Real estate agents and attorneys who are involved in such a deal might lose their license if the facts came out. They have an extra duty of disclosure and must comply with professional codes of ethics above and beyond what the average Joe must do. Here are some pertinent passages from the Realtor® and Bar Codes of Ethics:
| Pertinent parts of the Realtor® Code of Ethics | |
|---|---|
| Code provision | Comment |
| Preamble
REALTORS® can take no safer guide than that which has been handed down through the centuries, embodied in the Golden Rule, "Whatsoever ye would that others should do to you, do ye even so to them." |
If you made a mortgage loan, would you want one of your borrowers to ignore your due-on-sale clause and conceal the triggering transaction from you? |
| Article
2
REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction. |
Participants in subject-to deals almost invariably try to conceal the transaction from the lender. |
| Standard of Practice
2.1
REALTORS® shall only be obligated to discover and disclose adverse factors reasonably apparent to someone with expertise in those areas required by their real estate licensing authority. |
At the very least, an agent should recognize that triggering a due-on-sale clause warrants recommending that the client discuss the matter with their attorney. A blanket admonition to discuss the whole deal with an attorney is not sufficient. The agent should identify the due-on-sale issue specifically as a dangerous legal issue. |
At §9:87 of Miller and
Starr's California Real Estate Law 2d,
they say,
Both the seller and the real estate broker have a duty to disclose to a buyer any material fact that would affect the buyer's decision to buy, or the price or terms of purchase. The broker specifically has the duty to inform the buyer of the due-on-sale clause in every real estate transaction. (Eby v. Reb Realty, Inc., 9th Circuit, 1974, 495 F 2d 646) Thus the advice of the broker to 'hide' the transfer by use of an installment contract or wraparound deed of trust exposes the broker to liability for damages suffered by the buyer. |
Law clients who follow legal advice to hide a transfer of real estate can sue the attorney for malpractice if they suffer damage as a result. |
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| Rule | Comment |
|---|---|
| Rule
4.1
In the course of representing a client a lawyer shall not knowingly: (b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client... |
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| Rule
3-210 Advising the violation of law A member shall not advise the violation of any law, rule, or ruling of a tribunal unless the member believes in good faith that such law, rule, or ruling is invalid. |
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It's paragraph 17 of the standard "Single Family FNMA/FHLMC UNIFORM INSTRUMENT Form 3005 9/90 Amended 8/91" which is used almost universally on one- to four-family mortgages in the U.S. Paragraph 17 reads as follows:
17. Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.
The
original post-Garn FNMA/FHLMC due-on-sale clause said:
"If all or any part of the Property or an interest therein is sold or transferred by Borrower without Lender's prior written consent, excluding (a) the creation of a lien or encumbrance subordinate to this Mortgage, (b) the creation of a purchase money security interest for household appliances, (c) a transfer by devise, descent or by operation of law upon the death of a joint tenant or (d) the grant of any leasehold interest of three years or less not containing an option to purchase, Lender may at Lender's option declare all the sums secured by this Mortgage to be immediately due and payable."
The current clause lets the underlying federal statute and regulation deal with the details which previously were spelled out in the mortgage clause. I suspect the lenders decided it was better to claim the broadest possible right to accelerate the loan and to force people who wanted to learn of the limitations on enforcement to look up the law.
To understand the clause, you have to break it down into small parts. When you do, you immediately find that "due-on-sale" is a misnomer. A better name would be “due-on-transfer-of-any-interest clause.” The list of actions covered by the actual clause is far broader than just “sales.” The federal regulation (12 C.F.R. 591.2) says the due-on-sale clause is triggered by:
“...transfers of real property subject to a real property loan by assumptions, installment land sales contracts, wraparound loans, contracts for deed, transfers subject to the mortgage or similar lien, and other like transfers.”
A great many exceedingly ignorant investors think that all you have to do to get around a due-on-"sale" clause is a transaction that is not a "sale" per se. As the regulation shows, that is not true.
Note that the first sentence covers transfers of "an interest." That, and the regulation, make the clause cover not only sales, but land contracts. Many investors erroneously think that because the deed does not change hands in a land-contract sale, it is not a "sale" that triggers Paragraph 17 of the FNMA/FHLMC mortgage.
Many gurus say you can get around the due-on-sale clause by doing a lease option instead of a sale. Wrong. Subparagraph (d) of the longer clause covered that. Now you have to look at the law itself [§1701j-3(d)(4)] to learn that the due-on-sale clause is triggered by any lease longer than three years. And it's triggered by any lease that contains an option to purchase the property, regardless of the length of the lease.
In the mortgage (Paragraph 6), you promise to "...occupy, establish, and use the Property as Borrower's principal residence within sixty days after execution of this Security Instrument and shall continue to occupy the Property as Borrower's principal residence for at least one year after the date of occupancy..." The lender is prohibited from "unreasonably withholding" permission to not occupy during that period and "extenuating circumstances beyond Borrower's control" are an exception to the occupancy promise. In the absence of lender unreasonableness or extenuating circumstances, you may not do any kind of lease until you have lived in the property for a full year. If you habitually buy properties and immediately lease-option them, you will not be very credible arguing extenuating circumstances.
Another guru gimmick is for the current owner to transfer the property to a trust, then sell the beneficiary interest in the trust to the guy who wants to take over the mortgage.
The statute [12 USC 1701j-3(d)(8)] and the federal regulation [12 C.F.R. 591.5 (b)(vi)] say transfer of a home into an inter vivos trust does not trigger the due-on-sale clause.
"...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;"
"A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy"
Their purpose was to enable people who wanted to make use of the probate-avoiding aspects of those trusts. Note that the regulation exception does not cover subsequent sales of the inter vivos trust to someone else, only transfer of the home to an inter vivos trust owned by the same people as the original mortgage borrowers. The regulation's purpose most definitely was not to open up a loophole for avoiding due-on-sale clauses.
Remember also the title of paragraph 17 in the mortgage document: "Transfer of the Property or a Beneficial Interest in Borrower."
The exception to the due-on-sale enforcement only applies to owner-occupied homes. If you put the property into a trust then sell the beneficial interest in the trust and move out, you have triggered the due-on-sale clause.
Finally, the regulation says with regard to the inter vivos trust exception that the borrower must not refuse "to provide the lender with any reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficiary interest or change in occupancy..."
Taking an action that triggers the due-on-sale clause is neither illegal nor immoral. It simply gives the lender the right to call the loan, that is, to make you pay it off completely right now. If you cannot afford to do that, and most people cannot, that is a financially dangerous situation. Entering into a deal where the due-on-sale clause has been triggered puts a Sword of Damocles over your head.
Triggering a due-on-sale clause may not be illegal or immoral, but concealing the fact that such a clause has been triggered could possibly be both. Various gurus urge different methods of concealing the transfer of ownership and/or occupant. Each of those methods probably requires one or more parties to the deal to breach ethics or to commit crimes or violate common laws like fraud or breach of contract.
People who are prosecuted in mortgage matters are typically charged with one or more of the following federal felonies:
| Crime | Section of the U.S. Code | Definition | Punishment |
|---|---|---|---|
| False statement (HUD loan) | 18 USC 1012 | false statement... influences such Department to...enter into any contract | 1 year, fine, or both |
| False statement (conventional loan) | 18 USC § 1014 | knowingly...false statement...influencing in any way...federal...loan...or any change or extension...deferment of action | 2 years, $5,000, or both |
| Mail fraud | 18 USC § 1341 | ...obtaining money or property by means of false or fraudulent pretenses...[sends]...or... receives...any...thing | 5 years, $1,000, or both |
| Concealment | 18 USC § 1001 | ...in any matter within the jurisdiction of any department or agency of the United States...knowingly conceals or covers up by any trick, scheme, or device a material fact | 5 years, $10,000, or both |
| Conspiracy | 18 USC § 371 | ...two or more persons conspire...defraud the United States or any agency thereof...and one or more of such persons do any act to effect the object of the conspiracy | 5 years, $10,000, or both |
| Racketeering | 18 USC § 1961 | ...at least two acts of [mail fraud...within a ten-year period] | 20
years, $25,000, or both Under 18 USC 1964, a lender could sue you for racketeering and would be entitled to triple damages if they won |
Note that virtually all institutional (e.g., bank, credit union, savings and loan) mortgages are federally related because of federal deposit insurance, federal mortgage insurance, government backed bonds, federal charters of the lender, etc.
States also have similar criminal laws which are also violated in the typical mortgage scam. Common laws may also be violated. For example, if the borrower promised to inform the lender if the ownership, occupancy, etc. changed, and fails to do so, they have committed breach of contract. Persuading someone to commit breach of contract could be illegal interference on your part. Violations of common law are civil, not criminal, matters. That means you cannot be imprisoned for committing them, but you could be made to pay damages or forced to take some action.
For example, you getting the previous owner to keep the insurance on the property in his name to conceal the change in ownership from the lender is arguably conspiracy (two or more persons), mail fraud (something related to the insurance will go through the mail either from you or to you), concealment of a material fact, and false statement (to the insurance company about who is the current owner). If you do two such deals within a ten-year period, you have arguably violated the racketeering law.
In general, you should never do anything that cannot stand the full disclosure test. That is, if the deal could not be done if everyone involved, including all lenders, knew everything that was going on, the deal is probably unethical and illegal. The typical lease-option acquisition cannot be done unless the existing lender is kept in the dark about the change in control and occupancy of the property.
The bottom line here is that breaking laws or contracts is a serious thing.