The California Housing Finance Agency (CalHFA), a very small player in the California mortgage market, has temporarily halted foreclosures on homeowners who were current on their CalHFA purchase-assist mortgages but rented their homes out. Homeowners rented their homes out in an effort to stay current on their mortgages while relocating to find employment.

Although none of the homeowners had fallen behind on their monthly payments, foreclosures were initiated because, CalHFA claims, the Internal Revenue Service (IRS) requires homeowners with CalHFA mortgages financed through the sale of tax-free bonds to live in their homes for as long as the financing remains unpaid.

To ensure the purchase-assist financing complies with IRS requirements as viewed by CalHFA, these trust deeds (as do most other home loans) include a due-on provision which by its wording allows the lender to call due the entire sum of the loan if the borrower fails to continue to occupy the property. [CalHFA Financing Rider]

This postponement of foreclosures is temporary, and CalHFA will revisit their status in January.

first tuesday take:  CalHFA is following the lead of the California Department of Veterans Affairs (CalVet) by securing a higher portfolio yield on their adjustable rate mortgage (ARM) loans by use of the due-on clause — a most contemptible aggression. [Department of Veterans Affairs v. Duerksen (1982) 138 CA3d 149 (Disclosure: the legal editor of this publication was the attorney of record for the owner in this case.)]

As interest rates begin to rise around 2014-2015 (and likely for the next 30 years), lenders will increasingly look to the due-on clause to protect (and increase) portfolio yields. Such use of the due-on clause will hinder home sales volume even further.

These are the facts. The transfer of any interest in real estate triggers the due-on clause, except:

  • transfers of title between family members on one-to-four unit owner-occupied residences;
  • further encumbrances of a principal residence; and
  • leases of any property not exceeding three years.

This is federal law, and the leasing exemption (existing since 1982) appears to apply fully to homes financed by CalHFA. Federal law preempts state law enforcement on mortgage issues. [De La Cuesta v. Fidelity Fed. Sav & Loan Assn. (1981) 121 CA3d 328 (Disclosure: the legal editor of this publication was the attorney of record for the owner in the case.)]

To avoid a call or modification, a written pre-conveyance consent by lenders with due-on clauses in their trust deeds is required. [12 Code of Federal Regulations §591.5 (b)(1)(vi)]

CalHFA and CalVet interfere with the rights of owners (and the real estate market) to rent, finance or sell their properties when they include the due-on provision in their documentation and require occupancy forever solely by the owner under threat of a call.

They too are lenders, and they too will have their Minsky-moment, the aftermath of which will be most beneficial to real estate ownership and the multiple listing service (MLS) marketplace. [For more information regarding the due-on clause, see the March 2011 first tuesday article, The due-on-sale clause: barricading homeowners since ‘82.]

Why does CalHFA waste time, effort and California dollars castigating the handful of low-income first-time homebuyers who remain true to their debt obligation but need to relocate and rent out their mortgaged home to make payments? This temporary halt on foreclosures of non-delinquent loans needs to be made permanent, and a policy change would be enlightened conduct.

Better yet, CalHFA and CalVet need to get out of the due-on renting interference business and just make loans — lots of them.

In turn, CalHFA and CalVet homeowners might find strategic default and the money they save while not making payments a more effective means of shedding their black-hole assets than renting and waiting for a return to positive equity someday.

However, CalHFA and CalVet are not much interested in social policy, a stand consistent with all other mortgage lenders. [For more information on strategic defaults, see the July 2011 first tuesday article, Strategic default smarts.]

Re: “California state housing agency reverses on foreclosures” from the LA Times