Foreclosure and the Due-On-Sale Clause

It's almost guaranteed nowadays that just about every trust deed and promissory note contains a clause that gives the lender the right to immediately call their loan all due and payable upon a change in the ownership of the secured property. Such clauses are operable even in the instance of a forced sale situation, such as a foreclosure, though in actuality few senior lenders elect to call their loans due upon a trustee's sale of the property via a junior lien.

The rationale for the institutional lenders' traditional forbearance in calling their senior loans (where title transfers via a foreclosure action on a junior loan) seems to be grounded in their belief that such harsh action would discourage too many potential bidders from participating at trustee's sales. They realize that the absence of any outside bidders would result in lenders taking title to a lot of property that they'd have to rehab and resell rather than simply getting cashed out by speculators topping their opening bids at the trustee's sales.

It's even quite common for lenders to waive their due-on-sale rights when a hard-pressed homeowner voluntarily sells their property to a third party during the foreclosure process (prior to the actual trustee's sale). Lenders are especially accommodating if such a waiver is a condition precedent for a new owner stepping in and curing the foreclosure.

There are certain circumstances where lenders are actually prohibited (see the federal Garn-St. Germain Depository Institutions Regulation Act of 1982) from exercising their due-on-sale clauses. Most of them relate to property trans-fers amongst family members due to changes in status caused by marriage, divorce, death, inheritance or transfers to a living trust.

Another common waiver by senior lenders is the instance where a junior lienor becomes the owner of a property for lack of any outside bidders at their foreclosure sale. The rationale in the lending industry is that if senior lienors called their loans, just because a junior lienor ended up as the owner, in an effort to protect their loan, it would have too chilling an effect on the willingness of small lenders to make such loans.