- A mortgage agreement usually has a due-on-sale clause, which means that the borrower has to pay off the entire amount owed when he sells the property. In a wraparound mortgage, the borrower sells the property, but does not pay off the loan. This violates a mortgage clause, but not a law. The due-on-sale clause protects the mortgage lender. The lender determined the terms of the original mortgage based on the original borrower's risk profile. If the new buyer of the property is a more risky borrower, the lender may not want to lend funds to him or may want to charge higher interest rates for the loan.
- If the original mortgage lender learns about the new transaction, the lender has the right to exercise the due-on-sale clause. This means that at any time during the term of the wraparound mortgage, the original mortgage lender can call the entire mortgage due and payable. If neither the seller nor the buyer can pay off the loan balance, the original mortgage lender may foreclose on the property. Alternatively, the lender may do nothing, increase the interest rate or charge an assumption fee.
- During the term of a wraparound mortgage, the seller may transfer the deed of the property to the buyer. This appears in public records, but the original mortgage lender is unlikely to find out about the title transfer without a notification. If the seller does not notify the original mortgage lender of the wraparound mortgage or even attempts to conceal it, the whole arrangement amounts to fraud and is illegal.
- As the seller receives the wraparound mortgage payments from the buyer, he pays the original mortgage lender. In this scheme, the buyer can't track the payments because any correspondence with the original mortgage lender goes to the seller. As such, the buyer can't verify whether the seller really forwards the mortgage payments to the original lender. There is a danger of the seller keeping the money and letting the property go to foreclosure, depriving the buyer of his home.
previous post
next post