For many years investment "gurus" have been teaching investors to "acquire properties" without a mortgage, without down payments and without needing to qualify. For many years I have been teaching that this method, while perhaps not a violation of law, is definitely a violation of the mortgage agreement which, by law, puts the mortgage in full default.
Most real estate agents are taught that this is called the "acceleration clause". The real name for this is the "Due on Sale Clause" and it's in virtually every mortgage agreement with the exception of some commercial loans.
I don't really want to get too deep into this but the reason the Due on Sale Clause exists dates far back into mortgage lending - I was able to find examples well back into the 20th century. Even more recently the reason they are so prevalent today dates back to the late 1970's and early 1980's when interest rates were between 15% and 20%. Every Sunday, during that time, one of my favorite things to do was to get the Sunday paper and circle all the Home For Sale NQNE ASSUME ads. Then I would narrow it down to the area most interesting to me.
What that little NQ/NE/ASS meant was, "NON QUALIFYING, NON ESCALATING, ASSUMABLE LOAN" and it was golden! It was golden because many of those existing loans were only 10% interest or even less and you could NOT borrow 100% for investment purchases but you could negotiate an NQ/NE with a seller second of the difference between the pay-off and the sales price. Then you just went to a closer and signed the papers and transferred the title/deed.
But as interest rates rose the bankers (there were precious few mortgage brokers at the time) realized they were holding paper at less than they were paying for new debt. They had to do something. So, they stopped issuing NQ/NE/ASSUME loans and starting making the new borrower qualify. That really didn't make enough difference so they wiped out the ASSUME part, too.
However, as the foxes always find a new way into the hen house investors soon decided they just would get the owner to Quit Claim the property to the new buyer and carry on. So, the bankers inserted the Due on Sale Clause which was supposed to frighten the foxes out of the henhouse. It didn't.
For the last few years lenders haven't really been too interested in enforcing the DoS Clause because they've been too busy hanging their assets out on a limb. Now the limbs are breaking and the lenders are covering their assets again. So here is the first MAJOR announcement about DoSC's in a while:
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Fannie Mae Single Family
Announcements and Letters
2007 Announcements and Letters
Ann. 07-03: Introduction of the Fannie Mae Single-Family MBS Master Trust Agreement (Announcement 06-27) (03/01/07)
Due-on-Transfer Clauses
Servicing Guide Part I: Lender Relationships; Chapter 2, Contractual Relationship; Section 208.04, Servicer's Optional Repurchase of Certain MBS Pool Mortgages; and Part III: General Servicing Functions; Chapter 4, Transfers of Ownership.
Servicers are reminded that they must enforce the due-on-transfer clause when the mortgage documents include a due-on-transfer clause and the servicer has knowledge that a mortgaged property has been or is about to be conveyed by the borrower in violation thereof, and none of the permitted transfer or other exceptions contained in the Servicing Guide applies. An example of a due-on-transfer violation is when a borrower sells or transfers a property to an unrelated third party without prior approval of the servicer.
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What Does This Mean?
It means that servicing lenders who have sold to Fannie Mae but retained servicing will now be required under penalty to FNMA to enforce the Due On Sale Clause which means some "investor held" properties will be served and the loan to be paid off within 30 days or returned to the lender in good condition.
Do Not Make The Mistake
... of thinking you have some bullet proof plan like an Illinois Type Living Trust to hide behind. The feds are on this situation, too. There will be changes made to trusts over the next few months to put some teeth into the lender's right of redemption.
Here Is A Sample Due on Transfer Clause
Freddie Mac 3005
18. Transfer of the Property or a Beneficial Interest in Borrower. As used in this Section 18, “Interest in the Property” means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser.
If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender’s prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is given in accordance with Section 15 within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.
And Here is a GREAT LINK For You:
http://www.johntreed.com/dueonsale.html
John T. Reed - I've had people telling me for years I'd like what he says. Now I know why! I do like what he said at least on that page and his "Guru Recommendations" page.
And here is a good article from 1984 in the New York Times: http://query.nytimes.com/gst/fullpage.html?res=9C01EED9163BF933A25753C1A964948260
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