RE: HR's post about DOS and Land Trusts - Posted by Jeff Baron (Dallas, TX)

Posted by HankM on May 24, 1999 at 19:24:06:

I don’t think I’ve ever seen a frontal attack proposed before on DOS … can’t speak for others.

It would seem to me though that if you ended up with someone capable of making a decision (and committment) that they would want to qualify you somehow, though I appreciate that would depend on your proposal (1 month, 1 year, balance of loan term) …

I’m not adventurous enough to do this on something that I can make a lot of money on, but if there is a marginal one, I’ll give it a try.

Call it an olive branch on a sensible idea.

Hank

RE: HR’s post about DOS and Land Trusts - Posted by Jeff Baron (Dallas, TX)

Posted by Jeff Baron (Dallas, TX) on May 24, 1999 at 12:26:50:

This is a response to HR’s comments about DOS and Land Trusts… I was in the middle to typing a response when the slate was cleaned, but I thought HR posed some good questions regarding whether it’s worth while to use devices like Land Trusts to protect against the potential of a lender calling a loan due in light of evidence that lenders are not currently enforcing DOS clauses.

Here?s my take on this issue?

With the current financial climate of stable interest rates, the likelihood of any one particular loan being called due because of ownership transfer is small. Currently, most lenders? policies are to only call loans due for delinquent payment. (I talked to a homeowner last week that bought ?subject to? without knowing the implications. Because of other problems, the loan file went to the lenders legal department. When the unknowing buyer contacted the lender and their attorney and told them of their ownership in the property, their response was ?we don?t care who owns the house as long as payments are made on time).

Now, the question is: how will lenders? policies change if interest rates climb a few basis points. In a period of rising interest rates, lenders who have lots of lower interest rate loans will begin to suffer financially; These lenders will find the value of their mortgage assets diminishing in value as the prevailing interest rates exceed their mortgage coupon rates. At the same time, the prepayment rates (borrowers paying off before the 15/30 year maturity) of these mortgages will begin to fall because borrowers have a tendency to refrain from paying off loans that have lower than market interest rates, thus exacerbating the problem.

The combination of these factors will likely cause lenders to re-evaluate their portfolios and their investment strategies to remain profitable. Clearly, lenders will want to have as many of these low interest rate loans prepay as possible. Will this desire lead to lenders actively implementing a programs to uncover DOS violations and call those loans due? It will depend on the lenders evaluation of the risk/reward of doing so, but one thing is for sure… as rates continue to rise, the ?reward? for calling will rise as well .

So, the next question is: how much prevention should a prudent investor use. I think this depends on the length of time he intends to keep the loan in place. The longer he wants to keep it in place, the more important DOS prevention becomes. For quick flips where the loan will be paid off soon, DOS prevention is almost unnecessary; for long term holds it is extremely important.

In addition to other benefits, the land trust is an effective, albeit imperfect, prevention tool. Sure, it requires some extra paperwork and takes some extra time, but it clearly buys you some DOS protection.
IMO, a land trust is so simple to use and the preventative benefits so great, that it should be used any time an investor wants to keep a DOS loan in place for more than a few months.

Re: RE: HR’s post about DOS and Land Trusts - Posted by JSmith

Posted by JSmith on May 24, 1999 at 17:46:59:

Without being a know-it-all, I would like to share with you what I do.

I disagree with you on any form of what you call “Due On Sale prevention”. I perceive the exact same chances of a lender calling a loan due if they know you took title without consent as if that they did not know you took title. The exact same chances of calling the loan due if they knew you lease optioned the property without consent or they did not know you lease optioned the property. It simply does not matter.

First, the lender should always be made aware of any changes that have taken place in accordance with the mortgage and note. I always do and has never caused any problems. In some instances when the same lender is involved, I take the chance to have lunch with the lender to tell him what is going on and maybe see if any REO’s are around the corner. Almost always I know theses REO’s are around the corner because I have been doing my homework.

Every lender I have spoken with about this all say they would rather people be upfront with them and not try and beat the system. They also tell me that many clauses do not mean much at all to them except when payments are not being made. Did you know that the lender can call the loan due because of a lapse of casualty insurance, liens, failure to pay attorney’s fees if lender takes action, non payment of taxes, etc. They can even call the loan due for failure to maintain and repair a property. That’s why to me it is important to read the seller’s mortgage, if any, and meet the requirements. All will be well and very beneficial to you in the long run. Call me very old fashion, but getting around something you are not suppose to seems sort of … well, I will not say.

Whatever consent is needed, simply get it. For unbelievers, try this. If you know that you are going to short term assign or flip a property, call or mail a request to the creditor for consent and see what happens - - you’ll thank me later as to what opportunities open up.

JSmith

Re: RE: HR’s post about DOS and Land Trusts - Posted by JPiper

Posted by JPiper on May 24, 1999 at 15:20:56:

Nice post Jeff?.I agree with everything you said. I’d like to add one thing to it.

As with most things in life, things don’t repeat exactly in the same way. About the only guarantee in life is that things will change.

Many things are different today than they were back in the early 80’s. The financial system has gone through some significant changes. Back in the early 80’s the lending institutions were caught lending long, and borrowing short?.a prescription for disaster in a climate of rising interest rates. They had of course made fixed rate mortgage loans?.one aspect of the problem. They had also borrowed via savings accounts as an example, a vehicle which permits almost instant withdrawal. As rates rose people suddenly discovered money market funds?.a vehicle the banks didn’t offer at the time?..which paid market interest rates?.a rate which was significantly higher than the bank savings rate. The result was a massive outflow of short term money from the banks into money market funds?.who would then loan back to banks at market rates?.and obviously at rates significantly higher than savings accounts. Pretty bloody if you’re a banker.

As rates climbed the banks created adjustable rate mortgages (ARM) but no one wanted them. Ultimately the banks stopped making fixed rate loans?.right at the peak of rates. They zigged when they should have been zagging.

There have been numerous structural changes since then. One of those is that today the banks offer money market accounts. Today, banks sell loans to Wall Street?.something that I don’t believe existed then?.or if it did it was in it’s infancy. Banks in many cases function more like brokers?.selling the loan and perhaps retaining servicing. Another major change has been the birth AND growth of huge markets in things like Treasury bond futures?..a mechanism widely used today by institutions to hedge loan portfolio risk. I don’t remember now if Treasury bond futures existed back then?but if they did they were new?and mostly NOT used by the majority of lending institutions. And then there’s the huge growth in international financial markets?.the huge growth in foreign investment in the US. Or the major diversification and consolidation taking place in the banking system.

Where am I going with this? The one thing that I can guarantee you is that any new war is rarely the same as the old war. Most of us have a tendency to fight those old wars?over and over again. If rates rise in the future, the chances are that the impact of this rate rise will be different. Will it cause the banks to bleed again? Hard to say. The whole economy is now tied to financial instruments?whereby hedging can take place. They might indeed bleed again?.or they may have learned from the last time. Something will be different without any question.

Will the bank be looking to call loans? Again, hard to say. But I think it’s only prudent to use land trusts as a potential shield to the DOS clause. There’s no sense in taking chances that you don’t have to take. There’s enough risks in life without creating more for yourself.

JPiper

Re: RE: HR’s post about DOS and Land Trusts - Posted by Rob FL

Posted by Rob FL on May 24, 1999 at 18:20:19:

With private lenders I think your advice is very rational.

With large scale banks and mortgage companies probably not. Most of the Nationsbanks, Citibanks, and Norwests of the world would make you fill out 15 sheets of paperwork, pay for a credit check, pay a point or two for assumption fees, and make you formally qualify for the loan. If you wanted to qualify in the name of your corporation, trust, or LLC, they would tell you to go jump in a lake. Just my observations from being an RE broker and working at a title company.

Thanks, Jeff and Jim, for your thoughtful responses (nt) - Posted by HR

Posted by HR on May 24, 1999 at 16:36:53:

nt

Re: RE: HR’s post about DOS and Land Trusts - Posted by JSmith

Posted by JSmith on May 24, 1999 at 18:54:36:

I am not sure if you have ever sent a letter of consent to a private, local, or national lender for your personal properties, and if you did, I would need to see how you wrote it. If you are not good at writing letters, you can call and explain the situation.

Your letter or phone call should not say that you are requesting a loan assumption. Your letter or phone call should explain the situation. If the seller is having problems making mortgage payments and the house isn’t selling, tell the lender this, "Mr. and Mrs. Lender, the seller is having some serious problems and wants to sell her house if possible. The house has not sold in 6 months with a Realtor and frankly he may be in trouble of not making his mortgage payments. I am a local real estate specialist in the area and was wondering if we can solve his problem together so that he does not go into foreclosure. Wouldn’t you agree that it is in the seller’s best interest that you do not foreclose? Sure. May I suggest that I make a sensible deal with him that guarantees the payments being made and at the same time I stay protected? Sure.

Remember, all I need is consent from the lender for many option I now have. The lender always wants to know my plans. Since I have many options to give, we usually work out sensible plans that include consent. The good news is all of the other opportunity that opens up. Once you work with one lender, it’s very fun to work with them again.

I must bring up these are properties that are not in preforeclosure stage. These are properties that the loans are current and you need consent from the lender. To me, talking with lenders in the consent stage is very easy and non-confrontational.

By the way, always follow up by getting an e-mail address for further communication and database.

JSmith

Re: RE: HR’s post about DOS and Land Trusts - Posted by Bassman

Posted by Bassman on May 24, 1999 at 21:16:27:

while your trying to do a deal with the bank and get consent , i will be there to do the deal , with/without consent . While you are taking your time
"stealing in slow motion" , the ink will be dry on my contract.
Just my thoughts