Don’t expect lenders to refinance poorly formed trust loan
More and more borrowers are taking advantage of record-low mortgage interest rates, reducing their monthly payments on loans they might have refinanced just a few years ago — or maybe within the past several months. Like anything else, some loans are slam dunks; others are extremely complicated.
One example of a difficult loan for lenders to resolve involved a trust for a young man. The trust was established as a result of a will executed when his parents passed away. The main asset of the trust was a home he would receive at age 35. The mortgage of the home was being paid from a separate account outside of the trust.
“It got more complicated from there,” said Mark Palmer, a mortgage banker. “The trustee had moved the home into the name of the sister of the deceased for the purpose of the refinance. She was not part of the trust, and it raised all sorts of title insurance issues.”
According to Bob Pittman, an attorney specializing in trusts and retirement planning, the trust was not properly constituted and not properly administered.
“Trusts may spring to life upon the death of someone, but they must follow very specific rules, and then lenders and title companies are able to deal with them,” Pittman said. “The attorney involved should have asked for help from an attorney experienced in trust law.”
Palmer said he has refinanced several loans of homes within a trust, but some lenders often do not understand the guidelines that need to be in place for proper execution.
Pittman concurred, but was not as kind with the lending industry.
“When you go to refinance a home that is held in your revocable living trust, you will generally find lenders in two categories,” Pittman wrote. “Most lenders will ask for information on your trust and a letter from an attorney, usually the attorney who prepared your trust. The other category of lender is either uninformed or too lazy to understand the process with a trust. These lenders will ask you to transfer your home back to your individual name and then, when the loan is finalized, allow you to transfer your home back to your trust. This route works, but is time consuming and more expensive.”
Pittman said the “enlightened” lenders will want an attorney to provide an opinion letter along the following components:
• that in the attorney’s opinion, the trust is validly created, duly existing and enforceable under state law, and that holding title to the property in the trust does not in any way diminish the lender’s rights as a creditor;
• that the trust is revocable and the borrower established the trust during the borrower’s lifetime to be effective during the borrower’s lifetime;
• that the borrower is settlor (maker of the trust), beneficiary and a trustee of the trust; and
• that the borrower is duly qualified under applicable law to serve as trustee and is fully authorized under the trust and applicable law to hold title to, manage the property placed in trust, borrow money and pledge or otherwise encumber the trust assets absent written consent from the beneficiary or if consent of the beneficiary is required it has been so granted.
This opinion letter may be obtained from any attorney, but the attorney who drafted your trust will be in the position to readily render this opinion, saving you time and money.
Palmer said the refinance did eventually happen, but not through traditional channels. After additional expense and stress, an alternative lender finally pounded out a loan, reducing the rate from 7.625 percent to 4.75 percent.
“The moral of the story is that a trust should be set up by an attorney and accountant with extensive retirement, financial planning and estate planning experience,” Palmer said. “Additionally, not everyone should set up a trust. Some should consider selling assets while still alive or transferring while still alive. If they choose a trust, there are multiple trust options available — much in the same way as one would pick health insurance. All of the plans will pay the doctor bills; however, one will meet your specific needs better than another.”
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.
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