Mortgage payoff in a divorce

DEAR BENNY: My wife and I are in the process of getting a divorce. I am prepared to give her the family home so that our children will not be disrupted any more than they already are. I know that our mortgage lender will not relieve me of our joint obligation to make the monthly payments, but hopefully that will not be a financial problem for us. We have been advised that a lender can use the "due on sale" clause in the mortgage documents to block this transaction. Can this happen? --Tom

DEAR TOM: The short answer is no. Federal law permits certain real estate transfers even though the loan documents contain the "due on sale" clause.

Let's look at this concept. Mortgage lenders are in the business of making money, and obviously they do not like to allow people to assume a low interest rate when rates are much higher. While this scenario sounds unlikely in today's marketplace, many readers will recall the excessively high mortgage interest rates during the past decade.

Thus, many years ago, the mortgage industry came up with the concept of "due on sale." Most mortgage loan documents contain language to the effect that if property that is secured by a mortgage is sold or transferred without the lender's prior written consent, the lender has the right to call the entire mortgage due, and insist on payment in full. This is known as the "due on sale" clause.

There has been much litigation over this concept throughout the country, and the great majority of the court cases have upheld the lender's right to enforce the due-on-sale concept. In 1982, however, Congress enacted the Garn-St. Germain Act (12 UCA 1701j-3), which imposed certain restrictions on the enforcement of this clause.

This law contained nine specific exemptions where a lender was not permitted to exercise its option pursuant to a due-on-sale clause. When there is a real property loan secured by a lien on residential real property containing fewer than five dwelling units -- including a lien on the stock of a cooperative housing corporation or a residential manufactured home -- a lender cannot enforce the due-on-sale clause under the following circumstances:

• 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;
• a transfer where the spouse or children of the borrower become an owner of the property;
• a transfer to a relative resulting from the death of a borrower;
• a transfer by operation of law on the death of a joint tenant or tenant by the entirety;
• 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 (i.e., the so-called "living trust");
• the creation of a purchase-money security interest for household appliances (i.e., where you pledge your house in order to replace your heating and air conditioning system);
• the granting of a leasehold interest of three years or less not containing an option to purchase;
• a subordinate lien that does not involve a transfer of rights of occupancy in the property, and
• any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board. ...CONTINUED

All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.