I got into real estate law back in 1980, when interest rates had accelerated to the highest rates ever seen. The Vietnam War had pumped up the economy. Nixon had taken the country off the gold standard. The price of oil had gone through the roof. There was inflation at 13.5% per year and stagnation at the same time. It was called stag-flation. Paul Volker took a sledge hammer to the economy, raising and raising and raising interest rates to the point where Jimmy Carter lost the election and home mortgage rates were in the teens.
People wanted to sell their homes, but buyers either could not qualify for mortgages at such high interest rates or were not willing to do so. Millions of sellers had 4%, 5%, and 6% mortgages, and inventive real estate agents and lawyers figured out ways for buyers to assume their mortgages formally or informally. In some cases the mortgages had Paragraph 17 due-on-sale clauses, which said that if the seller sold the property the bank could call the loan due. However, many state cases around the country held that due-on-sale clauses were void as restraints on alienation, practical impediments to resale.
I went into partnership with attorney John Wagner in 1980, and we were very busy writing wrap-around deed of trust, seller-financing transactions. Title companies and escrow companies were unwilling to close the transactions, and so we escrowed them ourselves. Assume a $300,000 property with a $200,000 deed of trust against it and a buyer with $40,000 in cash. The buyer would pay $40,000 down and give the seller an all-inclusive, wrap-around deed of trust for $260,000 that wrapped around and included the underlying $200,000 deed of trust. The buyer would make payments to the seller, and the seller would make payments to the lender. Often we set up a collection account to handle the money and give the seller notice if the buyer was not paying on time. Sometimes we got consent from the lenders. Sometimes we did not even ask for consent.
Then in 1984 Congress federalized the law of due-on-sale and preempted all state cases and statutes on the subject. Banks could enforce their Paragraph 17 due-on-sale clauses and call loans due if there was a change in ownership. The borrower had six months to pay off the mortgage or take title back. In the agreements we wrote, the buyer and seller agreed what they would do if the lender called in the loan. There were exceptions to the new rule: The bank could not call in the loan if a parent deeded to a child, or a spouse deeded to a spouse, or if a borrower put title into the name of a trust and there was no change in possessory rights.
How does this relate to the present? Although interest rates are relatively low, it is still difficult for borrowers to get financing. The difficulty getting financing has had some impact on the current stagnation or drop in property values.
Maybe it is time for buyers and sellers to rebel. My recent experience is that lenders do not want to take properties back and will consent to wrap-around sales, with the understanding that the seller is not released from liability. The banks have too many properties in their portfolios and mortgage insurance companies are being stretched financially.
I am ready and willing to write and set up wrap-around deed of trust transactions.
Call me at 425-771-1110 or 888-999-2022 for further information. Or e-mail me. The fax number is 425-776-8081. Click here to sign up for our e-mail messages, our printed mailings, or to request a call back. For details about how to apply for a loan with my mortgage company go here.Copyright
© 2008 James Robert Deal.