DUE-ON-SALE-O-METER

[Rick H.]

Was just told today by a Chicago area attorney who works with a lot of investors that he has seen a sharp increase lately in banks calling notes due.

Very curious if anyone else is seeing this.

[Dion DePaoli]

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).