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.