Violating the Due-On-Sale Clause: Risky or Worth It?

[Timothy Asp]

This is something I've been thinking about quite a lot now that we're in a high(er) interest rate environment, and I'm interested in hearing from the BP community on what they think.  

Disclosure: Not a mortgage broker, lawyer or agent, and not licensed in any related field. I'm probably wrong, but discussions are fun, and that's what forums are for :)  

Like I'm sure many of you, I've got a home with a 2.7% 30yr fixed mortgage with lots of life left on it.  I'm dreading ever having to sell this home as that would mean giving up this wonderful rate.  It's not entirely logical, but it also grinds my gears that I'd essentially be giving the banks what feels like a gift by converting a low interest loan on the property into a market rate loan (assuming the new buyer is using conventional financing of course).  

So why not sell the home with the mortgage?  Let the new buyer assume the mortgage, and do a wrap-around mortgage for the remaining balance between down payment+existing note and sale price.  Big win for the buyer, and win for you since the affordability on your home for buyers is a lot better than one that would be sold with only traditional lending.  

Except this isn't possible...(?). Almost all loans (except FHA, USDA, and maybe some others) have due-on-sale clauses which allow the lender to call the note if title is transferred. From what I can tell, current rules were set in 1982 with the Garn-St. Germain Depository Institutions Act and the supreme court case Fidelity Federal Savings and Loan Association v. de la Cuesta, 102 S.Ct. 3014, (1982) which upheld the rights of banks to enforce these rules. 

Garn-St. Germain gave some carve-outs to the Due-on-sale enforceability, including transfers and sales to family members, trusts, second-liens, etc. This is with respect to loans secured by residential real property containing less than 5 dwelling units, so no commercial.

From this, there's been a number of seemingly-reasonable and smart folks writing about the enforceability and practicality of getting around the Due-on-Sale clauses.   Here's the best sources and discussions I've found discussing the issue and laying out ways of getting around this clause:

- Bill Bronchick - "There is no Due on Sale Jail"

- CRE University - "How to beat the due on sale clause"

- Robert Bruss - "The six pillars of assumption"

- Richmond Law Review -"The due-on-sale clause: A marriage gone sour - a checklist for the practitioner" This one is an actual published law review, but it's old.  Pre Garn. 

So TL;DR;

It seems like getting around the due-on-sale is possible, and selling the home bundled with a mortgage is possible using Land Trusts and roughly the following process (From CRE University)

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.

It seems like Lenders aren't paying attention to the details on performing loans - there are no spies at the title company, and almost all loans are sold off and handled by servicers these days.  

Now why would I want to deal with this legal headache of lawyers and trusts and all this? Is it worth it? 

With rates double what they were 6 months ago, we're talking serious savings for homebuyers if the seller was willing to do something like this.  Plus the seller would benefit by improving the desirability and affordability of their home for conventional buyers.   Lastly, maybe there's a way to turn your low interest rate mortgage into an asset by arbitraging the difference between what the trust pays for the note and the payments to the trust by the new beneficiary (buyer). 

So what do you think BiggerPockets?  Ethical?  Morally Gross?  Too Risky?  Worth it?  Let's hear it.