View Full Version : Acceleration and Demand Clauses on Mortgages?
06-12-2008, 11:55 AM
I've been researching these clauses but I can't find a lot of information out there aside from their definitions. Do you know how common a demand clause is? Acceleration clauses are very common, I know. And if the banking industry collapses, what should we expect in regards to mortgages? Anyone have an inside scoop on this subject?
06-12-2008, 12:27 PM
Can you give an example of one of either of these clauses?
Most state laws prohibit lenders from demanding the balance owed on the mortgage, but only if your payments are current.
If you fall behind, lenders are typically required to send you notice of default and give you something like 30-60 days to become current before they proceed with foreclosure...
06-12-2008, 12:32 PM
How commonly it is used will depend on the lender and how willing they are to work with the borrower. Right now, they seem to be reluctant to do so. The clause can also be used if say for example the borrower cannot provide proof of adequate insurance. I have to privide my lender with proof of insurance periodically.
A mortgage acceleration clause is added to a mortgage loan agreement as a protection to the lender. Demanding the loan outstanding amount in full is a right legally given to the lender. It empowers lenders to demand paying the mortgage if the borrower violates any of the obligations in the mortgage agreement and is a commonly used mortgage agreement demand feature.
Before the acceleration clause is enforced, there is usually a grace period allowing the borrower to catch up with payment. If they fail to do so, lenders get the right to call the loan and start foreclosure. Some lenders would agree to extend the grace period and will be willing to help the borrower stay in ownership, disregarding their right of foreclosure; others will take advantage of the right to demand immediate full repayment of the loan.
There are other demand features used protectively by the lender against particular events specified in the agreement - events may include payment default, refinancing, sale or bankruptcy, to name a few. A due on sale feature allows the lender to require full settlement of the debt if the owner sells. A demand clause will enable the lender to use any of the abovementioned events as a reason to take any action and even increase loan rates if market rates go up.
06-12-2008, 12:35 PM
A demand clause allows the lender to demand repayment for any reason. It protects the lender against having low-rate loans assumed by home buyers in a rising rate market just as effectively as a due on sale clause. But in addition, a demand clause permits the lender to raise your interest rate in a rising rate market even when you aren’t selling your house. The lender can force you to accept a higher rate by threatening that if you don't agree, the loan will be called.
A demand clause is also better (for the lender) than an acceleration clause. An acceleration clause allows the lender to call the loan if the borrower violates some contractual provision, such as a requirement that the loan must be repaid upon sale of the property.
Theoretically, the demand clause (no matter what justification given) allows the lender to call a loan for any reason at all, at their own discretion.
An acceleration clause would allow the lender to demand payment in full upon breach of contract. Being a day late can be considered a breach in contract.
If these terms are in loan documents then is it safe to say that you are signing a voluntary contract and thus it is enforceable? If state laws forbid either of these situations, why would they be in contracts?
We *assume* there are laws that protect homeowners, but are there really? What are they? I've been searching and I can't find them. Is it just an assumption by society? I've read they were passed after the Depression when banks were calling loans in an attempt to save themselves but what about now? Have laws been written to negate those laws?
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