Final answer:
A due-on-sale clause in a mortgage or trust deed prevents the use of a wraparound mortgage by requiring the full loan balance to be paid if the property is transferred. This protects lenders, who during the subprime mortgage crisis were often engaging in the risky securitization of loans.
Step-by-step explanation:
The clause in the original mortgage loan or trust deed that would prevent the use of a wraparound mortgage by a seller is commonly referred to as a due-on-sale clause. This provision stipulates that the full balance of the loan becomes due and payable if the property is transferred or sold without the lender's prior written consent. The due-on-sale clause is designed to protect lenders by preventing borrowers from transferring the responsibility of the original mortgage to another party without the lender's approval.
In the context of subprime loans and the securitization process, this clause becomes particularly relevant. Banks and other financial institutions engaged in the practice of securitizing loans, effectively off-loading the risk to investors who purchased the mortgage-backed securities. These institutions may have been less diligent in ensuring borrowers' ability to repay the loans, leading to the financial crisis of the late 2000s.