Posted by Rick Harmon on April 22, 2006 at 23:18:29:
The creation of junior lien may not trigger a due-on-transfer loan call, but a foreclosure of the junior lien and subsequent sale to 3rd party bidder or reversion to the lender/beneficiary is not protected.
Of course, I’d rather bet on my friend Joe K’s avoiding a due on sale because he talks a much better hunt than most investors.
I’ve been on both sides of this game many, many times. When it happened the first time to me, in 1985, I was terrified. So I refi’d. Now, if a loan were to be called I either pay the stinkers off or play the legal game, something that I sometimes do for sport because it’s more environmentally responsible than game hunting and few other people worry about attorneys losing a few feathers or taking buckshot.
In reality, it’s a big waste of time to worry about this. If a lender calls a loan, give them the money 'cause all they can do is take the property…they can’t eat you.
Here’s my little “G-St-G” summary that give to all the attorneys that call me looking for insight (or sympathy for their clients):
Garn St. Germain Act re: Loan Assumption
This whole issue was settled in the 1982 federal act called the Garn-St. Germain Depository Institutions Act. According to the Act there are only nine exceptions to a lender?s ability to enforce it?s due-on-sale clause and they are:
(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon ?
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.