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     | Monday, January 10, 2000 - 04:41 am  Sean asked, "Greg -- do you admit that there is no special legal definition of assumption and that novation is the proper legal word to use for assuming a loan the bank's way?" (from the topic: Credit: Buy now with low scores or wait)
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| | Monday, January 10, 2000 - 04:52 am Sean: If you say "land contract," they would understand. If you say, "lease, with option to buy," they would understand. How is this relevant to Kathy? If she asks the seller to let her live in the house and own it through "novation," then nobody will know what she is talking about. That doesn't help her. It also doesn't help to use the word "assumption" because that does not describe what you suggested either. If you say "novtion" (defined by he link you gave to http://www.duhaime.org/dict-no.htm#N as "Substitute a new debt for an old debt cancelling the old debt." (which, of course, makes no sense in terms of usage of English-- it should say "The substitution of a new debt... ")) in real estate circles, most people wouldn't know what you are talking about. Right? To answer your question: "do you admit that there is no special legal definition of assumption and that novation is the proper legal word to use for assuming a loan the bank's way?" Is this, a court of law? Law school? No, Your Honor, I do not admit anything, Judge Wapner, sir. The definition-- practical and legal-- of "assumption" comes within the contracts signed by the parties and the lending guidelines. I gave links to credible authorities in the field of real estate (above) who use the contracts. Take up your needling street lawyering with them. If you would like to-- or absolutely must-- use the word "novation" as a substitute, I am sure a court would allow it, as long as everybody involved understands what you mean. The most common type of assumable loans I know of are FHA and VA loans. Here is a page at hud.gov called "Administration of Insured Home Mortgages" that talks about assumptions. The words "assumption" or "assume" appear 30 times. "Novation" does not appear. Directive Number: 4330.1. I searched hud.gov at http://www.hud.gov/search.html for the word "assumption." 724 documents were returned. I searched for "novation" and 8 documents appeared (some flukes because of the word "renovation," none relevant to this topic. Go see for yourself. More? http://www.altavista.com/cgi-bin/query?sc=on&q=loan+assumption&kl=XX&pg=q http://www.altavista.com/cgi-bin/query?sc=on&q=assumable+mortgage&kl=XX&pg=q Now try this: http://www.altavista.com/cgi-bin/query?sc=on&q=loan+novation&kl=XX&pg=q There's my final answer, Regis; what in the world is the point?
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| | Monday, January 10, 2000 - 10:20 am Well, I tried some of your links and the result was depressing. Looking for the words "assume" "assumption" and "assumable" I typed in the word "assum" and searched. The first link I found had the text: 1. Record in G/L as a 126CB (assuming input stage and prior stage is equal) as follows: Needless to say this isn't exactly thrilling me. So I tried "assumption" and got no hits. So I switched to "due on sale" and "match exact phrase" and came up with this: "Mortgagee Letter 94-4. As long as the due on sale clause is not triggered, lenders can delete borrower from title using streamline refinance if six months have passed from when quitclaim deed was executed. For streamlines that trigger due on sale clause, lender may do credit qualifying streamline refinance." There it is, in black and white, Greg. The HUD directs lenders who find that someone has assumed an FHA-insured loan without authorization they should go for a "credit qualifying streamline refinance." Try bringing that up in casual conversation with your Realtor. Of course the question is what exactly is a streamline refinance anyway? Not to worry you can select this link and read all about them. Surprisingly enough a streamline refinance does not require an appraisal and in fact an appraisal should not be done if the property is non-owner occupied. Does this surprise you, Greg? Did you expect the HUD would recommend jailtime or something? Also don't forget to check here where the HUD confirms that an FHA-insured loan can be obtained when the borrower has an interest in the property through a creative financing technique: "...payment on a land contract, contract for deed, or other similar type financing arrangement where the borrower does not have title to the property, the new mortgage may be processed as either a purchase or a refinance transaction with maximum insured financing if the borrower receives no cash at closing" (emphasis added). In fact a land contract or lease-option is a better method than obtaining a purchase money mortgage from the seller or all-inclusive trust deed because in these transactions legal title is passed, which has the effect of barring considering FHA-insured financing as a purchase arrangement. Keep scanning down for this doozy: "7)Delinquent mortgages are generally not eligible for streamline refinancing until the loan is brought current. However, if the mortgage is delinquent by no more than two monthly payments, the refinancing lender may pay the borrower's mortgage to bring the payments current provided no obligation is placed on the borrower to repay the funds used to bring the mortgage current" (emphasis added). ************************************************** In short, I feel I have completely refuted your earlier claim that engaging in a creative financing technique would result in the borrower needing to meet a more demanding LTV standard than through a purchase. Let's continue -- same link to this text: "[Substitute refinances]...may be used...(d)Following an assumption of a mortgage where the transferability restriction (due-on-sale clause) was not triggered, such as in a divorce where a property transfer results from the divorce decree or by devise or descent and the assumption occurred less than six months previously." Note their wording: "assumption of a mortgage where the [due on sale clause] was not triggered..." Considering how specific they were, wouldn't you say that there are two categories of assumptions: an assumption where the due on sale clause was not triggered and one where it was? Are not both defined as assumptions by HUD in this very document? Are we not seeing an admission that these "non-assumable loans" are getting assumed anyway, often without the consent or even informing HUD or the lender? Do we not see that this occurs so often that a procedure has been set forward to enable lenders to handle this situation in accordance with HUD guidelines? I think we do. ************************************************** A land contract, lease-option a performance mortgage and other "creative financing" techniques where the Buyer does not take legal title to the property have a bad reputation and it is partially deserved. Traps abound in these waters for the unwary, but all these traps can be overcome when a person is sensible enough to obtain competent, professional help such as a real estate attorney.
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| | Monday, January 10, 2000 - 12:22 pm As an additional note, are you aware that leasing a house for more than 3 years violates the due on sale clause and provides FNMA and FHLMC the ability to call your loan immediately due and payable? Are you aware that in 1978 in the case of Wellenkamp v. Bank of America the California State Supreme Court held that due-on-sale clauses were not enforceable?
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| | Monday, January 10, 2000 - 02:24 pm Sean: re leasing your house for more than 3 years: I looked at this page and don't recognize it to be by anyone of authority. I haven't read loan docs in about 2 years now, so it could be a new clause. Any court cases to support this? Highly unlikely. Imagine the borrower gets transferred out of the area, has to move, market sucks, yet borrower has to sell?
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| | Monday, January 10, 2000 - 03:49 pm Well, the page referenced is from a reputable newspaper "The Washington Post" I believe based in Washington DC. This is, of course, no guarantee that what they have said is true, but I had heard it before. It's nothing I didn't already know. See also this Washington Post link. See also this link and scan for "leasehold interest."
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| | Monday, January 10, 2000 - 06:20 pm Well, I'm not big on second hand info, especially from newspapers. Unless it says so in the FNMA loan docs now, or on their site, no points. I DO know that this was NOT the case last time I read loan docs. The second Washington Post link has absolutely NOTHING to do with the 3yr clause. Why did you post it?
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| | Monday, January 10, 2000 - 07:18 pm Ok, Sean, with my 9600 baud connection I went through John Reed's page "this link" and finally found this: "The actual wording of the clause 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." I don't see anything about 3 years. Reed continues: "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." Not only does it seem that the 3 year period no longer applies, but it has nothing to do with my concern about not being able to rent out your home. I've never given anyone a lease for more than a year, don't know anyone who did, and can't see why one would do that. ESPECIALLY not when you had to move due to a job transfer and you're just waiting for the market to get better. You had said "As an additional note, are you aware that leasing a house for more than 3 years violates the due on sale clause and provides FNMA and FHLMC the ability to call your loan immediately due and payable?" According to the Reed page, that's absolutely not true (and never was true.) There is big difference between "leasing a house for more than 3 years" and giving somebody a 5-year lease. Obviously you can lease a house for 50 years, with 1 yr renewed leases, and never trigger the due on sale clause. You had me worried, glad we straightened that out.
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| | Tuesday, January 11, 2000 - 05:13 am Sean: You are changing the subject. The subject is "Assumption vs Novation." I would be happy to address your other questions, but addressing them here has been deemed an inappropriate use of the forum. I answered your question, "Greg -- do you admit that there is no special legal definition of assumption and that novation is the proper legal word to use for assuming a loan the bank's way?" Sean, do you claim that there is no special legal definition of assumption and that novation is the proper legal word to use for assuming a loan the bank's way?
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| | Tuesday, January 11, 2000 - 05:30 am Christine: This thread has gone from defining the terms assumption and novation to due on sale, streamline refinances, creative financing, obtaining competent, professional help such as a real estate attorney, due-on-sale clauses in certain contracts, a court ruling on due-on-sale clauses, and leashold interest. Should I respond here?
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| | Tuesday, January 11, 2000 - 06:59 am I do claim that novation is the proper legal way to refer to the bank's preferred method of assuming a loan with a due-on-sale clause. If HUD wants to call it a "streamline refinance" that's on them.
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| | Tuesday, January 11, 2000 - 08:44 am Sean: The most common type of assumable loans I know of are FHA and VA loans. HUD calls it an "assumption," as I explained above (and properly footnoted the document from which the information was obtained, HUD Directive Number: 4330.1). It is called "Administration of Insured Home Mortgages." The words "assumption" or "assume" appear 30 times. "Novation" does not appear. Apparently you need more proof of the legimacy of the term. It also appears on the "Truth-In Lending Statement"; "novation" does not. The FHA Multistate Fixed Rate Note states, "If Borrower defaults by failing to pay in full any monthly payment, then Lender may, except as limited by regulations of the Secretary... 'Secretary' means the Secretary of Housing and Urban Development of his or her designee." So, in referring to the HUD/FHA rules ("the regulations of the Secretary") that outline assumptions I gave you previously, "assumption" is the correct, right, preferred, and proper word. You are still having trouble staying on the topic. The question was, "Do you claim that there is no special legal definition of assumption and that novation is the proper legal word to use for assuming a loan the bank's way?" Your answer: "I do claim that novation is the proper legal way to refer to the bank's preferred method of assuming a loan with a due-on-sale clause. If HUD wants to call it a "streamline refinance" that's on them." You inserted "due on sale" in your answer. In effect, you changed your own question. If you're going to be hyper-technical about one thing, you will have to be so completely.
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| | Tuesday, January 11, 2000 - 11:00 am Christine: Please check out this link and scan for this text: 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. Greg: An "assumable mortgage" is a mortgage that does not contain a due-on-sale or alienation clause. These mortgages can still be assumed, although you run the risk of the lender calling the entire amount due and payable. I'm not here to play semantics. To assume means to take over -- like assume command. If you take over payments you have assumed the payments of the loan. No one goes to jail for assuming a non-assumable loan. The worst that ever happens is the lender requires the new payor to pay for the closing costs to convert all the paperwork for the loan over to reflect him or her as the new borrower.
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| | Tuesday, January 11, 2000 - 11:14 am Sean: As I posted previously: "Obviously you can lease a house for 50 years, with 1 yr renewed leases, and never trigger the due on sale clause. You had me worried, glad we straightened that out." Do you NOT understand this?
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| | Tuesday, January 11, 2000 - 11:29 am I suppose you just go for a one-year lease with an option to renew and you've circumvented the problem. Personally I never worry about due-on-sale clauses. Screw 'em.
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| | Tuesday, January 11, 2000 - 01:35 pm Sean: You said, "I'm not here to play semantics." That line is used a lot in the same vein as "Well, you don't have to get snippy about it" after someone has had their " earlier claim" "completely refuted." But, you are indeed playing semantics. That's the subject of this thread: your insistence that the word novation is relevant in real estate and finance circles, when it is not, and that it is more correct than assumption, even when novation doesn't appear in the contract or guidelines, and assumption does. Your changing the subject to mask it is not lost on me. And you're playing games in other ways, here, too. It is possible that someone reading you post above about typing in the word "assumption" at http://www.hud.gov/search.html (as I suggested) and getting no hits is actually the real result. I recommend to anybody reading this that they try it for themselves. I recommend, Sean, that you try it again and return here with the results. I am willing to give you the benefit of the doubt. For anyone interested, the genesis of this thread was Sean's statement: "As for how you assume a loan without the lender knowing ... you just tell the person who is currently paying that you'll take over payments for him. You start making those payments. You just assumed the loan." As if it were that easy. If it were, why would they call them "VA assumable loans"? Sean, you didn't answer the last question. By the way, at one point in your last message to me you spoke of an "assumable mortgage," then you changed to "assuming a non-assumable loan." You know the difference between a loan and a mortgage, don't you?
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| | Tuesday, January 11, 2000 - 02:15 pm Well like I said, I went to the HUD search and I typed in the word "assumption" and it gave me several links, this one being the first link. So I went in there, I hit CTRL-F and I typed in the word "assumption" so that it would scan the document quickly for the word "assumption" and you know what? The word "assumption" did NOT occur anywhere in that document. I also tried the text string "assum" and that wasn't there either. Try it for yourself! Undaunted I went to the next link on the list and I did the same thing -- searched for the word "assumption." Again I got the same result -- the word "assumption" did not occur in that document anywhere nor the text string "assum" either. Well, I'm not gonna sit around all day checking links that HUD claims has the word assumption in it when serious checking shows the word ain't there, nor any derivative of the word. That's just a waste of my time. As for assuming loans v. assuming mortgages in the state I live in the word "mortgage" is generic for all kinds of things. There are no mortgages anywhere in California. All real estate transactions here are accomplished using two documents, a promissory note and a deed of trust. It is, however, common practice here to say, "I need to get a mortgage" when really the person means "I need to get a loan." Even if we were using mortgages, they are not "gotten" mortgages are given by the borrower to the lender. ************************************************* None of this changes the fact that if you pick up a mortgage document and the lender tells you that it's "not assumable" that you won't find the word assume or any variation thereof anywhere in the document. What you will find is a clause that says that the loan is "due on sale." To be legally enforceable (in my state) both the promissory note and the deed of trust must contain the due on sale clause.
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| | Tuesday, January 11, 2000 - 03:59 pm Sean: You are going for broke, now. Previously in this thread (Monday, Jan 10, 3:20 pm)(all you have to do is scroll up to see it), you said "Needless to say this isn't exactly thrilling me. So I tried "assumption" and got no hits. In the last post you said, "Well like I said, I went to the HUD search and I typed in the word "assumption" and it gave me several links... " "Like [you] said" what? I searched http://www.hud.gov/search.html again, just a moment ago. Again, I got not "several" hits, I got 724. You are not there yet, but at least you are getting closer to the truth. I gave you the number of the HUD directive. If you refuse to read it, that's your problem. 4330.1 REV-5, APPENDIX 12 ASSUMPTION REQUIREMENTS 4330.1 REV-5 CHAPTER 6. CHANGE OF MORTGAGORS (ASSUMPTIONS) OR SERVICERS AND SALE OF MORTGAGES http://www.hudclips.org/sub_nonhud/cgi/hudclips_run.cgi?hudclips_run HUDClips search: (type in "4330.1" with no quotation marks) http://www.hudclips.org/sub_nonhud/cgi/hudclips.cgi?hudclips This changes your premise that the word "novation" has some regular place in a practical discussion of real estate finance, and that "assumption" means something other than what it does.
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| | Wednesday, January 12, 2000 - 06:38 am This discussion is pointless. Your position appears to be that if a landlord says you can't sublease that you you are physically prevented from doing so by the power of his forbiddance. I can assure you that people sub-lease things all day long that specifically say in their agreement that you can't sublease. I can assure you that people assume real estate financing all day long that says right in it it's due on sale. I can assure that people share their ISP accounts all day long even though their agreement may say that only one person is permitted to use the account. "Non-assumable" loans can be assumed. You just are making a certain, calculated risk in anticipation of a certain calculated reward. I don't care how many times HUD, FNMA, FHLMC or any other bank stands up and assures you that their loan can't be assumed. What they are really thinking is that they don't want you to assume it and they'll try to block you from assuming it, if they can. And I'm pleased for this opportunity to increase your vocabulary to include the word novation. Should I proceed now to explain arbitrage and how it deals with real estate financing?
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| | Wednesday, January 12, 2000 - 07:40 am Sean: The discussion is only pointless if you keep changing the subject: "Assumption vs. Novation." You wanted to nitpick it to death, so I let you and you were not able to prove anything about the word "novation." I proved to you that "assumption" is the preferred and clearly understood term in the real estate community-- indeed referring directly to the contracts and the regulations to which the contracts refer regarding "assumption" (not "novation"). You presume that I didn't already have the word "novation" in my vocabulary. However, even if that were the case, you would have only increased my vocabulary with a useless term. Nobody says "novation." Everybody (who knows) says "assumption." FHA assumable loans. VA assumable loans. To assume them, you have to sign contracts. Nobody can assume a loan under those contracts without signing. Try this test: if a loan taken by "novation" or, even "assumption" under your way, does it appear on the credit report of the person who assumes it? If you use the right words in your posts, people will know what you are talking about. An assumption is a very specific transaction regarding assumable loans. Buying on land contract is something else, but not assumption.
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| | Wednesday, January 12, 2000 - 08:11 am The answer is, if a loan is novated, it will appear on your credit profile and if a loan is assumed it will not but rather it will appear on the credit profile of the original borrower. A "non-assumable loan" is any loan that does not have a due-on-sale clause. A competent real estate attorney says as much right here. There is nothing illegal, immoral or unethical about assuming a "non-assumable" loan. In California, the state in which I live, there is an official Realtor®-approved form used when you are busy assuming a non-assumable loan. Utah has their own forms to cover the same situation. Here is an opinion letter regarding the ethics of violating a due-on-sale clause. Also note that in Medovoi v. American Savings & Loan, 89 Cal.App.3d 875 (1979) the court declared a lender could not sue the buyer for fraud for deliberately concealing a transfer, since he has no legal obligation to tell the lender of the transfer. Do you get that Greg -- no legal obligation to assume a loan "the bank's way" instead of your own way. None of this is to say that there are not real dangers associated with creative financing techniques like land contracts, but the due-on-sale clause should be the least of anyone's worries. I'd be far more worried of the property burning down and all proceeds of insurance going to the original owner. I'd be far more worried that the original owner would file bankruptcy, which might affect my position as well as costing me thousands in legal fees. I'd be far more worried that the IRS would come after the property because the original owner was delinquent on paying income tax. There is nothing that can be found in the text of any "non-assumable" mortgage or deed of trust that prohibits it from being assumed. The only text in it says that the lender can at their sole option accelerate the mortgage under such circumstances. I think this horse has been beat to death.
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| | Wednesday, January 12, 2000 - 09:02 am Another tangent. Back to the original post: Sean asked, "Greg -- do you admit that there is no special legal definition of assumption and that novation is the proper legal word to use for assuming a loan the bank's way?" (from the topic: Credit: Buy now with low scores or wait) Apparently the FHA promissory note (financing contract) referring to the HUD regulation which uses "assumption" ("novation" in non-existent) is not good enough for Sean, even the regulations have been there for a long time. Sean, is there any movement to change the words "assumption" and "assume" in the HUD guidelines to "novation" and "novate"? Are you going to lead the charge?
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| | Wednesday, January 12, 2000 - 10:17 am An open letter to Letha Strothers, HUD. Dear Letha: I obtained your name and email address off the Hub website and I am very concerned about some of the information contained there about loan assumptions. As you know assumptions with and without the lender's knowledge and consent is very common but is frowned upon by HUD and FHA guidelines. I feel that your language in regards to the matter is unclear, confusing to consumers and can result in harm to consumers by unscrupulous individuals. Simply classifying a loan as "non-assumable" then later including information on how a lender can "streamline refinance" those loans that were assumed in violation of the due-on-sale clause may lead individuals to be unclear as to HUD's position on the matter. As you know the safest method for the Seller of a house with FHA-insured financing is for the Buyer to have the parties on the current financing updated. This procedure is known as a "novation." I hope you will take action to update your terms and information to make it as clear as possible the potential dangers involved in assumptions for sellers of real property. Best regards, ************************************************* There you go, Greg -- I am leading the charge for language clarity.
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| | Wednesday, January 12, 2000 - 03:02 pm Thanks, Sean. Hope you got more luck than me getting a response from HUD.
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| | Thursday, January 13, 2000 - 03:46 am Sean: You said, "Simply classifying a loan as "non-assumable" then later including information on how a lender can "streamline refinance" those loans that were assumed in violation of the due-on-sale clause may lead individuals to be unclear as to HUD's position on the matter." What loans closing today are classified by HUD as "non-assumable"?
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| | Thursday, January 13, 2000 - 06:47 am I believe the HUD requires all loans FHA-insured after 1986 to include a due-on-sale clause. I believe VA guaranteed loans are in the same boat. In fact, I don't know of any commercial lender that doesn't insert a due-on-sale clause into their note and deed of trust.
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| | Thursday, January 13, 2000 - 10:00 am Sean: What loans closing today are classified by HUD as "non-assumable"? You are changing the subject again. I didn't ask about a "due-on-sale" clause.
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| | Thursday, January 13, 2000 - 10:15 am If you think that then you obviously don't understand the discussion. From The REISCOM Real Estate Dictionary: ASSUMPTION OF MORTGAGE Taking title to property which has an existing mortgage and agreeing to be personally liable for the payment of the existing mortgage debt. A distinction exists between "assuming" a mortgage and taking title 'subject to' a mortgage. If the purchaser agrees to assume the mortgage, he or she becomes personally liable on any deficiencies, such as not making payments, occurring in a foreclosure sale. When a purchaser takes title subject to the mortgage, no personal liability is undertaken to the lender; thus, the purchaser could walk away from the mortgage and lose nothing but the equity already invested. In both situations the original borrower is liable to the lender unless specifically released in a novation. A mortgage may obtain a non-assumption clause or due on sale clause which prohibits an assumption without consent of the lender. Such consent is normally given for a fee and a possible jump in the interest rate if the contract rate is below the prevailing market rate (emphasis added). From the same site: DUE-ON-SALE CLAUSE A clause included in many mortgages permitting the lender to require the borrower to repay the outstanding balance when the property is sold. Also known as a non assumption clause, the effect is that mortgages with such a clause are non assumable unless the lender permits the assumption. The lender may allow the mortgage to be assumed only after adjusting the interest rate to reflect current market conditions (emphasis added).
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| | Friday, January 14, 2000 - 05:27 am Sean: What loans closing today are classified by HUD as "non-assumable"? Are you saying your answer is "all loans FHA-insured"?
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| | Friday, January 14, 2000 - 07:55 am If you want to know what loans closing today are classified by HUD as "non-assumable" ask HUD. If you want to know about "non-assumable" loans learn from a real estate attorney.
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