Some homeowners who have successfully modified their mortgage may decide later on to transfer property to another family member, such as a son or a daughter for estate purposes. Any transfer, even if merely a transfer of a part interest may trigger a due on sale/transfer clause in the modified mortgage which would mean that as soon as the property has been transferred, the bank can declare that the entire unpaid balance is immediately due and payable. For example, if you own the mortgaged house outright and decide to convey to your grandchild or perhaps decide to convey the house to your sibling then you may be unwittingly triggering the due on sale/transfer provision in the mortgage and the bank can demand that you pay the unpaid balance. However, the due on sale/transfer clause is preempted by the Garn-St. Germain Depository Act of 1982 (see U.S. Code section 1701j-3(d)). The act specifically provides that due on sale/transfer provisions are not enforceable under the following situations:
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) 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; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.
Based on the aforementioned situations, the examples I gave above where the owner conveys the mortgaged property to a grandchild or to a sibling may not be protected under the act.
Before making any transfer of mortgaged property, speak to an attorney who specializes in mortgage litigation.
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) 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; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.
Based on the aforementioned situations, the examples I gave above where the owner conveys the mortgaged property to a grandchild or to a sibling may not be protected under the act.
Before making any transfer of mortgaged property, speak to an attorney who specializes in mortgage litigation.
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