The topic of assigning subject to deals and the mortgage payments is a very hot topic with real estate investors and real estate agents. Many investors claim that assigning mortgages or payments are  a great way to make money with no risk.

A simple example of a mortgage assignment sale would a property owner who owes $240,000 on a home. A contract would be written for an amount that would include closing costs and the $240,000 owed on the property (most likely around $265,000). The buyer would bring $25,000 to closing and then would assume the payment’s on the loan of $240,000.  The investor who puts the deal together keeps the $25,000 and then creates paperwork on the seller behalf that assigns the mortgage payments to the buyer, but herein lies the problem.

What Are The Perils Of A Mortgage Assignment Sale?

The lender in most cases is not made aware of the assignment, even if they are, they can call the loan due at any time. With times being what they are, most banks will be happy with a current loan and most likely will do nothing about this assignment (for now), but they still have the right to do so in the future.  However, imagine the buyer owning the property for a 18 months, staying current on the loan the whole time, and then receiving a letter stating that the loan is being cancelled (called due) immediately. The bank would have this right.

The buyer would be faced with four options.

1.Negotiate with the bank for a loan modification
2.Refinance the property with another lender
3.Sell the property
4.Be foreclosed upon

Of course, if a buyer goes into this with poor credit, it might be a risk worth taking. After purchasing a property through a mortgage assignment sale, the buyer would only be at risk for losing the equity gained and the initial investment.  But what about the property seller?

Mortgage Assignment Sale Sellers Still At Risk

Since the banks will not be releasing the seller of liability at closing during a mortgage assignment sale, the seller will be “on the hook” the entire time the mortgage remains on the property. Without a novation, the lender will still be looking at the seller for satisfaction. That means if a poor credit buyer purchases the property through a mortgage assignment and then defaults, the seller is the one who will bear the foreclosure process or other remedy resulting in the bank calling the note due.

I cannot imagine a situation where the seller should be comfortable with a mortgage assignment sale. Seller’s who are faced with a tough time selling their home have better options, and many of these sellers should consider a short sale, as it gets the property sold and these sellers can move on with their lives.

Mortgage Assignment Sale Advice

If you own a property and are presented with an offer involving a mortgage assignment, you should seek advice from a Real Estate Attorney. The strength of the buyer should weigh heavily on your willingness to take this risk, and most likely there are wiser remedies for you to pursue. Of course, if you receive an offer from a buyer pursuing a mortgage assignment sale, it wouldn’t hurt to request the bank’s approval for the assignment, and thus removing the seller from the loan.

Are Mortgage Assignments Legal?

Lets examine the  due-on-sale provisions in Section 408 of the Fannie Mae Servicing Guide. All of the provisions are very clear about property transfers to non-credit worthy buyers.   This is one of many clauses from the 2011 Fannie Mae Servicing Guide section on Property Transfers:

When the servicer learns of a transfer of ownership after the fact, it should notify the property purchaser that the mortgage loan is due and payable. For a whole mortgage loan or a participation pool mortgage loan held in Fannie Mae’s portfolio, the servicer may give the purchaser 30 days in which to pay the mortgage loan balance in full or to apply and qualify for a new mortgage loan. If neither the funds nor a credit application is received within the 30 days, the servicer may institute foreclosure proceedings. Under certain circumstances, Fannie Mae may consider the following alternatives:

A. Waiver for mortgage loans in default. If a whole mortgage loan or a participation pool mortgage loan that is subject to Fannie Mae’s due-on- sale policy is in default, it may be in Fannie Mae’s best interest to allow the mortgage assumption rather than to accelerate the mortgage debt. In such cases—as long as the proposed property purchaser is creditworthy— the servicer should contact its Portfolio Manager, Servicing Consultant, or the National Servicing Organization’s Servicer Solutions Center at 1-888-326-6435 to determine whether Fannie Mae is willing to forego the enforcement of the due-on-sale (or due-on-transfer) provision to avoid a property acquisition. A seriously delinquent MBS mortgage loan cannot be assumed unless the servicer first repurchases it from the MBS pool. (Also see Part VII, Section 503, Managing Chapter 7 Bankruptcies

Sixty percent (60%) of  sellers in distress are covered by Fannie Mae, FHA, VA mortgages, hence the problem is a huge one and these deals tend to blow up in a short time frame.

The other issue is with properties that are covered by PMI, how do you get the PMI insurer to approve the new buyer?

In my opinion, I do not recommend this type of investing as its  dangerous to all parties.