The History Of The Due On Sale Clause
By Nick Johnson
The author has permitted the reprinting and redistribution of this article.
To truly understand the Due-on-Sale clause you have to know it’s
origin and reasoning. Also understanding court rulings in the matter
brings clarity to the Clause and its use from and by lending
institutions that have and currently still lend to Americans wishing to
own a piece of the American dream.
Previous to 1933 home mortgage loans were not desirable to say the
least. High interest rates and short term loans with large down
payments and no mortgage insurance. This kept the borrowers to
constantly re-finance their loan for the newer increasing interest
rates or come up with the remaining cost of the property. Obviously
this shaky system went on and was unable to withhold during the 1929
depression, so something needed to be done. Ring a bell
The Home Owners Loan act of 1933 changed the prevailing home mortgage
system by allowing lower interest rates and providing insurance for
it’s loans through FHA(Federal Housing Authority) and Federal
Savings and Loan Insurance Corporation(FSLC) and much longer repayment
terms of up to 25y-30rs.
Included in the Home Owners Loan Act of 1933 section 5 were the
regulations regarding the Due-on-Sale clause in lenders loan policy.
The policy was there to force the new borrower to obtain newer and
higher financing rates especially now that they were required to
significantly lower rates and terms from before 1933.
Fast forward through the 1950’s, 1960’s. America was
rapidly growing with access to funds and loans readily available at
very attractive rates. During the 1970’s Americans seen an
increase in interests rates and mortgages were again becoming very
expensive. April 1971 interest rates were 7.31% and continued to
rapidly increase to a peak in October 1981 of 18.45%. As you can see
with rates skyrocketing creative ways of purchasing homes were more and
more in demand for investors and even regular home buyers which leads
to the next chapter in the evolution of the Due-on-Sale clause.
In July 1973, Birdie, Dorothy, and Fred Mans purchased a property in
Riverside California for the amount of $19,100 financed with Bank of
America with a 30yr fixed rate of 8% (the going rate that month was
8.05%, and the annual rate that year was 8.04%). Secured by a Deed of
Trust instrument containing the Due-on-Sale clause included. In July of
1975, Cynthia Wellenkamp purchased the property by assuming the balance
of the loan at the 8%. In July 1975 the going interest rate was 8.89%
for FHA. The prevailing interest rate from Bank of America
would’ve been nearing 9.25%. The Deed was transferred and
recorded into the name of Cynthia Wellenkamp on July 10th, 1975. It has
been said that Wellenkamp made her July payment and Bank of America
returned the payment citing it’s right to accelerate the loan and
calling it due. The bank did offer to refinance the loan in her name at
the 9.25% rate. Wellenkamp refused and so Bank of America filed a NOD
(Notice of Default).
Wellenkamp had argued that the security of the loan had not been
impaired by the transfer in ownership of the property or as a result of
the sale and that it constituted and unreasonable restraint in
violation of California law. The Wellenkamp case made it to the Supreme
Court and the court found in her favor. Other similar cases had also
been brought into the California Supreme Court and had similar findings
on the part of the Petitioner (homeowners). Those decisions said that
the Due-on-Sale clauses were not enforceable unless the lender could
prove impairment of security.
This obviously unleashed the amount of assumable transactions being
done not only in California but across the country. During these high
interest rate times the Savings and Loans industry was hurting in a
major way. So many of these homes were now being purchased with the
assumption of the loans and the lending institutions were not able to
write new loans using the current higher interest rates. Federally
insured Savings and Loans were going bankrupt so the Federal Government
pursued in overturning the Wellenkamp vs. Bank of America case and they
were soon successful.
January 28th, 1982 U.S Supreme Court agreed to hear Fidelity Federal
Savings & Loans vs. De La Cuesta. It was one of the cases
originating in California. The U.S Supreme Court found in favor of the
government in overturning the case of Fidelity Federal Savings &
Loans vs. De La Cuesta resulting in momentum for the government to pass
future legislation most notably the Garn-St. Germain Depository
Institutions Act of 1982.
GARN-ST GERMAIN DEPOSITORY INSTITUTIONS ACT OF 1982
The Bill, whose full title was To revitalize the housing industry by
strengthening the financial stability of home mortgage lending
institutions and ensuring the availability of home mortgage loans.
This Bill is named after it’s 2 sponsors Fernand Joseph St. Germain and Edwin Jacob Garn.
Co- sponsoring the act were 28 other members of Congress . The bill has
a lot of other laws that were enacted within it, we’re more
specifically concerned with Title III Part C which specifically states
the following
Part C - Preemption of Due-on-Sale Prohibitions - Permits a lender to
enter into or enforce a contract containing a due-on-sale clause with
respect to a real property loan. Postpones until three years after
enactment of this Act authorization to enforce a due-on-sale clause in
the case of any contract involving a real property loan made or assumed
during a period when a State had prohibited due-on-sale clauses.
Permits a State legislature to enact laws within such three-year period
with respect to loans originated in non-Federal institutions. Permits
the Comptroller of the Currency and the National Credit Union
Administration to regulate similar loans originated by national banks
or federal credit unions.
Sets forth circumstances under which a lender may not exercise its option under a due-on-sale clause.
Declares that such rules and regulations may permit a lender to
exercise its option under a due-on-sale clause with respect to a real
property loan and any related agreement under which a borrower obtains
the right to receive future income.
The only ‘assumable’ mortgages now were those FHA and VA
loans. On December 1st, 1986, FHA began requiring credit checks before
they would approve loan assumptions and set a number of strict
‘Subject To’ related rules in place. While VA now would not
allow assumptions of loans unless the new borrower was approved by VA
as of February 29th, 1988.
The actual wording as taken from a Deed of Trust filed with the
Maricopa County, Arizona Recorders office Friday March 27th, 2009 goes
as follows
Transfer of the Property of Beneficial Interest in Borrower. As used in
this section 18, ‘interest 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 the 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 not less than 30days
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 the expiration of this
period, lender may invoke any remedies permitted by this security
instrument without further notice or demand on borrower.
Let me give you my interpretation of this mumbo jumbo. They (lender)
has to the right to call the note(security instrument) due if you
transfer ownership or beneficial interest. Plain and simple right
So why is it then that so many GURU’s are selling these programs
that are claiming to get around the Due-on-Sale clause Isn’t it
simple to see that even creating a Land Trust and transferring the
beneficial interest in that property through the trust still
constitutes an acceleration of the note due
Now I believe in the use of Trusts for what I believe their intended
purpose (asset protection and estate planning) however it clearly does
nothing to protect the seller or buyer when any interest or ownership
transfers.
Please know this information when doing transactions that will
constitute the lenders right and ability to accelerate the note. It
doesn’t mean they will, but they can, regardless of what
you’ve been told.
If
you would like to take advantage of the market and learn how to invest
in real estate and you are local to the Dallas Fort Worth area, I know
a really great teacher and mentor here in Arlington Texas. Please take
a look at his web site: DennisJHenson.com,
Dennis has a great Mentoring and training program, I know because I am
one of his former students. I learned a lot from his one on one
teaching technique. - Michael Harman 817-457-7572
mchfun.business@gmail.com
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