solve anything in the long run.

Sorry, I wasn't talking about OP's example of an LLC issue, but more of a sub to arrangement where a seller sells a house and provides their own financing while carrying a mortgage as well. In that situation, if a bank calls the note due, the purchaser would have to refi enough to pay of the original mortgage? How exactly would that work?

Hugely interesting discussion by the way 

[Bill Gulley]

Originally posted by @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.

This thread is a few pages long, I didn't read all the comments, saying all the people say this won't happen isn't true at all, I don't say it! LOL

Sorry it blew up on you, but I've posted several experiences where a lender lowered the hammer, just pay it off, or unwind it. Neither a good position.

The way that you may avoid this issue is by making your LLC an part of your overall estate plan, a letter from your attorney saying the transfer is for estate planning will usually get you off the hook as transfer for estate planning are exempt from the Act allowing lenders to go there.

I don't suggest you go with any other slick trick that may have been suggested, using trusts changing beneficial interests and such as that is still a violation and your note Is now on their radar screen, what ever you do it will be checked and audited again, I assure you.

Go the estate planning route or unwind the deal at this point. In fact, unwinding it can take a day, make them happy, you can do estate planning later on and inform them before you change it again for that specific reason. Good luck :) 

[Roy N.]

@Serge S.

The present interest rate environment is indeed the big factor in lender's willingness to invoke the due-on-sale.

We are looking at a couple of opportunities where we have the option of acquiring the shares of the holding company rather than the assets directly.  While there are several advantages & drawbacks to buying the company, the aspect of no change in registered ownership is the one of primary interest to us.

Once upon a time, the no change in ownership also meant no invocation of due-on-sale. These days, I doubt there is a lender out there who's due-on-sale does not include "change of controlling interest".     Being up-front, we have approached each of the mortgagees in advance to determine if they will retain the financing currently in-place.  

Not surprisingly, the lender whose notes are 2-points above current rates was quick to provide us written confirmation they would not accelerate their notes.  Those with notes that are either floating at a (negative) delta from prime or fixed within 1-point of prime have been evasive in their responses.

[Bill Gulley]

The OP has a secondary market loan, the requirement to call it comes from the servicing agreement, not interest rates. A portfolio lender may decide considering interest rates, but a note under servicing that has been sold will get tripped by the servicing requirements, not interest rates, a servicer may have no choice and they aren't getting the interest rates the bond holders are, or the holder of the note.

While the Act was passed in the early 80s during high interest rates, to keep the lender's interest rate risk manageable as folks were assuming payments, that is not the case today, the issues are legal aspects of notice and foreclosure, clogging the security and servicing agreements set by note or bond portfolios. A bank servicing their own portfolio may look at it from an interest rate risk standpoint, but that is not the only or primary concern. :)

[Bryan L.]

For me, this brings up the bigger question.

What is the best way for one to buy a property from a seller using some type of creative financing?  Every different method has it's own unique risks and advantages.

How about this:  Why not buy on a land-contract method and not record the land-contract?  Using this method, I would still want to have a liability insurance policy in place, but I think that it could be done without having to notify the lender.  Of course, your  equitable interest is not as strong (and not very well protected without having it recorded at the courthouse), but if you didn't put down a large down-payment anyway, why would you care?  Any thoughts?

[Roy N.]

@Bill Gulley

Thanks for the feedback.  

Up here most, if not all, {schedule A, B} lenders service their own notes.  As such, I've always interpreted a lender's interest in calling due a note with the rate of return on the note versus what they can obtain in the current market.   Perhaps, I've been a little hasty.  A note can most certainly get tipped due to the servicing language of the mortgage agreement, but we have found up-front communication with the lender (and having ourselves vetted) assuages trepidations. 

Where mortgage terms in Canada seldom exceed 5-years, we have been successful - in our few instances thus far - in persuading lenders not to accelerate in light of the fact the note will be up for refinancing in 3-5 years.

I will definitely be more pedantic in my interpretation of how/why/when due-on-sale will be invoked in the U.S.A. markets as we continue our modest foray south of the 49th.

[Bill Gulley]

Originally posted by @Roy N.:

@Bill Gulley

Thanks for the feedback.  

Up here most, if not all, {schedule A, B} lenders service their own notes.  As such, I've always interpreted a lender's interest in calling due a note with the rate of return on the note versus what they can obtain in the current market.   Perhaps I've been a little hasty.  A note can most certainly get tipped due to the servicing agreement, but we have found up-front communication with the lender (and having ourselves vetted) assuages trepidations. 

Where mortgage terms in Canada seldom exceed 5-years, we have been successful - in our few instances thus far - in persuading lenders not to accelerate in light of the fact the note will be up for refinancing in 3-5 years.

I will definitely be more pedantic in my interpretation of how/why/when due-on-sale will be invoked in the U.S.A. markets as we continue our modest foray south of the 49th.

Hey, not problem, I realize things are different in the tundra country, LOL.

Your point as to communication is on point, it certainly applies here as well. Regional and smaller banks here worked with me, a bit different since I was servicing loans than the average investor, but that is most certainly the key, communication! :)

[Cheryl C.]

@Bryan L.

I would not buy anything on a Land-Contract (aka Contract for Deed) for the following reasons:

The seller may further encumber the property by obtaining more mortgage debt.  The seller may get judgment liens recorded against the property post your LC - ex. hospital, credit card, you name it.  This could end up with the property being upside down and the loss of your equity (I am assuming that you want the property for it's equity).

Along the same lines, what prevents the seller from selling the house out from under you during your LC?  You've recorded nothing in Land Records giving Notice of any Beneficial Interest in the property.  A bone fide purchaser for value w/o notice takes free of any claim by you.  Do you require proof the RE Taxes are being paid?

Does your contract state that the seller will maintain insurance and that you are an additional insured? Will this trip the DOS? Is it really a rental or is it a sale? If you have an equitable interest in the property, can you be sued for negligence (someone injured on the property)? If so, will your insurance cover you or claim you have no insurable interest. I sure wouldn't put myself in this situation.

I've always thought the whole "subject to" arena was the place of late night infomercials and fraught with landmines. I was totally onboard with the FHA and VA assumptions of yesteryear - but never these Land Contracts.

You state that little money is at risk. This likely (hopefully) will change due to appreciation. I would secure my interest by recording a Deed of Trust. In other words - do your Land Contract and record a DOT/Mortgage to protect your equity and be properly an additional insured. (just thinking out loud on how best to do this)

[Stephen Kunen]

Does anyone have experience refinancing the original note in the name of an LLC? I'm thinking that one way to eliminate the problem is to eliminate the original mortgage with a refinance. Does anyone know of portfolio lenders who does this kind of refinance?

I believe small banks with a commercial real estate division will possibly allow this if the loan to value ratio is correct. I'm thinking if a different lender is used than the original bank, the second bank can pay off the first note, and eliminate the problem. 

Has anyone tried or had success with this strategy?

[Michael Worley]

Originally posted by @Bill Gulley:

The OP has a secondary market loan, the requirement to call it comes from the servicing agreement, not interest rates. A portfolio lender may decide considering interest rates, but a note under servicing that has been sold will get tripped by the servicing requirements, not interest rates, a servicer may have no choice and they aren't getting the interest rates the bond holders are, or the holder of the note.

While the Act was passed in the early 80s during high interest rates, to keep the lender's interest rate risk manageable as folks were assuming payments, that is not the case today, the issues are legal aspects of notice and foreclosure, clogging the security and servicing agreements set by note or bond portfolios. A bank servicing their own portfolio may look at it from an interest rate risk standpoint, but that is not the only or primary concern. :)

As a banker, I'd like to interject my thoughts, which come from a bank's point of view. The above information is correct, but only part of the story. The notion that a bank will not call a performing loan due is absolutely incorrect. Whether it's a real estate loan, a C&I loan for working capital, loans for equipment, or revolving lines of credit it goes through a similar process. We are constantly reviewing our portfolio of loans, grading their risk weightings, and deciding what (if any) actions we need to take. This happens on all loans, regardless of their status of paying as agreed or not.

The motivations for doing this are many, but one that is extremely important, but almost never mentioned here is how Bank Examiners view our portfolio risk. Bank Examiners require us to have a risk weighted portfolio within the parameters. A loans risk weighting changes with updated financials, borrowing bases, change in ownership, collateral changes, etc.

If you change ownership of a property by quit claim deed, it vastly changes the risk weighting of that real estate loan.

I could talk for days about the inner workings of AND how misunderstood banking is by many people but that's another thread.

[Michael Worley]

Originally posted by @Stephen Kunen:

Does anyone have experience refinancing the original note in the name of an LLC? I'm thinking that one way to eliminate the problem is to eliminate the original mortgage with a refinance. Does anyone know of portfolio lenders who does this kind of refinance?

I believe small banks with a commercial real estate division will possibly allow this if the loan to value ratio is correct. I'm thinking if a different lender is used than the original bank, the second bank can pay off the first note, and eliminate the problem. 

Has anyone tried or had success with this strategy?

That's exactly what the bank is asking the OP to do. Pay off the original note. A refinance is just the mechanism for funding that. The method you're describing is just a commercial real estate loan.

[Ben Leybovich]

Originally posted by @Roy N.:

@Serge S.

The present interest rate environment is indeed the big factor in lender's willingness to invoke the due-on-sale.

We are looking at a couple of opportunities where we have the option of acquiring the shares of the holding company rather than the assets directly.  While there are several advantages & drawbacks to buying the company, the aspect of no change in registered ownership is the one of primary interest to us.

Once upon a time, the no change in ownership also meant no invocation of due-on-sale. These days, I doubt there is a lender out there who's due-on-sale does not include "change of controlling interest".     Being up-front, we have approached each of the mortgagees in advance to determine if they will retain the financing currently in-place.  

Not surprisingly, the lender whose notes are 2-points above current rates was quick to provide us written confirmation they would not accelerate their notes.  Those with notes that are either floating at a (negative) delta from prime or fixed within 1-point of prime have been evasive in their responses.

 Roy - be careful on that. I am looking at the same thing, and I think I'll just do the property - the added layer of DD at the holding company level is unnecessary...just to hide prop taxes :)

[Bill Gulley]

@Michael Worley

Welcome to BP! Yes, I only gave the story of the OP's secondary market, you're absolutely right that Bank Examiners don't like seeing changes it title, I use to gig each one I found, you'll find it on an exceptions list,  we have no idea of the new guy's ability to pay, credit or any other prudent lending aspect, so.....it's call this due or correct it!

Portfolio reviews are usually spelled out in the lending policy too, what is acceptable and what needs board approval, if you get that far, document your transaction, some may allow you to move past GO. Most probably won't.

Thanks Michael....  :)

[Roy N.]

Ben:

I appreciate the heads-up, but evaluating a business is more familiar to me than real estate ... at least, I've been at it much longer.   

In this case, property taxes and land transfer fees (0.5%) are only part of the picture.  Purchasing the business will only be viable if we can keep {most of} the current financing in-place and the Vendor remains on-board with a buyout over 3-5 years (allows them to defer capital gains).   

The debate at the moment is capital cost allowance (CCA) recapture.  Since there is no change in ownership of the individual assets, my understanding at this point is no CCA recapture need be incurred at this time.  This is beneficial to the vendor (more profit from sale), but not so much for the buyer as the piper will eventually have to be paid when a property is sold.   We need to negotiate some form of reserve/set-aside to address this liability.

[Mike S]

We had mulled over buying and transferring to our LLC but the DOS worried us too much. That's why from the start we worked with a private lender who wrote us commercial loans titled to the LLC and guaranteed personally by the partners. Sure we had to put down 30% and the rate is 6% but we don't worry about DOS.

Provided you have the capital, why not just refinance into a commercial loan?

[Michael Worley]

Originally posted by @Mike S:

We had mulled over buying and transferring to our LLC but the DOS worried us too much. That's why from the start we worked with a private lender who wrote us commercial loans titled to the LLC and guaranteed personally by the partners. Sure we had to put down 30% and the rate is 6% but we don't worry about DOS.

Provided you have the capital, why not just refinance into a commercial loan?

You can also use community banks for those commercial loans. Most allow 75-80% LTV on SFR 1-4 or Multi Family. Yes there will be personal guarantees, but the rates should be closer to 5% than 6%. Also, most community banks will portfolio their own loans which means the banker relationship you develop will go a long way toward selling the loan in loan committee and it means more than likely you won't have pre payment penalties. If you stabilize the property you can then get permanent take out financing through Fannie, etc. to get a 30 year amortization 4% fixed for 10 years type financing to improve your cash flow.

One has to look at financing deals with the stage of the property in mind. Fully stabilized properties are financed very differently than 'value-add' or Rehab properties.

[Mike S]

We do use a local portfolio lender for our loans and I believe that the relationship being built will be advantageous to us in the future.

[Joseph Karbus]

Just another example of the IRS-like thuggery exhibited by banks--their DOS clause threat letter is more about power and control of the servile sheeple than about a performing loan with current payment history as it makes no good economic sense to abandon a performing loan.

[Roy N.]

Originally posted by @Joseph Karbus:

Just another example of the IRS-like thuggery exhibited by banks--their DOS clause threat letter is more about power and control of the servile sheeple than about a performing loan with current payment history as it makes no good economic sense to abandon a performing loan.

 But sometimes it makes good business sense.  If you have a performing loan at 3% which just tripped the due-on-sale provisions, but can redeploy that capital at 7%, foregoing any significant mitigating factors, it would be a poor business decision to not do it.

[Karen Margrave]

The reason the banks will start calling some of these loans is simple, money! In an atmosphere where values were falling and maintaining properties was cumbersome  and expensive, closing ones eyes to the deals selling properties "subject to" was easy. They basically were allowing those buyers to maintain the houses for them, in many cases invest thousands into repairs, and build the values back up while payments are being made. Now, it's payday. properties have gone up in value, and if the banks call the loans, they make money again. If they can't be refinanced then the banks end up with properties that have been improved and are more valuable, which can be sold, if they can be, the bank has new loans (though probably at a lower interest rate)  

[Michael Worley]

I'm just curious about where everyone seems to think interest rates are higher now than when the original loans were written? The 10 year treasury is at 1.92% today, it was 2.72% in March of 2014, 1.86% April 1st of 2013. In fact, with the exception of a few months in 2012 and a few months in 2013 interest rates TODAY are lower than they have been for the any period of the last 10 years. They are lower today than in 2014, they are lower now than in 2008, 2009, 2010, 2011, 2012, etc. You get the point.

This notion that banks are A) taking out a 3% loan to get a 7% loan on the books is not only unrealistic, but false considering the interest rate environment.

Also, someone mentioned the FED raising rates in either this thread or another thread. The FED doesn't control LONG TERM interest rates. Residential loans (which is what we're talking about here, because a commercial loan would have been in the LLC's name in the first place) are tethered to the 10 Year Treasury Note. The 10Y Treasury's interest rate is determined on the OPEN MARKET, not by some nefarious FED or rich bankers sitting in a smoke filled back room.

Getting DOS called by a bank has nothing to do with it being a performing loan or not. It has to do with the fact that the bank's risk is greatly altered by the sale of the collateral to which the NOTE is tied.

If you borrowed money from your neighbor, but gave him the keys to your car to hold in good faith as collateral AND THEN sold the car, you don't feel like the neighbor would feel uneasy about the loan he has outstanding with you? You don't feel like he'd want to get paid immediately?

[Account Closed]

Originally posted by @Aaron Mazzrillo:

Originally posted by @Account Closed:

stop paying, gut the house/sell everything of value, break their loan obligation in bankruptcy, see how they feel then.

 This qualifies as some of the stupidest advice I've ever seen on this website.

this was probably a joke....let me check again...I just got confirmation from myself, it was a joke.