With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon -



(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.

(The Federal Home Loan Bank Board, which was disbanded in 1989 and replaced by the Office of Thrift Supervision, takes the absurd position that the Act only applies to owner-occupied homes. See 12 C.F.R. 591. However, the clear language of Garn Act specifically states that it applies to residential one-to-four family homes. There is no mention that it must be "owner-occupied." Although never enforced or challenged, such a direct conflict with the Congressional statute would probably be struck down in court as being "ultra vires").

A land trust is form of a revocable, living trust which is exempted under the Garn Act. A land trust, like a living trust, is create by two legal documents:

1) A trust agreement between the creator (called "grantor" in legal terms) of the trust and the trustee which defines the trust arrangement; and

2) A deed from the creator of the trust to the trustee.

The trustee holds title for the benefit of the grantor (in this case, the grantor is also the "beneficiary"). If you place title to your property into a land trust, you have not violated the due-on-sale (so long as there is no change in occupancy).

Let's say that you come across a seller who is willing to give you title to his property. The only "glitch" is that the loan is not assumable because the mortgage has a due-on-sale clause. Here's the process for getting around it:

STEP 1: Sammy Seller signs a trust agreement with you as trustee of his trust. Sammy is named as the "beneficiary" of the trust.

STEP 2: Sammy Seller transfers title to the trustee (no violation of the due-on-sale clause).

STEP 3: Sammy Seller quietly assigns his interest under the trust to you (similar to a transfer of stock in a corporation). This assignment is not recorded in any public record. Sammy moves out and you move in.

STEP 4: You are now the beneficiary of the trust. Your trustee makes payments to the lender.

Keep in mind that the assignment of Sammy Seller's interest under the trust to you does trigger the due-on-sale, but who is going to tell the lender? In reality, the lender will discover the transfer of an interest in real estate in one of three ways:

1) Change of name on the deed. Not likely, since lenders don't readily have "spies" at the clerk's and recorder's office;

2) Different name on the check received for payment. Not likely, since the bank officers are far removed from the clerical workers who process payments; or

3) Change of hazard insurance beneficiary. This is the most common way a lender discovers a transfer of interest in the borrower's property.

If you notify your insurance carrier of a change in insurance beneficiary, the lender, who is also a named beneficiary, receives a copy of the change. However, if you transferred title into a land trust, the new beneficiary under the insurance policy will be the trustee of the land trust. The lender will probably not object, since it will assume the seller has implemented an estate planning device. If the beneficiary of the trust is assigned, the lender will not be notified since the insurance beneficiary (the trustee) has not changed.

This strategy is not much different than simply transferring title directly from seller to buyer (called taking a deed "subject to"). However, the chances of the lender discovering the change of ownership are greatly reduced. This is especially true where the lender has contracted to use a "servicing" company to deal with most facets of the loan.

If you have had any experience with servicing companies, you may know that most are so poorly managed that they don't know which way is up (I would wager that a survey of 100 servicing company employees would reveal that 98 of them wouldn't know the meaning of a due-on-sale clause).