Bill, this is another good post and an idea worthy of consideration.  Do you think anybody currently in Washington has a grasp of this subject, or the vision to make a change?

Eric, I doubt it. It is up to us to bring it to their attention. Thanks for commenting.

Bill Roberts

No doubt a good cause to take up.  But I doubt it will gain traction.  We need big government to help us with our problems.  (Sarcasm.) 

We probably won't see it now, but if inflation had taken off and the economy had kept rolling along a little better than it is now I wonder how many banks would have started calling do notes that were written at 6% but now could be getting 8%.  Know what I mean?

Chris, not to advocate "big government" but do you see the private sector willing (or able) to step forward and solve these problems without intervention?  Gee, if they could do so, where are they now?  

Eric,  The same place big governement is.  :) 

Here's the deal, every time there is a crisis it gets used for political expediancy rather than solving the problem.  Predatory lending?  Yes, it happened.  But what about predatory borrowing?  Everyone knew real estate on the coasts was rising faster than could be sustained.  Everyone.  Including the teachers that qualified for $890,000 mortgages. 

I don't have all the answers.  Free enterprise is struggling to correct itself currently.  And if gov gets involved it will screw something else up.  I would rather let the situation run it's course.  If we can get the Due on Sale off, great.  But be that as far as it would go. 

Bill R,

Excellent!

People need to understand "Due on Sale" like "Short Sales" is due-able today! The bank will agree to a sale "subject to" if it's in the best interest of the bank!

If your initial request is rebuffed by some bank flunky, get the VP's name and address and have a third party submit a written requist. I like to use an attorney who's letterhead mentions bankruptcy, make no threats, let them read between the lines.

There are buyers who would look at the negative equity as the cost of oppertunity.

Bill

Chris, please enlighten us about all the teachers that qualified for $890,000 mortgages.  Maybe education is a more profitable vocation than any of us realized.  I never realized all those evil "predatory" borrowers were conspiring to ruin the economy and take advantage of the poor lenders.

Bill,

Great idea that could help our country right now. I am sure our gov. will embrace this in a matter of minutes; then again I want to throw a fastball at 95 mph.....neither is going to happen.

Eric,

It is readily apparent to me that you do not understand hyperbole and that you like to argue.  I have other things to do.  But yes, I turned down working with would-be buyers that had stated-income loans for properties they never should have afforded.  If you never had that, then you were well insulated.  I'm done with this discussion. 

Chris, We have an adversarial relationship with banks. They believe in the Golden Rule - He who has the gold makes the rules.

Well, only government can correct them on this misconception. I wish it weren't so. I wish we could affect change in this area without the help of government but I just don't see how.

Thanks for chiming in.

Bill Roberts

Bill A, Thanks for your assessment. I know it is "Doable" now under certain circumstances, I just want it to be doable under all circumstances.

Bill Roberts

Kim, What would you do if you could throw a 95mph fastball?

Congress wrote the law, they can unwrite it. All we need is massive amounts of publicity and public pressure.

Or one of the candidates to take this on as a "cause celebre."

Bill Roberts

BTW I hope your dream comes true. Anything is possible.

  hey, wow what a great idea, i have been in the business for 24 year, since the end of 1984 and have NEVER heard of this. Perhaps we could start by contacting our state associations about working it on a state basis and go from there . Perhaps if our state RPAC committe hammered at the state reps we could attack from that angle, good post !

Bill:  The Garn St-Germaine Act was a really great Reagan act that later allowed the S&Ls to make riskier ventures.  It was a major cause for the S&L crisis of the 1980's.  It cost the government about $125 billion.  The New York Times had a feature yesterday about the Keating 5 fiasco... same deal, so I wouldn't be writing my Congressman in the next few months about a repeal. 

If we could only keep the corrupt outs of these great Acts, we would be cooking with oil.  No one, so far, has kept the the criminals and the mob from finding loopholes to do work their dirty little magic financial deals. 

I could see this as a short term fix but why was the law written in the first place?  To keep investors and unqualified people from leveraging property?  You would definitely need to limit the number of properties and individual could purchase without qualifying to one and you would have to have some kind of income verification to insure the new owner does not get into the same situation.

Chris, you elected to get things started in your state. Thanks.

Bill Roberts

Jan, Jake Garn may have been a friend of Reagan's but he was a better friend of the banks. They wanted to call all those loans so they could rewrite them at higher rates. Whatever else happened along the way to the S&L crisis was frosting on the cake.

Now is the perfect time to rewrite this law. We have a crisis to solve and this would help considerably.

Bill Roberts

Jimmy, No, the law was written so that banks could call the loans due, then relend the money at higher rates,

Bill Roberts

Hi Bill,

Great topic. Personally, I would never sell subject-to. But it’s a great way to buy!

But if they won’t “unwrite the law,” why not accomplish close to the same thing with a Contract for Deed or Land Contract? It’s not a sub-to or AITD, but I would think it could be beneficial in a lot of  situations.

Just wondering.

Bill this is a darn good solution. Get rid of the "due on sale" and many properties would move. I like it. I like it a lot!!

Michael, It is still an alienation of title and triggers a due on sale clause. If you choose to hide it from the lender then that is fraud.

Bill Roberts

BB, OK you are "elected" to mobilize forces in FLA to work on this issue. I like that a lot.

Thank you for your support.

Bill Roberts

I AGREE, BUT IT ISN'T GOING TO HAPPEN.

St. Germain, if I recall, was very much on the take, resulting in the due on sale with which we are still saddled.

I don't think it is that great of an idea. 

We got into this problem in part because of buyers that were willing to take on loans that they had no business taking on.  If these very same people could buy without having to be approved... especially now that they have been cheated out of a lesson by not getting hit with imputed income or anything, and walking away... then I think there would be property moving, but the problem would just be stalled.  

I don't like regulation, and feel that it should be repealed, but I don't think it would be all that good of a deal for a bank to let happen.   

Lenn, With all your influence we could be well on our way toward repeal if you would just sign on.

Bill Roberts

Lane, I really thought you would be in favor of this. I must have failed to make my case with you.

If you think this would be a problem talk to a few "old-timers" to get a feel for how things were when we didn't have to worry about due on sale.

Foreclosures were down, way down. Of course the banks didn't like it. They wanted to relend the money at higher rates.

Bill Roberts

Sometimes I think we could absorb some of this overburden by HUD going back to the good ole FHA-235 programs...maybe more assumable loans again? Just a thought...

Bonnie, Almost all loans are assumable with lender permission. What we need is to be able to take over the loan WITHOUT lender approval.

Bill Roberts

Would this be similiar to an assumable mortgage? Sounds like it to me.

Bill.  I tried that when Senator Paul Sarbanes was in the Banking, Finance and Urban Affairs Chairman and then Ranking Member with some influence in the matter.  The representatives in MD and VA just aren't on the same wave length. 

The political climate would just never let that happen.  Barney Frank is now the Chairman of that committee and he's in the pocket of the Banking Industry. 

Bill

What is in the Kool-Aid down there these days?

I can't say that I was lending before the DIA of 1982, but I can't say I necessarily agree with your premise until I understand a little better. You borrow, you pay, you don't walk away....what is so hard about that? Am I being naive?

You know I respect you enough to be willing to listen a little more.

I am currently working on some of these deal but where a land contract is used.  I could never see a lender calling a performing loan do on sale these days.  They have enough to worry about.

And you are right if we all did more creative deals their would be no reason for any home to sit on the market or be in foreclosure.

Great blog and great follow ups thank you everyone I learn a ton by this post. This is the type of blog that builds active rain keep up the great Bolgs. Please

Hi Bill,

You're making some good points here. I remember those days well and Ms. Cynthia Wellenkamp and her attorney, Mr. Crane, I think his name was Fred. We thought we were in fat city doing all of those subject-to's back then, right? I can remember, we pretty much knew who the state vs. federally charters S&L's/banks were at the time.

If my memory is right, the issue was also preserving the lower rate on the subject-to loans, vs. the rates going through the roof at the time. Since rates aren't really big big issue now, you would think lenders would be happy receiving the monthly payments on time.

Bill:

 RIGHT RIGHT RIGHT!.  Being creative is the key now in real estate.  I'm in Michigan (in the Metro Detroit area) and we are #1 in the country for foreclosures.  This is a great way to get more buyers to the table, esepcially in the city of detroit. There are so many people out there right now, who have lost their homes for the wrong reasons. 

Buyers will definately look at "negative" equity as an opportunity cost, especially since many of their other options (not good ones) are 20-30% down, or 9-18% interest rate. 

Most importantly, this would be a way for buyers to purchase homes HONESTLY and not have to resort to defrauding the mortgage companies, title companies, real estate agents, and sellers. 

 If we could get these mortgage companies to allow someone to assume the exisiting mortgage, they will at least have someone to start making the payments a previous buyer couldn't make.

 Even when business was great just a few years ago, our company sold many many many homes on land contracts (seller financing) and lease options.  At the time, that was the only alternative for people who did not have good credit, unverifable income, or just could not qualify for a traditional or fha mortgage (or even non conforming).  Being able to subject to mortgages would be great!!!! 

 Thanks, i will definately do my part here!  

here's my link

Bill - This is something I hadn't thought of! And, I even bought my first home with a partner, taking the seller's loan "subject to" when investors were dumping their investment properties as fast as they could go before the 1986 Tax Reform went in to effect. I could see how a market like Joy is describing could use a tool like this. You deserve the feature on this!

Robert, Yes.

Lenn, We can't win this if we don't try. It seems we might have a perfect storm effect right now with the mortgage crisis and the election.

Bill Nazur, the history of mortgages running with the property rather than the borrower goes back hundreds of years. We are living with an anomaly right now. Read my other post that I linked in this post.

Bronson, You need to make your transaction transparent to avoid fraud charges.

Eric, Thank you.

Bill Roberts

Lynda, The problem is that just because the bank accepts payments now from a "subject to" buyer they can still accelerate later if the market changes. They need to be estopped from calling the loan.

I wrote about Fred Crane's battles with Bank of America on my other post linked in this post. I'm glad you remember it.

Bill Roberts

Joy, It is because of problems like you are facing that we may have an opportunity to rectify this situation. If a political candidate would take it on as one of his "issues" maybe something would happen.

Bill Roberts

Karen, Thank you for your kind words.

Bill Roberts

Hi Bill - Very interesting post.  Certainly some higher-up in the banking system has pondered this exact issue.  From my reading it doesn't seem like we would need new legislation, just a banking industry willing to 'allow' subject-to...

They already send you a letter with several options instead of foreclosure (forbearance, deed in lieu, etc...).  I wonder why they don't offer this as an option? 

Like I said, I don't like federal regulation...

Later I see you mentioning accelerating later... that is wrong.  If they accept it at sale, it is a done deal.  

Look from the bank side for a moment.  I you loaned me $100, and then I loaned it to someone else and told you that you needed to talk to the other guy, you'd be a little ticked.  Rightfully so.  It's the qualifying part.  

I would almost bet that an industry would pop up with people with good credit buying homes and then getting cash to sell it to someone that wouldn't be able to buy the house in 100 years for that rate.  There would have to be a long seasoning to prevent that.  If there was a carried back responsibility, then it would be too unattractive... How would you like to be on the hook if the guy you sold the house to flaked 7 years down the line. 

I'm not shocked it was done, and I am not against the idea.  I just see a lot of potential issues... and that would be why banks would seriously hate it.  Their only upside is that the property might not go to foreclosure. 

But then, look at a market like CA... with big drops.  I don't remember who now, but there was a featured post about a guy wit ha $500k mortgage (100%) on a property now worth about $325k.  That, and all of the ones like it are stuck. 

Bill, can't you effect an AITD now?  It is in violation of the loan covenant but I've not seen one called yet (if payments were made timely).  In this era of securitization, I think all the rules are out the window.

While I agree with your cause, I think AITD's are still practiced today

Well, Im not a banking or legal expert, but it looks to me like a good idea.  'Haven't heard that suggested in the media, but a public push for this concept might be just the idea.

Bill:

Interesting idea. It may help a little bit but it won't reverse the problem.  There are areas of the country that have seen a 50% drop in property values.  Many homeowners are upside down and walking away.  Fixing the due on sale clause won't help in those areas.

Around here many properties have fallen in value and people are upside down by as much or more than $100,000.   Even if someone could just assume the mortgage, it doesn't seem like the best idea.  If rates go up significantly then having assumable mortgages would be attractive to buyers. 

That could help right now. but honestly, if you did a wrap around, say with a seller currently in default, in lieu of a down payment, the buyer would make them current & simply take over the mortgage. Would the bank really use the due on sale? I mean, let the house go into foreclosure when they are now getting their money? Not sure.

But here is wouldn't really solve anyone's problem, unless they had equity in their home. Most homes bought in the past few years were close to 100% financing & homes have gone down in the meantime. Who would buy a house and assume a mortgage at well over current market value?

Just a though. Good post.

I think this could help the "investors" who are just letting their "investments" go back to the bank.

Just dropping by to say hello!

I like the way you think.  At least this is an idea that could actually make a difference.

Joe, the problem is that we used to be able to take property "subject to" the existing financing but the banking industry hated it. They managed to get this legislation through Congress to reinstate "due on sale" clauses which they had writen into all mortgage contracts.

Now, unless they specifically "accept" an assignment of the contract or "assumption" they can accelerate the loan any time they want even if they have been accepting payments from the buyer for some time.

I hope this makes the issue clear for you.

Bill Roberts

Lane, You say you are against Federal legislation but that is exactly what we have right now. "Due on Sale" has been illegal for hundreds of years. Learn the history. This law is an anomaly which counters long established legal principle. You can read about it in my other post. I suggest you do that.

As for the bank "accepting" the subject to from the get go, that depends on whether they have accepted the assignment in writing or if they have merely accepted payments from the buyer. Without written acceptance they can still accelerate years later if the market changes.

Most mortgages are non-recourse. The security is the property not the borrower. This is also a long established legal principle. If a lender thinks that they have been defrauded they need to do a judicial foreclosure if they want recourse. It will almost always be denied.

Please read my other post.

Bill Roberts

Brian, The issue is not whether you can use an AITD now and whether it will work, but rather what the bank will do if the climate changes. They may be willing to look the other way right now but in a year or two when the market has "firmed up" and rates have gone up they may find it desirable to call the loan so they can re-lend at a higher rate or just collect some "fees" from the owner.

Bill Roberts

Margaret, That is exactly what we need, a public push.

Bill B, Nothing cures everything. A journey of a thousand miles begins with a single step.

Carolyn, My comment to you is the same as the one above.

Susan, It will depend on the amount of negative equity. A little negative (say 10% or less) might be an acceptable "cost" to a buyer who might not otherwise be able to buy a house.

Renee, Hello. I'm glad you stopped by.

Dan, Thank you very much.

Bill Roberts

Interesting thought I cannot imagine them doing it but the banks seem to think it will all go away if they just wait a few more months. I guess if I had my money in play and you were not paying I would get involved with a solution. The banks seem to think they will get the property back and then resell it to a buyer that is so desperate to get the house they will wait a month for a response and the be expected to jump through the hoops they demand instead of trying to be more consumer friendly. The will have to do something. Thanks for the Post.

Terry, Thanks for your thoughts.

Bill Roberts

Briliant Article tremendous responses ! I even took the time to read everything! 

An alternative thought to sidestep the banking industry lobbyists take it to wall street and the securities division. The banks have made the money and as we all now know its the securities investors who are taing he hit, this who invested in these hybrid instruments are taking the loss, Pension funds, insurance, mutual funds not just limited to the U.S.

The reform act  of 1982 can be modified, I wouldn't suggest a complete reversal, however with qualified Investors showing a net worth of $1,000,000 or more the door should and can be open for change. This solid 'meat and potatoes' approach coupled with continuing alternative modifications by banks, securities companies and the government will fast track a cure to the crisis America is facing restoring confidence and hope in the economy.

Bill thanks for posting the blog and planting the seeds of reform

Chris Giddings

I never realized that was even a change made. Although I was really young back then. If it could help some people out, I think it should be looked at!

Chris, Thank you for your thoughtful comment. Hopefully, some measure of change is possible.

Bill Roberts

Christy, The more of us that push for change the better our chances are.

Bill Roberts

Bill, I can't beat you on it, so I won't try... but if I were the bank, I would want to be able to control who is paying me back.  I would want to know how reliable they will be. 

The property is the security, but the rate and terms are based on the borrower.  Shouldn't those change if the borrower changes?  If I have a 820 credit score, and lock down a killer rate, is it then ok for me to sell the property to someone with a 420 credit score and walk away?   

Bill- They did not have a due on sale clause in 1980 and 1981 when we were doing wrap around mortgages that was the only thing a buyer could do because the interest rates were 17%! You just could not qualify. I think it is all about the money. The banks really added the due on sale because they realized how much money they were losing with wraparounds, not points, no closing costs, no loan origination fees, etc. Hope maybe someone will listen, we need less government. Especially now. 

Bill- They did not have a due on sale clause in 1980 and 1981 when we were doing wrap around mortgages that was the only thing a buyer could do because the interest rates were 17%! You just could not qualify. I think it is all about the money. The banks really added the due on sale because they realized how much money they were losing with wraparounds, not points, no closing costs, no loan origination fees, etc. Hope maybe someone will listen, we need less government. Especially now. 

Lane, You say you can't beat me so you won't try, but you're still trying. You really have to understand that there exists an adversarial relationship between banks and everybody else. They have chosen to do business that way.

In the final analysis I don't care what the bank wants. I care what is good for me and what is good for my clients. How the bank chooses to price a loan is their business. They will get that or they will get the property. That doesn't change no matter who the borrower is. The security doesn't change by changing the property owner.

In the event that they (the bank) choose to do a judicial foreclosure they can still go after the original borrower unless they have agreed to an assignment or substitution in writing.

So my question for you is are you one of them or one of us?

Bill Roberts

Katerina, Banks have been putting "Due on Sale" clauses in mortgage contracts for years but they were unenforcible by law until Congress enacted the Depository Institutions Act of 1982 also known as the Garn-St. Germaine Act.

This is a case of government interference on behalf of the banks, like they need protection from us.

Right now we could really use some relief from this onerous law.

Bill Roberts