Sunday, August 16, 2009

There's No "Due On Sale" Jail!

Even if there was a jail for Sub-To "violators", the jail would be empty.

Read my response to a guy who was warning off about 2,500 would-be investors “that banks call loans in on Sub-To investors because they want to make sure they're on the hook for the loan."

Dear So and So,

"I admire your efforts to keep folks out of trouble. And with all due respect to your desire to keep us informed of what banks will and won't do with Sub-To, I can say from experience that banks do NOT "invoke" the DOSC to assure [that] the TRUE owner of a property is on the hook," as you've postulated.

Meanwhile, in the event of a transfer of equitable interest, subject to the existing financing, the DOSC allows a lender to exercise it's right to either call the loan due, or require the new owner to qualify for a new loan, and/or assume the existing loan(s) --- as a practical matter. However, the motivation for calling a loan due, if it's ever happened with a "current" loan, is NOT to mitigate risk, but to otherwise secure a better interest rate on the existing financing, and certainly NOT to create more REO's for itself.

The only reason the banks started inserting the DOSC was because there was a rash of Sellers in the late 1970's and very early 1980's that were seller financing their homes at 10%, because buyers couldn't qualify with the bank's 18% interest rate. As a result, the banks were losing business --- because they wanted 18%. So the DOSC, short of a default, is all about making money, not mitigating risk.

Today, the bank interest rates are very hard to compete with. Seller financing is usually more expensive than bank financing. So Buyers will look to get bank rates as soon as possible.

As an aside, I'm fairly certain that banks know that their rates are generally more attractive than the average seller is offering. So, short of a credit issue, they're attracting most of the potential "profitable Buyers" already.

There's no need to force the rest to qualify, or mitigate risk, or create REO's for themselves. It would make no sense for the bank.

Anyway, I appreciate your conservative approach, but in practice, what you're suggesting just is not happening. If bank rates climb back up to 18%, your scenario may very well become likely, but not before.”
What I didn't mention was that there is already a person "on the hook" for the loan. Yes, it's the original borrower. Sub-To financing doesn't change this.

The bank still has a person it can "go after" in the event of default. So it's not like the bank has lost anything in the transaction. What's more, there is now not one, not two, but three parties that are motivated to keep the loans "current!" It's the bank itself, of course, but also the borrower, and the new sub-to title holder. That's a better position for the bank than what they originally bargained for.

So banks don't deliberately "switch out" borrowers just because they can.

However, if the loan becomes delinquent, all bets are off.

Share this with anyone who claims banks are calling in "current" Sub-To loans.


MattJohnson said...

Not to mention that banks aren't even foreclosing on loan that are WAY past due. Some friends of mine unfortunately "lost" their house to foreclosure a year ago, and the house is still sitting vacant (I didn't want to get involved in their business, so I have no idea if they actually received an NOTS.)

They're kicking themselves now for paying rent for so long. Hard to believe the lender wouldn't want to take back a house close to the coast and was recently renovated (and would sell in a heartbeat).

If they aren't taking back inventory like this, there's no way they're going to mess with a loan that's current.

Jay Palmquist said...

I've got friends still in their house after an NOD 18 months ago!!!!

I'm telling NOD victims to just stay in their houses and maintain the landscaping, and chances are the banks will simply ignore them for the time being. Evidently, maybe for at least 18 months straight. Who knew?

Even then, the bank will give them a notice to vacate, so they won't be in fear of having an eviction on their "records".