I'm Back

I greatly enjoyed my initial foray into blogging. Like Lost, those few of you who have actually read this might have wondered when the next season would begin. Here's my first for the new season. The topic: the intersection of residential mortgage lending and probate.

Scenario: Guy dies, owning a home; has two sons, no other heirs. The sons inherit the home by dad's will. Probate lawyer deeds home to two sons, who are 18 and 20; not minors, but no established credit. That deed would ordinarily trigger the due-on-sale clause of the mortgage, but for Garn St. Germain, a federal law that preempts state law and forbids the exercise of a due-on-sale clause in such an event. Sons continue to make loan payments, but worry about telling the bank that their Dad died because they don't want to lose the home. They live there and want to remain there, for now.

Question: What happens to the promissory note when Guy dies? I imagine there are two alternatives: (1) note provides that death is an event of default, which enables the bank to accelerate the debt; or (2) note is enforceable against the estate, but not in default. If death is an event of default, and the bank can accelerate the loan and foreclose the mortgage, doesn't that basically circumvent the protections of Garn St. Germain? (Recall that GSG prohibits the lender from enforcing the due-on-sale clause, which would be triggered by the deed conveying the home from Guy to sons, but does not apparently prohibit the lender from declaring a default under the note for the death of the borrower.) In the second case, suppose the bank does not make a claim against the estate? The head of our trusts & estates practice group tells me that he rarely, if ever, sees such a claim against an estate. His theory is that the note may be unenforceable unless such a claim is made. In that case, sons may not have to pay the note any longer, and the lender winds up with an unenforceable mortgage (because it is no longer supported by a valid debt).

I welcome your thoughts in the comments. Nice to see you again.