Wrap-Around Deed Of Trust

How To Use This Tool To Purchase Real Estate

WRAP–AROUND DEED OF TRUST TRANSACTIONS

DUE-ON-SALE CLAUSE CLOSINGS

SELLER FINANCING

JAMES ROBERT DEAL, J.D.

425-774-6611 x 1

James@JamesDeal.com

MATTHEW PARKER

MatthewParker@JamesDeal.com

425-774-6611 x 2

 

The law office of James Robert Deal does escrow closings and escrow setup for wrap-around, due-on-sale, seller-financed, creative financing transactions.

 Our office also does escrow setup and escrow closings for commercial real estate transactions.

In some cases our office can do escrow setup in all 50 states.

 Our office closes for-sale-by-owner transactions in Washington.

 Interest rates have gone up, from under 3.0% now to over 7.0% per year. This means it is harder for buyers to qualify and that the purchase price they qualify for is less.

A possible solution is not to get new financing at all, instead to use the seller’s loan instead through a wrap-around deed of trust.

If the seller owns the property free and clear, the process is a lot easier.

A seller-financed, wrap-around, all-inclusive deed and deed of trust deal is seller financing. So too is a loan assumption if there is also a balance still owing to the seller. So too is a lease-option deal, which is usually unrecorded.

If the seller owes a balance to an existing lender, the seller might consider offering a wrap-around, seller-financed deed of trust transaction or a lease-option transaction.

If a buyer can pay all cash down to the balance that the seller owes to the lender, this is called a parallel wrap-around. The wrap-around note and deed of trust might give the buyer the same interest rate and monthly payments as the seller has. Or the seller might charge a rate and payments that are higher and make some extra money for going to the trouble of extending credit to the buyer.

Bear in mind that sellers should comply with Dodd Frank restrictions on seller financing. These restrictions apply when the deal is a recorded wrap-around deal. It is unclear whether some or all Dodd Frank restrictions apply when the lease-option is the form of seller financing utilized.

Read my own summary of Dodd Frank restrictions as they apply to seller financing at this link.

Read Bronchick’s summary summary of Dood Frank restrictions as they apply to seller financing at this link.

Things changed at the end of the Carter years and the beginning of the Reagan years. Paul Volker took a sledge hammer to the economy, raising interest rates to the point where Jimmy Carter lost reelection. Vietnam War deficit financing had pumped up the economy. Nixon had taken the country off the gold standard in 1971. The price of oil had gone through the roof. There was inflation at Volker raised the Fed Funds rate to 17.0% per year. In 1981 mortgage rates were as high as 18.27% per year. There was inflation and recession at the same time. It was called “stagflation.”

People wanted to sell their homes, but buyers either could not qualify for mortgages payments at such high interest rates or were not willing to do so. Millions of sellers had old 3%, 4%, and 5% mortgages, and inventive real estate agents and lawyers figured out ways for buyers to assume sellers’ mortgages formally or informally.

If the buyer paid enough down to pay off the seller’s equity in the property, this was called a parallel wrap-around. The seller could give the buyer the same payments and interest rate as the seller was paying. The seller might charge the buyer a higher interest rate than the seller was paying on the seller’s underlying mortgage for the trouble of carrying the buyer.

In some cases the mortgages had due-on-sale clauses in Paragraph 17 (renumbered today to Paragraph 18). A due-on-sale clause says that if the seller sells the property the bank can call the loan due. However, many state cases around the country held that due-on-sale clauses were void as restraints on alienation because they were practical impediments to resale.

Back in 1980 the typical transaction was a $100,000 property with a $20,000 down payment and an $80,000 deed of trust back to the seller. A five-year cash out was typical. The buyer would give the seller an all-inclusive, wrap-around deed of trust for $80,000. It would wrap around and include any underlying lender financing, which the seller would continue to pay out of the payments from the buyer. Often a collection account was set up to handle the money, hold the original note and reconveyance, and give the seller notice if the buyer was not paying on time. Sometimes buyer and seller got consent from the lenders. Sometimes they did not even ask for consent.

Then in 1984 Congress federalized the law of due-on-sale and preempted all state cases and statutes on the subject. Banks could enforce their Paragraph 17 or 18 due-on-sale clauses and call loans due if there was a change in ownership. If a lender is foreclosing, the lender must give 30 days notice, and if the balance was not paid in full or the property was not deeded back to the seller, then the bank could conduct a foreclosure, a process that typically would take six or seven months.

In the wrap-around note the buyer and seller agreed what would be done if the unlikely event that the lender called in the loan. Generally, it was the buyer who would agree to refinance or sell the property so if, in the unlikely event, the lender called the loan due the seller could pay off the lender.

Note: a violation of a due-on-sale clause is a violation of a term in the mortgage just like any other. It could be cured if the buyer deeded the property back to the seller. The buyer and seller might then enter into a private, unrecorded contract. This never happened because lenders never called loans due on sale – as long as the payments were being paid. The due-on-sale clause mostly functioned to frighten most sellers, buyers, and brokers into getting new loans and paying off old loans.

There were exceptions to the new rule: The bank could not call in the loan if a parent deeded to a child, or a spouse deeded to a spouse, of if there was a divorce and one spouse ended up with the house, or if a borrower put title into the name of a trust and there was no change in possession, or if title passed by inheritance.

The due-on-sale section of the Garn-St.Germain Act 12 U.S. Code § 1701j–3 – Preemption of due-on-sale prohibitions, says

(a)DefinitionsFor the purpose of this section—

(1)

the term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent;

(2)

the term “lender” means a person or government agency making a real property loan or any assignee or transferee, in whole or in part, of such a person or agency;

(3)

the term “real property loan” means a loan, mortgage, advance, or credit sale secured by a lien on real property, the stock allocated to a dwelling unit in a cooperative housing corporation, or a residential manufactured home, whether real or personal property; and

(4)

the term “residential manufactured home” means a manufactured home as defined in section 5402(6) of title 42 which is used as a residence; and

(5)

the term “State” means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, American Samoa, and the Trust Territory of the Pacific Islands.

(b)Loan contract and terms governing execution or enforcement of due-on-sale options and rights and remedies of lenders and borrowers; assumptions of loan rates

(1)

Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may, subject to subsection (c), enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan.

(2)

Except as otherwise provided in subsection (d), the exercise by the lender of its option pursuant to such a clause shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the lender and the borrower shall be fixed and governed by the contract.

(3)

In the exercise of its option under a due-on-sale clause, a lender is encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption.

(c)State prohibitions applicable for prescribed period; subsection (b) provisions applicable upon expiration of such period; loans subject to State and Federal regulation or subsection (b) provisions when authorized by State laws or Federal regulations

(1)In the case of a contract involving a real property loan which was made or assumed, including a transfer of the liened property subject to the real property loan, during the period beginning on the date a State adopted a constitutional provision or statute prohibiting the exercise of due-on-sale clauses, or the date on which the highest court of such State has rendered a decision (or if the highest court has not so decided, the date on which the next highest appellate court has rendered a decision resulting in a final judgment if such decision applies State-wide) prohibiting such exercise, and ending on October 15, 1982, the provisions of subsection (b) shall apply only in the case of a transfer which occurs on or after the expiration of 3 years after October 15, 1982, except that—

(A)

State, by a State law enacted by the State legislature prior to the close of such 3-year period, with respect to real property loans originated in the State by lenders other than national banks, Federal savings and loan associations, Federal savings banks, and Federal credit unions, may otherwise regulate such contracts, in which case subsection (b) shall apply only if such State law so provides; and

(B)

the Comptroller of the Currency with respect to real property loans originated by national banks or the National Credit Union Administration Board with respect to real property loans originated by Federal credit unions may, by regulation prescribed prior to the close of such period, otherwise regulate such contracts, in which case subsection (b) shall apply only if such regulation so provides.

(2)

(A)

For any contract to which subsection (b) does not apply pursuant to this subsection, a lender may require any successor or transferee of the borrower to meet customary credit standards applied to loans secured by similar property, and the lender may declare the loan due and payable pursuant to the terms of the contract upon transfer to any successor or transferee of the borrower who fails to meet such customary credit standards.

(B)

lender may not exercise its option pursuant to a due-on-sale clause in the case of a transfer of a real property loan which is subject to this subsection where the transfer occurred prior to October 15, 1982.

(C)

This subsection does not apply to a loan which was originated by a Federal savings and loan association or Federal savings bank.

(d)Exemption of specified transfers or dispositionsWith respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—

(1)

the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;

(2)

the creation of a purchase money security interest for household appliances;

(3)

a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;

(4)

the granting of a leasehold interest of three years or less not containing an option to purchase;

(5)

a transfer to a relative resulting from the death of a borrower;

(6)

a transfer where the spouse or children of the borrower become an owner of the property;

(7)

a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;

(8)

a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or

(9)

any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

(e)Rules, regulations, and interpretations; future income bearing loans subject to due-on-sale options

(1)

The Federal Home Loan Bank Board, in consultation with the Comptroller of the Currency and the National Credit Union Administration Board, is authorized to issue rules and regulations and to publish interpretations governing the implementation of this section.

(2)

Notwithstanding the provisions of subsection (d), the rules and regulations prescribed under this section may permit a lender to exercise its option pursuant to a due-on-sale clause with respect to a real property loan and any related agreement pursuant to which a borrower obtains the right to receive future income.

(f)Effective date for enforcement of Corporation-owned loans with due-on-sale options

The Federal Home Loan Mortgage Corporation (hereinafter referred to as the “Corporation”) shall not, prior to July 1, 1983, implement the change in its policy announced on July 2, 1982, with respect to enforcement of due-on-sale clauses in real property loans which are owned in whole or in part by the Corporation.

(g)Balloon payments

Federal Home Loan Bank Board regulations restricting the use of a balloon payment shall not apply to a loan, mortgage, advance, or credit sale to which this section applies.

How does this relate to the present? Rates are not as high as in the time of Volker, but, it is still difficult for borrowers to get financing. That difficulty has had a significant impact on the current stagnation in sales and the drop in property values.

Maybe it is time for buyers and sellers to rebel. My experience is that lenders do not want to take properties back and will consent to wrap-around sales, provided that the seller is not released from liability. The banks, mortgage companies, and insurance companies have too many mortgages in their portfolios as it is. If a mortgage is being  paid current, generally they do not want to call it in.

The likelihood that a lender will exercise a due-on-sale clause is reduced because the Garn St. Germain Act also states the following, also quoted above:

In the exercise of its option under a due-on-sale clause, a lender is encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption.

12 U.S. Code § 1701j–3

There is an obscure case from some state or federal court somewhere that says that the above paragraph is not binding because lenders are only encouraged and not absolutely required to allow a new, negotiated lower interest rate. The argument can still be made that a compromise interest rate should be agreed on, although to my knowledge this has never happened – because due-on-sale clauses are not being invoked at all.

The due-on-sale clause is not something to be afraid of. Buyer and seller can either get the lender to agree to waive enforcement of the due-on-sale clause, or the buyer and seller can disregard the due-on-sale clause. They should acknowledge that there is a risk, although it may be small. The must agree that if the lender calls the loan due, that the buyer will either refinance or resell the property.

The big exception is in the case of large commercial transactions. When a lender lends on a big building, the lender wants to know with whom the lender is dealing, and a due-on-sale clause is more likely to be invoked.

What kind of buyer would be a likely candidate for an all-inclusive, seller-financed, wrap-around sale? If buyer and seller can get the lender to consent to the wrap-around, then any buyer would be a likely candidate.

If the buyer and seller cannot get a response from the lender or if the lender refuses to give consent, then the buyer and seller could proceed anyway. They type  of buyer who would go ahead would generally be an investor or a person who could tolerate a certain level of risk, perhaps a person with sufficient assets who could refinance or re-sell the property if this were absolutely necessary.

I am hesitant to put a first time buyer into a confidential, wrap-around purchase unless I could be sure that the buyer can pay off or refinance the loan if necessary – again even though the likelihood of a lender enforcing a due-on-sale clause is zero or close to it. Maybe the first time buyer has parents who could pay off or refinance the loan if it were necessary.

My position is that forcing buyers to get new financing so that sellers can pay off exiting loans is bad policy. A mortgage is a form of money, and the payoff of a mortgage reduces the money supply.

Bank regulators should require banks to allow buyers to take over sellers’ existing mortgages when rates are high in order to spur home sales. Due-on-sale clauses should be disregarded and assumptions and wrap-around sales should be allowed until the housing and mortgage markets return to normal.

Until such change is made, buyers and sellers can be creative and “go around” due-on-sale clauses.

My practice as an attorney is to give initial telephone consultations to buyers, sellers, and real estate brokers by telephone for no charge. I can represent the buyer or the seller. I can also act as a neutral mediator if there is a clear understanding of that this means.

If there is a real estate broker involved, I advise the broker to put together a standard wrap-around purchase and sale agreement, label it as a good faith but non-binding letter of intent, and then turn the documents over to me to turn it into a for escrow setup and clarify all issues. The real estate multiple associations have standard forms that cover assumptions and wrap around mortgages.

However, the standard forms do not cover all issues. Brokers are not licensed to write complex addenda any different from standard, lawyer-prepared addenda. Brokers’ errors and omissions policies do not cover them when they depart from the standard forms. At that point, the broker should bring me into the picture. I will complete the escrow setup, write the wrap-around note and deed of trust, configure a collection account setup, and either turn the transaction over to an escrow company or close the transaction in my law office. We sometimes close escrows if the property is in Washington. If the property is not in Washington, we send the escrow to an escrow or title company in the relevant state. If I am doing escrow setup on a transaction outside of Washington, escrow would be by a title company or independent escrow company, and I would insist that the buyer and seller have local counsel.

During my consultation we will discuss fees. My fee is higher if I agree to take payment at closing, lower if the client or clients pay me part or all of my fee in advance.

The FED raises interest rates to slow inflation. Raising interest rates is the only tool the FED has to work with. The other tool would be to raise taxes and reduce the deficit. The current deficit is around $30 trillion. A certain deficit is acceptable, but in my opinion, it should be lowered in times of inflation in order to keep rates down. Rates should be lower so that the middle class and the poor can afford more of the things they need.

 

WRAP–AROUND DEED OF TRUST TRANSACTIONS
DUE-ON-SALE CLAUSE CLOSINGS
SELLER FINANCING

JAMES ROBERT DEAL, J.D.
425-774-6611 x 1
James@JamesDeal.com
MATTHEW PARKER
MatthewParker@JamesDeal.com
425-774-6611 x 2

l

The law office of James Robert Deal does escrow closings and escrow setup for wrap-around, due-on-sale, seller-financed, creative financing transactions.

l

Our office also does escrow setup and escrow closings for commercial real estate transactions.

l

In some cases our office can do escrow setup in all 50 states.

l

Our office closes for-sale-by-owner transactions in Washington.

Interest rates have gone up, from under 3.0% now to over 6.0% per year. This means it is harder for buyers to qualify and that they purchase price they qualify for is less. A possible solution is not to get new financing at all, instead to use the seller’s loan instead through a wrap-around deed of trust. If the seller owns the property free and clear, the process is a lot easier.

A seller-financed, wrap-around, all-inclusive deed and deed of trust deal is seller financing. So too is a loan assumption if there is also a balance still owing to the seller. So too is a lease-option deal, usually unrecofded.

If the seller owes a balance to an existing lender, the seller might consider offering a wrap-around, seller-financed deed of trust transaction or a lease-option transaction.

The Lease Option Alternative

A lease-option transaction is typically unrecorded. A wrap-around, seller-financed, deed of trust transaction are generally recorded.

If a buyer can pay all cash down to the balance that the seller owes to the lender, this is called a parallel wrap-around. The wrap-around note and deed of trust might give the buyer the same interest rate and monthly payments as the seller has. Or the seller might charge a rate and payments that are higher and make some extra money for going to the trouble of extending credit to the buyer.

Bear in mind that sellers should comply with Dodd Frank restrictions on seller financing. These restrictions apply when the deal is a recorded wrap-around deal. It is unclear whether some or all Dodd Frank restrictions apply when the lease-option is the form of seller financing utilized.

Read my own summary of Dodd Frank restrictions as they apply to seller financing at this link.

Some background is necessary.

Before 1980 most mortgages were assumable, sometimes without release of liability for the original borrower and rarely with release.

Things changed at the end of the Carter years and the beginning of the Reagan years. Paul Volker took a sledge hammer to the economy, raising interest rates to the point where Jimmy Carter lost reelection. Vietnam War deficit financing had pumped up the economy. Nixon had taken the country off the gold standard in 1971. The price of oil had gone through the roof. There was inflation at Volker raised the Fed Funds rate to 17.0% per year. In 1981 mortgage rates were as high as 18.27% per year. There was inflation and recession at the same time. It was called “stagflation.”

People wanted to sell their homes, but buyers either could not qualify for mortgages payments at such high interest rates or were not willing to do so. Millions of sellers had old 3%, 4%, and 5% mortgages, and inventive real estate agents and lawyers figured out ways for buyers to assume sellers’ mortgages formally or informally.

If the buyer paid enough down to pay off the seller’s equity in the property, this was called a parallel wrap-around. The seller could give the buyer the same payments and interest rate as the seller was paying.

The seller might charge the buyer a higher interest rate than the seller was paying on the seller’s underlying mortgage for the trouble of carrying the buyer.

In some cases the mortgages had due-on-sale clauses in Paragraph 17 (renumbered today to Paragraph 18). A due-on-sale clause says that if the seller sells the property the bank can call the loan due. However, many state cases around the country held that due-on-sale clauses were void as restraints on alienation because they were practical impediments to resale.

Back in 1980 the typical transaction was a $100,000 property with a $20,000 down payment and an $80,000 deed of trust back to the seller. A five-year cash out was typical. The buyer would give the seller an all-inclusive, wrap-around deed of trust for $80,000. It would wrap around and include any underlying lender financing, perhaps $40,000 in this example, which the seller would continue to pay out of the payments from the buyer. Often a collection account was set up to handle the money, hold the original note and reconveyance, and give the seller notice if the buyer was not paying on time. Sometimes buyer and seller got consent from the lenders. Sometimes they did not even ask for consent.

Then in 1984 Congress federalized the law of due-on-sale and preempted all state cases and statutes on the subject. Banks could enforce their Paragraph 17 or 18 due-on-sale clauses and call loans due if there was a change in ownership. The bank had to give 30 days notice, and if the balance was not paid in full or the property was not deeded back to the seller, then the bank could conduct a foreclosure, a process that typically would take six or seven months.

In the wrap-around note the buyer and seller agreed what would be done if the unlikely event that the lender called in the loan. Generally, it was the buyer who would agree to refinance or sell the property so if, in the unlikely event, the lender called the loan due the seller could pay off the lender.

Note: a violation of a due-on-sale clause is a violation of a term in the mortgage just like any other. It could be cured if the buyer deeded the property back to the seller. The buyer and seller might then enter into a private contract. This never happened because lenders never called loans due on sale – as long as the payments were being paid. The due-on-sale clause mostly functioned to frighten most sellers, buyers, and brokers into getting new loans and paying off old loans.

There were exceptions to the new rule: The bank could not call in the loan if a parent deeded to a child, or a spouse deeded to a spouse, of if there was a divorce and one spouse ended up with the house, or if a borrower put title into the name of a trust and there was no change in possession, or if title passed by inheritance.

The due-on-sale section of the Garn-St.Germain Act 12 U.S. Code § 1701j–3 – Preemption of due-on-sale prohibitions, says

(a) DEFINITIONSFor the purpose of this section—
(1) the term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent;
(2)the term “lender” means a person or government agency making a real property loan or any assignee or transferee, in whole or in part, of such a person or agency;
(3)the term “real property loan” means a loan, mortgage, advance, or credit sale secured by a lien on real property, the stock allocated to a dwelling unit in a cooperative housing corporation, or a residential manufactured home, whether real or personal property; and
(4) the term “residential manufactured home” means a manufactured home as defined in section 5402(6) of title 42 which is used as a residence; and
(5) the term “State” means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, American Samoa, and the Trust Territory of the Pacific Islands.
(b)LOAN CONTRACT AND TERMS GOVERNING EXECUTION OR ENFORCEMENT OF DUE-ON-SALE OPTIONS AND RIGHTS AND REMEDIES OF LENDERS AND BORROWERS; ASSUMPTIONS OF LOAN RATES
(1) Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may, subject to subsection (c), enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan.
(2) Except as otherwise provided in subsection (d), the exercise by the lender of its option pursuant to such a clause shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the lender and the borrower shall be fixed and governed by the contract.
(3) In the exercise of its option under a due-on-sale clause, a lender is encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption.
(c) STATE PROHIBITIONS APPLICABLE FOR PRESCRIBED PERIOD; SUBSECTION (B) PROVISIONS APPLICABLE UPON EXPIRATION OF SUCH PERIOD; LOANS SUBJECT TO STATE AND FEDERAL REGULATION OR SUBSECTION (B) PROVISIONS WHEN AUTHORIZED BY STATE LAWS OR FEDERAL REGULATIONS

(1) In the case of a contract involving a real property loan which was made or assumed, including a transfer of the liened property subject to the real property loan, during the period beginning on the date a State adopted a constitutional provision or statute prohibiting the exercise of due-on-sale clauses, or the date on which the highest court of such State has rendered a decision (or if the highest court has not so decided, the date on which the next highest appellate court has rendered a decision resulting in a final judgment if such decision applies State-wide) prohibiting such exercise, and ending on October 15, 1982, the provisions of subsection (b) shall apply only in the case of a transfer which occurs on or after the expiration of 3 years after October 15, 1982, except that—

  • (A) a State, by a State law enacted by the State legislature prior to the close of such 3-year period, with respect to real property loans originated in the State by lenders other than national banks, Federal savings and loan associations, Federal savings banks, and Federal credit unions, may otherwise regulate such contracts, in which case subsection (b) shall apply only if such State law so provides; and
  • (B)the Comptroller of the Currency with respect to real property loans originated by national banks or the National Credit Union Administration Board with respect to real property loans originated by Federal credit unions may, by regulation prescribed prior to the close of such period, otherwise regulate such contracts, in which case subsection (b) shall apply only if such regulation so provides.

(2)

  • (A) For any contract to which subsection (b) does not apply pursuant to this subsection, a lender may require any successor or transferee of the borrower to meet customary credit standards applied to loans secured by similar property, and the lender may declare the loan due and payable pursuant to the terms of the contract upon transfer to any successor or transferee of the borrower who fails to meet such customary credit standards.
  • (B) A lender may not exercise its option pursuant to a due-on-sale clause in the case of a transfer of a real property loan which is subject to this subsection where the transfer occurred prior to October 15, 1982.
  • (C) This subsection does not apply to a loan which was originated by a Federal savings and loan association or Federal savings bank.
  • (d)EXEMPTION OF SPECIFIED TRANSFERS OR DISPOSITIONSWith respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
    • (1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
    • (2) the creation of a purchase money security interest for household appliances;
    • (3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
    • (4) the granting of a leasehold interest of three years or less not containing an option to purchase;
    • (5) a transfer to a relative resulting from the death of a borrower;
    • (6) a transfer where the spouse or children of the borrower become an owner of the property;
    • (7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
    • (8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
    • (9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

(e) RULES, REGULATIONS, AND INTERPRETATIONS; FUTURE INCOME BEARING LOANS SUBJECT TO DUE-ON-SALE OPTIONS

  • (1) The Federal Home Loan Bank Board, in consultation with the Comptroller of the Currency and the National Credit Union Administration Board, is authorized to issue rules and regulations and to publish interpretations governing the implementation of this section.
  • (2) Notwithstanding the provisions of subsection (d), the rules and regulations prescribed under this section may permit a lender to exercise its option pursuant to a due-on-sale clause with respect to a real property loan and any related agreement pursuant to which a borrower obtains the right to receive future income.

(f) EFFECTIVE DATE FOR ENFORCEMENT OF CORPORATION-OWNED LOANS WITH DUE-ON-SALE OPTIONSThe Federal Home Loan Mortgage Corporation (hereinafter referred to as the “Corporation”) shall not, prior to July 1, 1983, implement the change in its policy announced on July 2, 1982, with respect to enforcement of due-on-sale clauses in real property loans which are owned in whole or in part by the Corporation.

(g) BALLOON PAYMENTS-Federal Home Loan Bank Board regulations restricting the use of a balloon payment shall not apply to a loan, mortgage, advance, or credit sale to which this section applies.

How does this relate to the present?

Rates are not as high as in the time of Volker, but, it is still difficult for borrowers to get financing. That difficulty has had a significant impact on the current stagnation in sales and the drop in property values.

Maybe it is time for buyers and sellers to rebel. My experience is that lenders do not want to take properties back and will consent to wrap-around sales, provided that the seller is not released from liability. The banks, mortgage companies, and insurance companies have too many mortgages in their portfolios as it is. If a mortgage is being paid current, generally they do not want to call it in.

The likelihood that a lender will exercise a due-on-sale clause is reduced because the Garn St. Germain Act also states the following, also quoted above:

In the exercise of its option under a due-on-sale clause, a lender is encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption.
12 U.S. Code § 1701j–3

There is an obscure case from some state or federal court somewhere that says that the above paragraph is not binding because lenders are only encouraged to allow a new, negotiated lower interest rate. The argument can still be made that a compromise interest rate should be agreed on, although to my knowledge this has never happened – because due-on-sale clauses are not being invoked at all.

The due-on-sale clause is not something to be afraid of. Buyer and seller can either get the lender to agree to waive enforcement of the due-on-sale clause, or the buyer and seller can disregard the due-on-sale clause. They must should acknowledge that there is a risk, although it may be small. The must agree that if the lender calls the loan due, that the buyer will either refinance or resell the property.

The big exception is in the case of large commercial transactions. When a lender lends on a big building, the lender wants to know with whom the lender is dealing, and a due-on-sale clause is more likely to be invoked.

What kind of buyer would be a likely candidate for an all-inclusive, seller-financed, wrap-around sale? If buyer and seller can get the lender to consent to the wrap-around, then any buyer would be a likely candidate.

If the buyer and seller cannot get a response from the lender or if the lender refuses to give consent, then the buyer and seller could proceed anyway. They type of buyer who would go ahead would be an investor or a person who could tolerate a certain level of risk, perhaps a person with sufficient assets who could refinance or re-sell the property if this were absolutely necessary.

My position is that forcing buyers to get new financing so that sellers can pay off exiting loans is bad policy. A mortgage is a form of money, and the payoff of a mortgage reduces the money supply.

Bank regulators should require banks to allow buyers to take over sellers’ existing mortgages in order to spur home sales. Due-on-sale clauses should be disregarded and assumptions and wrap-around sales should be allowed until the housing and mortgage markets return to normal.

Until such change is made, buyers and sellers can be creative and “go around” due-on-sale clauses.

My practice as an attorney is to give initial telephone consultations to buyers, sellers, and real estate brokers by telephone for no charge. I can represent the buyer or the seller. I can also act as a neutral mediator if there is a clear understanding of that this means.

If there is a real estate broker involved, I advise the broker to put together a standard wrap-around purchase and sale agreement, label it as a good faith but non-binding letter of intent, and then turn the documents over to me for escrow setup. The real estate multiple associations have standard forms that cover assumptions and wrap around mortgages.

However, the standard forms do not cover all issues. Brokers are not licensed to write complex addenda any different from standard, lawyer-prepared addenda. Brokers’ errors and omissions policies do not cover them when they depart from the standard forms. At that point, the broker should bring me into the picture. I will complete the escrow setup, write the wrap-around note and deed of trust, configure a collection account setup, and either then the transaction to an escrow company or close the transaction in my law office. We sometimes close escrows if the property is in Washington. If the property is not in Washington, we send the escrow to an escrow or title company in the relevant state.

During my consultation we will discuss fees. My fee is higher if I agree to take payment at closing, lower if the client or clients pay me part or all of my fee in advance.

By the way: The FED raises interest rates to slow inflation. Raising interest rates is the only tool the FED has to work with. The other tool would be to raise taxes, preferably on higher income earners, those with the money to spend into the economy and promote inflation. The current deficit is around $30 trillion. A certain deficit is acceptable, but in my opinion, it should be lowered in times of inflation in order to keep rates down. Rates should be lower so that the middle class and the poor can afford more of the things th
es in Paragraph 17 (renumbered today to Paragraph 18). A due-on-sale clause says that if the seller sells the property the bank can call the loan due. However, many state cases around the country held that due-on-sale clauses were void as restraints on alienation because they were practical impediments to resale.

Back in 1980 the typical transaction was a $100,000 property with a $20,000 down payment and an $80,000 deed of trust back to the seller. A five-year cash out was typical. The buyer would give the seller an all-inclusive, wrap-around deed of trust for $80,000. It would wrap around and include any underlying lender financing, perhaps $40,000 in this example, which the seller would continue to pay out of the payments from the buyer. Often a collection account was set up to handle the money, hold the original note and reconveyance, and give the seller notice if the buyer was not paying on time. Sometimes buyer and seller got consent from the lenders. Sometimes they did not even ask for consent.

Then in 1984 Congress federalized the law of due-on-sale and preempted all state cases and statutes on the subject. Banks could enforce their Paragraph 17 or 18 due-on-sale clauses and call loans due if there was a change in ownership. The bank had to give 30 days notice, and if the balance was not paid in full or the property was not deeded back to the seller, then the bank could conduct a foreclosure, a process that typically would take six or seven months.

In the wrap-around note the buyer and seller agreed what would be done if the unlikely event that the lender called in the loan. Generally, it was the buyer who would agree to refinance or sell the property so if, in the unlikely event, the lender called the loan due the seller could pay off the lender.

Note: a violation of a due-on-sale clause is a violation of a term in the mortgage just like any other. It could be cured if the buyer deeded the property back to the seller. The buyer and seller might then enter into a private contract. This never happened because lenders never called loans due on sale – as long as the payments were being paid. The due-on-sale clause mostly functioned to frighten most sellers, buyers, and brokers into getting new loans and paying off old loans.

There were exceptions to the new rule: The bank could not call in the loan if a parent deeded to a child, or a spouse deeded to a spouse, of if there was a divorce and one spouse ended up with the house, or if a borrower put title into the name of a trust and there was no change in possession, or if title passed by inheritance.

The due-on-sale section of the Garn-St.Germain Act 12 U.S. Code § 1701j–3 – Preemption of due-on-sale prohibitions, says

(a)DEFINITIONSFor the purpose of this section—
(1) the term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent;
(2) the term “lender” means a person or government agency making a real property loan or any assignee or transferee, in whole or in part, of such a person or agency;
(3) the term “real property loan” means a loan, mortgage, advance, or credit sale secured by a lien on real property, the stock allocated to a dwelling unit in a cooperative housing corporation, or a residential manufactured home, whether real or personal property; and
(4) the term “residential manufactured home” means a manufactured home as defined in section 5402(6) of title 42 which is used as a residence; and
(5) the term “State” means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, American Samoa, and the Trust Territory of the Pacific Islands.
(b) LOAN CONTRACT AND TERMS GOVERNING EXECUTION OR ENFORCEMENT OF DUE-ON-SALE OPTIONS AND RIGHTS AND REMEDIES OF LENDERS AND BORROWERS; ASSUMPTIONS OF LOAN RATES
(1) Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may, subject to subsection (c), enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan.
(2) Except as otherwise provided in subsection (d), the exercise by the lender of its option pursuant to such a clause shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the lender and the borrower shall be fixed and governed by the contract.
(3) In the exercise of its option under a due-on-sale clause, a lender is encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption.
(c) STATE PROHIBITIONS APPLICABLE FOR PRESCRIBED PERIOD; SUBSECTION (B) PROVISIONS APPLICABLE UPON EXPIRATION OF SUCH PERIOD; LOANS SUBJECT TO STATE AND FEDERAL REGULATION OR SUBSECTION (B) PROVISIONS WHEN AUTHORIZED BY STATE LAWS OR FEDERAL REGULATIONS
(1) In the case of a contract involving a real property loan which was made or assumed, including a transfer of the liened property subject to the real property loan, during the period beginning on the date a State adopted a constitutional provision or statute prohibiting the exercise of due-on-sale clauses, or the date on which the highest court of such State has rendered a decision (or if the highest court has not so decided, the date on which the next highest appellate court has rendered a decision resulting in a final judgment if such decision applies State-wide) prohibiting such exercise, and ending on October 15, 1982, the provisions of subsection (b) shall apply only in the case of a transfer which occurs on or after the expiration of 3 years after October 15, 1982, except that—
(A) a State, by a State law enacted by the State legislature prior to the close of such 3-year period, with respect to real property loans originated in the State by lenders other than national banks, Federal savings and loan associations, Federal savings banks, and Federal credit unions, may otherwise regulate such contracts, in which case subsection (b) shall apply only if such State law so provides; and
(B) the Comptroller of the Currency with respect to real property loans originated by national banks or the National Credit Union Administration Board with respect to real property loans originated by Federal credit unions may, by regulation prescribed prior to the close of such period, otherwise regulate such contracts, in which case subsection (b) shall apply only if such regulation so provides.
(2)
(A) For any contract to which subsection (b) does not apply pursuant to this subsection, a lender may require any successor or transferee of the borrower to meet customary credit standards applied to loans secured by similar property, and the lender may declare the loan due and payable pursuant to the terms of the contract upon transfer to any successor or transferee of the borrower who fails to meet such customary credit standards.
(B) A lender may not exercise its option pursuant to a due-on-sale clause in the case of a transfer of a real property loan which is subject to this subsection where the transfer occurred prior to October 15, 1982.
(C) This subsection does not apply to a loan which was originated by a Federal savings and loan association or Federal savings bank.
(d) EXEMPTION OF SPECIFIED TRANSFERS OR DISPOSITIONSWith respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

(e) RULES, REGULATIONS, AND INTERPRETATIONS; FUTURE INCOME BEARING LOANS SUBJECT TO DUE-ON-SALE OPTIONS
(1) The Federal Home Loan Bank Board, in consultation with the Comptroller of the Currency and the National Credit Union Administration Board, is authorized to issue rules and regulations and to publish interpretations governing the implementation of this section.
(2) Notwithstanding the provisions of subsection (d), the rules and regulations prescribed under this section may permit a lender to exercise its option pursuant to a due-on-sale clause with respect to a real property loan and any related agreement pursuant to which a borrower obtains the right to receive future income.
(f) EFFECTIVE DATE FOR ENFORCEMENT OF CORPORATION-OWNED LOANS WITH DUE-ON-SALE OPTIONS
The Federal Home Loan Mortgage Corporation (hereinafter referred to as the “Corporation”) shall not, prior to July 1, 1983, implement the change in its policy announced on July 2, 1982, with respect to enforcement of due-on-sale clauses in real property loans which are owned in whole or in part by the Corporation.
(g) BALLOON PAYMENTS
Federal Home Loan Bank Board regulations restricting the use of a balloon payment shall not apply to a loan, mortgage, advance, or credit sale to which this section applies.
How does this relate to the present? Rates are not as high as in the time of Volker, but, it is still difficult for borrowers to get financing. That difficulty has had a significant impact on the current stagnation in sales and the drop in property values.

Maybe it is time for buyers and sellers to rebel. My experience is that lenders do not want to take properties back and will consent to wrap-around sales, provided that the seller is not released from liability. The banks, mortgage companies, and insurance companies have too many mortgages in their portfolios as it is. If a mortgage is being paid current, generally they do not want to call it in.

The likelihood that a lender will exercise a due-on-sale clause is reduced because the Garn St. Germain Act also states the following, also quoted above:

In the exercise of its option under a due-on-sale clause, a lender is encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption.
12 U.S. Code § 1701j–3

There is an obscure case from some state or federal court somewhere that says that the above paragraph is not binding because lenders are only encouraged to allow a new, negotiated lower interest rate. The argument can still be made that a compromise interest rate should be agreed on, although to my knowledge this has never happened – because due-on-sale clauses are not being invoked at all.

The due-on-sale clause is not something to be afraid of. Buyer and seller can either get the lender to agree to waive enforcement of the due-on-sale clause, or the buyer and seller can disregard the due-on-sale clause. They must should acknowledge that there is a risk, although it may be small. The must agree that if the lender calls the loan due, that the buyer will either refinance or resell the property.

The big exception is in the case of large commercial transactions. When a lender lends on a big building, the lender wants to know with whom the lender is dealing, and a due-on-sale clause is more likely to be invoked.

What kind of buyer would be a likely candidate for an all-inclusive, seller-financed, wrap-around sale? If buyer and seller can get the lender to consent to the wrap-around, then any buyer would be a likely candidate.

If the buyer and seller cannot get a response from the lender or if the lender refuses to give consent, then the buyer and seller could proceed anyway. They type of buyer who would go ahead would be an investor or a person who could tolerate a certain level of risk, perhaps a person with sufficient assets who could refinance or re-sell the property if this were absolutely necessary.

My position is that forcing buyers to get new financing so that sellers can pay off exiting loans is bad policy. A mortgage is a form of money, and the payoff of a mortgage reduces the money supply.

Bank regulators should require banks to allow buyers to take over sellers’ existing mortgages in order to spur home sales. Due-on-sale clauses should be disregarded and assumptions and wrap-around sales should be allowed until the housing and mortgage markets return to normal.

Until such change is made, buyers and sellers can be creative and “go around” due-on-sale clauses.

My practice as an attorney is to give initial telephone consultations to buyers, sellers, and real estate brokers by telephone for no charge. I can represent the buyer or the seller. I can also act as a neutral mediator if there is a clear understanding of that this means.

If there is a real estate broker involved, I advise the broker to put together a standard wrap-around purchase and sale agreement, label it as a good faith but non-binding letter of intent, and then turn the documents over to me for escrow setup. The real estate multiple associations have standard forms that cover assumptions and wrap around mortgages.

However, the standard forms do not cover all issues. Brokers are not licensed to write complex addenda any different from standard, lawyer-prepared addenda. Brokers’ errors and omissions policies do not cover them when they depart from the standard forms. At that point, the broker should bring me into the picture. I will complete the escrow setup, write the wrap-around note and deed of trust, configure a collection account setup, and either then the transaction to an escrow company or close the transaction in my law office. We sometimes close escrows if the property is in Washington. If the property is not in Washington, we send the escrow to an escrow or title company in the relevant state.

During my consultation we will discuss fees. My fee is higher if I agree to take payment at closing, lower if the client or clients pay me part or all of my fee in advance.

By the way: The FED raises interest rates to slow inflation. Raising interest rates is the only tool the FED has to work with. The other tool would be to raise taxes, preferably on higher income earners, those with the money to spend into the economy and promote inflation. The current deficit is around $30 trillion. A certain deficit is acceptable, but in my opinion, it should be lowered in times of inflation in order to keep rates down. Rates should be lower so that the middle class and the poor can afford more of the things they need.

Sincerely,

James Robert Deal
Real Estate Managing Broker & Real Estate Attorney
Broker License #: 27330
WSBA License #: 8103
James@JamesDeal.com
PO Box 2276 Lynnwood WA 98036
Home Office Line: 425-774-6611
Home Office Fax: 425-776-8081
WSBA License # 8103
Broker License # 27330
eXp Realty Main Office:
2815 Elliott Ave, Suite 100
Seattle WA 98121
eXp DOL Licensing: 4484
NWMLS #: 9393
eXp Main Office Phone: 888-317-5197
We help buyers, sellers, brokers. Free telephone inquiries.

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15605 Cascadian Way Bothell WA

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15605 Cascadian Way Bothell Washington. $430,000. 3 bedrooms, 2 bathrooms. Buy on FHA Rehab Loan. Hold long term. Eventually sewers may be extended 400 feet, and then two homes, two duplexes or five townhouses can be built. James Robert Deal, Attorney and Broker, 425-774-6611.

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