Hi

As inflation spikes, there will be a problem with real estate that has never raised its head before – the due-on-sale clause.  Almost every mortgage today has a due-on-sale clause built in.  It is authorized by federal law under the Garn-St. Germain Act of 1982.

Even though it has been around for forty years, it has never been an issue.  That’s because interest rates have been going down continually since 1982.  Interest rates in mortgages will have to go up – way up – to curb inflation.  They hit 18% in 1981, and inflation then wasn’t even close to what it is now.  You might note that in 1982 they changed the way inflation was calculated to make the numbers lower. 

When inflation gets up in the teens, the banks will be hunting for every 3% loan they can possibly clear off their books.  That means a lot of people are in trouble.  Using land trusts to hide the transfer of a property won’t work, in fact that is FRAUD and comes with huge federal charges.

Lots of people have moved properties into LLCs for asset protection purposes.  I personally think that the banks probably will let transfers into an LLC go unpunished, when they are owned by the same people in the same proportions that were on the original deed when the loan was authorized. 

I do have some grounds to rest my belief on.  Fannie Mae has actually made a statement in their regulations concerning transfer of a Fannie Mae backed property into an LLC.

The Fannie Mae Servicing Guide published December 8, 2021, lists a number of exceptions to transfers that trigger the due-on-sale clause.  Those exceptions pretty much follow the Garn-St. Germain Act exceptions.  For example, transfer to a living revocable trust or to heirs doesn’t trigger the due-on-sale clause.  Fannie Mae adds an exception for transfers to an LLC.  It uses the following language:

 a limited liability company (LLC), provided that

• the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and
• the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).

Then Fannie Mae adds language to provide that the servicer must notify the borrower that a property transferred to an LLC must be transferred back to a natural person prior to any subsequent refinance application in order to meet Fannie Mae’s Selling Guide underwriting requirements.

 

Moving property into an LLC will certainly cause problems in refinancing.  There may be problems with insurance, property taxes, and in other places, but the asset protection is worth it in most cases. 

 

If you have a property you got on a “subject-to deal,” a wrap around, transfer of a trust’s beneficial interest, or any other transfer of ownership, directly or indirectly, then you had better be looking at refinancing, because I think the banks are going to have a heyday.

 

Lee Phillips