Transfers of Mortgaged Land. Due on Sale. Due on Sale/Transfer Clauses and the Garn St. Germain Act 2/24/2014

Size: px

Start display at page:

Download "Transfers of Mortgaged Land. Due on Sale. Due on Sale/Transfer Clauses and the Garn St. Germain Act 2/24/2014"

Alfred Riley
6 years ago
Views:

1 Due on Sale/Transfer Clauses and the Garn St. Germain Act Transfers of Mortgaged Land Mortgagee may be concerned by transfer without payoff of the mortgage (e.g., creditworthiness of buyer). Could mortgage address this risk by prohibiting any transfer? No; direct, absolute restraints on alienation of a fee simple are void; courts invalidate clauses that purport to prohibit a mortgagor from selling the land at all (disabling restraints) But what about due on sale clauses (i.e., if mortgagor transfers the land without mortgagee s consent, mortgagee may accelerate the debt)? Due on Sale If lender exercises a due on sale clause b/c proposed transferee is objectively unsatisfactory, enforceability of due on sale clause has always been clear E.g., buyer is not creditworthy E.g., buyer has criminal record for arson/meth manufacture Enforcement of a due on sale clause in such a case does not create an unreasonable restraint on mortgagor s right to transfer But: What if lender is motivated by interest rate concerns? Uphoff owns home Bank holds 6% mortgage, balance = $120,000, 20 years to maturity Mitchell (M) wants to buy Uphoff s home If M must borrow (15%) Monthly: $1, Total interest (30 years) $426, If M can assume (6%) Monthly: $ Total interest (30 years) $139, Annual mortgage payment differential $9, Present value of savings over 20 years $59, If M can take over the mortgage, Uphoff can command sale premium (up to $59,929.59) on sale of home 1

2 Percent Interest FSLIC Insured S&Ls Cost of Funds Return on Mortgages Pre 1982, mortgagor might try to sell home and let buyer take over the existing loan, but lender would block sale using due on sale clause (requiring buyer to get new mortgage loan) Borrowers began suing lenders, challenging this practice as an unreasonable restraint on Borrower s right of alienation Majority: due on clause freely enforceable Minority (esp. California): lender can object if the transfer would impair the lender s security or increase the risk of default, but not just b/c interest rate is no longer favorable to lender Garn St. Germain Act Applies to all mortgage loans (whenever made), and to all transfers of mortgaged property made after October 15, 1982 Act pre empts any contrary state law (court decision, statute, or regulation) that restricts enforcement of a due on sale clause in accordance with its terms Essentially, Act makes a due on sale clause enforceable according to its terms, as a matter of federal law Note: Lender doesn t have to accelerate, and can instead choose to allow subject to/assumption transfer [12 U.S.C. 1701j 3(b)(3)] O owns land subject to a mortgage that provides: If the mortgagor sells the mortgaged land without the prior written consent of mortgagee, mortgagee may accelerate the maturity of the mortgage debt. O deeds the land to his son as a birthday gift, without the prior written consent of mortgagee Can mortgagee accelerate the loan? Problem 2

Fannie/Freddie Due on Clause Garn Act does not specify what a due on clause must say; it only pre empts contrary state laws that would limit the effectiveness of a due on clause according to its

3 Fannie/Freddie Due on Clause Garn Act does not specify what a due on clause must say; it only pre empts contrary state laws that would limit the effectiveness of a due on clause according to its explicit terms Thus, the language of the actual clause is critical I.e., if the clause is triggered only by sale, a non sale transfer will not trigger the clause (courts tend to narrowly construe restraints on alienation) Thus, gift to son will not trigger due on sale clause in this problem 18 [p. 1252]: 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. Under this provision, mortgagee could accelerate the debt based on mortgagor s gift deed to his son Under Fannie/Freddie provision, could Bank accelerate if Mortgagor: Grants Litton an option to buy the mortgaged land? Grants Wells an easement over the land? Leases the land to Mitchell? Takes out a home equity second mortgage loan? Defaults on that loan and the home equity lender later forecloses? Exceptions [p. 475]: Lender can t exercise dueon clause if owner: Grants subordinate lien (e.g., home equity loan) Grants PMSI for household appliances (even if they become fixtures upon installation) Transfers on death of joint tenant/entireties tenant Leases for < 3 years, w/out purchase option Transfers on death to relative Transfers to spouse/children Transfers to ex spouse in marital dissolution Transfer to inter vivos trust (if owner is beneficiary and there is no transfer of occupancy) 3

4 Note 1, page 478 Husband and wife own land as joint tenants, on which they operate a grocery store Bank holds mortgage that contains a due on transfer clause Husband dies; wife continues operating grocery store Can Bank accelerate? Yes; exceptions don t apply b/c this is business property, not residential real property containing less than 5 dwelling units Note: exceptions apply only to mortgages on residential land (< 5 dwelling units) 1982: exceptions applied to all mortgages 1983: Congress amended the Garn Act to limit the exceptions to residential mortgages only (< 5 units) Rationale: commercial lenders objected to being barred from acceleration, if borrower had obtained a subordinate mortgage loan, w/out consent Note 2, page 478 Husband and wife own farmland as joint tenants Bank holds a mortgage on the land which contains a due on transfer clause Husband dies Can Bank accelerate the mortgage loan over objection of widow? Note 2, page 468 Potential application of statute in this situation is not clear If purpose of loan was to finance farming operation, Bank may expect to be able to accelerate But, if H and W lived on the farm, the court may treat the farm as residential real property (and then might treat the loan as being covered by the Garn Act exceptions for intra family transfers on death) 4

5 How might Bank structure the loan differently to address this ambiguity? Bank could have originally made two separate mortgage loans: (1) Loan A, secured only by farm house and curtilage; (2) Loan B, secured by the rest of the farmland (and financing farm operations) In the event of transfer on death, Bank could accelerate Loan B (commercial mortgage financing farm operations), but not Loan A (residential) 5

QUESTION 2: SELECTED ANSWER A

QUESTION 2: SELECTED ANSWER A 1. Interests in Greenacre To determine who has what interest in Greenacre (G), the validity and effect of each transfer/agreement must be determined. Generally, property may