Demand Mortgages

[joestein]

Many years ago when I was refinancing the mortgage on my old house I noticed that there was a box checked on the good faith estimate/disclosure that said "demand feature". So, questioning it, I found out that means that a lender can call your mortgage at any time for any reason or no reason.

I was worried that if interest rates rise, the lender could call my fixed rate loan because it wasn't as profitable as newer loans. So, I didn't go with that lender and refinanced with someone else.

I was just reading an article about how fast mortgage rates are rising and starting thinking about the demand feature. Do you think if rates get into the 6s or 7s (which they might) - would banks start to call fixed rate loans with a demand feature that have low rates (2 - 3%)?

So, does anybody know if they have a demand feature? Do you think that banks would call those loans or would the outrage be too great?

 

[Big Matt]

If it is in a mortgage backed security the lender loses the call feature. I believe yours was a pretty big loan, so too big for Fannie Mae and Ginnie Mae.

 

[joestein]

If it is in a mortgage backed security the lender loses the call feature. I believe yours was a pretty big loan, so too big for Fannie Mae and Ginnie Mae.

This was a $300K refinancing around 2015 or so. I think it was a Fannie mae (it was definitely some sort of large well known loan program) and I was told it was standard on all their loans. They were shocked that I was questioning it - the mortgage company said it was the first time anyone had asked about it.

Good point about the bundling and selling of the mortgages. I wasn't aware of that.

 

[Ralph Sir Edward]

Many years ago when I was refinancing the mortgage on my old house I noticed that there was a box checked on the good faith estimate/disclosure that said "demand feature". So, questioning it, I found out that means that a lender can call your mortgage at any time for any reason or no reason.

I was worried that if interest rates rise, the lender could call my fixed rate loan because it wasn't as profitable as newer loans. So, I didn't go with that lender and refinanced with someone else.

I was just reading an article about how fast mortgage rates are rising and starting thinking about the demand feature. Do you think if rates get into the 6s or 7s (which they might) - would banks start to call fixed rate loans with a demand feature that have low rates (2 - 3%)?

So, does anybody know if they have a demand feature? Do you think that banks would call those loans or would the outrage be too great?

If they can, and the rates are high enough, they will. In my youth, mortgages were "assumable", i.e. you didn't have to refinance the mortgage when you sold the house. That died in the '80's, no mortgage company would write that kind of mortgage any more. we'll see about "callable" mortgages. . . . The owner of the mortgage, i.e. the underwriter of the Mortgage Backed Security, would still have that right. Whether they would exercise it, is unknown.

Consider - the present value of a 3% mortgage in a 7% environment is around 50% of the face value. The holders of the tranches are used to getting principle back; it's part of the deal in the MBS world. They would just reinvest the capital in a new MBS at a higher rate. So forcing the payment of 100% on a Mortgage only worth 50% in the open market, is a great arbitrage opportunity for somebody. . .

 

[Sandy VDH]

VA Mortgages are still assumable.

 

[joestein]

So, if the mortgages get called will there be enough outrage to stop it?

I would think that very few people have enough funds to payoff their mortgage.

 

[VacationForever]

I think the risk of loan companies recalling a mortgage is miniscule if you make every payment on time. If they do, you know Congress would put in a new law to stop them from doing so.

Big brother always likes to bail out the little guys, rightly or wrongly.

 

[Janann]

So, if the mortgages get called will there be enough outrage to stop it?

I would think that very few people have enough funds to payoff their mortgage.

Yes, there would be enough outrage. I think the chances of this happening in more than a tiny number of cases is remote.

The current lender would expect you to find a new lender rather than pay it with cash on hand.

 

[geekette]

So, if the mortgages get called will there be enough outrage to stop it?

I would think that very few people have enough funds to payoff their mortgage.

Agree. That’s scary. If I could buy the place outright, I wouldn’t need a mortgage!

gross practice, if it becomes widespread.

 

[easyrider]

I have never seen the "demand" box on any mortgage contract I have signed. It has been about 8 years since I last signed a mortgage contract. I did go over my son's mortgage contract and didn't notice this "demand" box on it either. Never knew this demand thing existed so I guess it's good to know.

The only demand features I know about are the "due on sale" at closing and the "acceleration clause' where the mortgage can be called for breach of contract.

Bill

 

[dioxide45]

Since the Fed is perhaps the biggest buyer of mortgage backed securities, would it be in their best interest to have these mortgages called?

 

[PigsDad]

Has anyone ever heard of this happening to someone who is current on their mortgage? I would think that if this has happened in the past, it would have been all over the news. Somehow I think there is extremely low risk of this ever happening, and I wouldn't lose any sleep over it. But that is me.

Kurt

 

[geekette]

Has anyone ever heard of this happening to someone who is current on their mortgage? I would think that if this has happened in the past, it would have been all over the news. Somehow I think there is extremely low risk of this ever happening, and I wouldn't lose any sleep over it. But that is me.

Kurt

agree on never hearing of it happening, but, I would not sign such a contract as having it hanging over my head would cause me to lose sleep. The idea of prematurely emptying my retirement savings, suddenly, would creep me out. Less creepy than sudden foreclosure, however.

that said, it wouldn’t bother me to have a demand feature on an amount I financed out of convenience vs need. I recently bought land that I paid cash for. The amount was large enuf that it would have helped my cash flow to finance it, with ability to pony up at any time if called.

overall, borrower beware. Hopefully people do carefully read everything before signing, but, I‘m sure there are people that don’t.

 

[Ralph Sir Edward]

Yes, there would be enough outrage. I think the chances of this happening in more than a tiny number of cases is remote.

The current lender would expect you to find a new lender rather than pay it with cash on hand.

Bingo!

 

[joestein]

I have never seen the "demand" box on any mortgage contract I have signed. It has been about 8 years since I last signed a mortgage contract. I did go over my son's mortgage contract and didn't notice this "demand" box on it either. Never knew this demand thing existed so I guess it's good to know.

The only demand features I know about are the "due on sale" at closing and the "acceleration clause' where the mortgage can be called for breach of contract.

Bill

I had never heard of it either until I saw it on the good faith sheet. I spoke to quite a few people about it and everybody seemed unaware.

Lets not kid ourselves - when we buy a house, we sign many, many pages. I tried skimming each page as I signed and I certainly looked over my mortgage docs when I got them, but it would be easy to miss something if you aren't looking.

Remember- this was around 7 to 8 years ago.

 

[mdurette]

I'm a residential loan officer - just about 30 years now and this thread piqued my interest as I have never had this come up. I went into some 2015 loans I did - conventional (secured by Fannie/Freddie) and FHA, VA and portfolio. The forms used are industry standard. The Good Faith Estimate does not have any notations for a demand feature, but the Truth in Lending does. On the small sampling I looked at, this demand feature box was never checked off.

My thought is either the lender you were dealing with didn't know how to correctly complete the TIL or it was some sort of portfolio/private lending loan that did have a demand clause. Either way, it is not standard on mortgages.

 

[Snazzylass]

My thought is either the lender you were dealing with didn't know how to correctly complete the TIL or it was some sort of portfolio/private lending loan that did have a demand clause. Either way, it is not standard on mortgages.

Thanks for weighing in! I know you know what you're talking about!

 

[Snazzylass]

So, if the mortgages get called will there be enough outrage to stop it?

I would think that very few people have enough funds to payoff their mortgage.

I agree with mdurette. I've been doing "refi's" for the past 6 years (yeah, I'll be looking for a new job soon). I see a lot of sloppy paperwork by other lenders were forms are not filled out completely, and even we don't have time to read all the docs line by line.

Lenders do not want to be in the RE business. It's expensive and they aren't good at it. It was a disaster in 2010, 2011 etc. Vehicles can be repossessed and taken to an auction and liquidated. It doesn't work half as cleanly with RE. Besides, there are laws in place that keep people in their home for maybe close to a year after they stop paying. Remember that? That's a loser's game for the lender.

On the other hand, I've help a lot of people with balloon clauses which were coming due. It's just best to be proactive and clean those up. In cases were customers cannot (and I've seen those), I suspect the lender will ultimately try to due a workout with the customer. This should be the last resort asI assume these situations would hurt the customer's credit.

 

[Laurie]

I'm a residential loan officer - just about 30 years now and this thread piqued my interest as I have never had this come up. I went into some 2015 loans I did - conventional (secured by Fannie/Freddie) and FHA, VA and portfolio. The forms used are industry standard. The Good Faith Estimate does not have any notations for a demand feature, but the Truth in Lending does. On the small sampling I looked at, this demand feature box was never checked off.

My thought is either the lender you were dealing with didn't know how to correctly complete the TIL or it was some sort of portfolio/private lending loan that did have a demand clause. Either way, it is not standard on mortgages.

This is what I love so much about TUG - the collective expertise on almost every subject under the sun.

 

[eschjw]

Two weeks ago we closed on a 10 year 2.5% mortage from our local credit union that had the demand feature checked. Prior to closing I was concerned about the feature and inquired about the implications. The loan officer told me that it was used to facilitate a foreclosure for nonpayment and had only been used once in the history of the credit union.

 

[dioxide45]

Two weeks ago we closed on a 10 year 2.5% mortage from our local credit union that had the demand feature checked. Prior to closing I was concerned about the feature and inquired about the implications. The loan officer told me that it was used to facilitate a foreclosure for nonpayment and had only been used once in the history of the credit union.

But they could do the same without that box checked. Non payment will lead to foreclosure. I wonder if they just made something up, kinda like the timeshare salespeople

 

[PigsDad]

But they could do the same without that box checked. Non payment will lead to foreclosure. I wonder if they just made something up, kinda like the timeshare salespeople

But going through foreclosure can be a long process. This would allow the bank to bypass much of that process, I would assume. Of course, they could be lying, but in general I would trust someone at my credit union over a TS sales person.

Kurt

 

[dioxide45]

But going through foreclosure can be a long process. This would allow the bank to bypass much of that process, I would assume. Of course, they could be lying, but in general I would trust someone at my credit union over a TS sales person.

Kurt

I don't know how it could allow them to bypass much of the process. If they demand on the mortgage and the borrower doesn't pay, they still have to go through foreclosure.

ETA: Perhaps comparing it to a timeshare salesperson wasn't the best comparison. Perhaps comparing them to a customer service phone rep would be better. When they don't know the answer, they tend to make something up.

 

[joestein]

A good discussion. When I was faced with this information 8 years ago - I was worried about what would happen if rates rose. However, I was worrying about nothing because the rates never rose much.

However, who knows what will happen when rates start to rise north of 6 or 7 percent.

 

[dioxide45]

However, who knows what will happen when rates start to rise north of 6 or 7 percent.

I am not sure who really controls the demand. Once a loan originator sells the loan on the secondary market, they don't care so much about the interest rate. They just collect payments and collect a service fee. Does the investor control the ability to demand or is it the mortgage servicer? Servicers con't really care about the rate. Originators made their money up front. Originators might like demands because it would force people to refinance at newer rates that those originators can resell. Investors would like the higher rates of return, but they bought the securities using money that was priced based on the rates at the time. Of course, for the most part, the Fed is the biggest buyer of these securities and they probably don't want to be demanding on all these mortgages which could cause huge issues in both the mortgage industry and housing.