The assumable low-interest mortgage, now prized and protected like a rare Ming vase by its fortunate owner, soon may be nudged off its last protective pedestal by the Reagan administration.
White House and Treasury officials are working with the Federal Home Loan Bank Board on a plan for savings and loans which, among other things, would prevent states from overruling S&Ls that prohibit assumptions, according to administration officials. The President's Commission on Housing is preparing to endorse the same proposal in a report next month.
The legal status of attempts by S&Ls to end assumability is being hashed out in federal and state courts. Since the early 1970s, most mortgage lenders have included due-on-sale clauses in home-loan agreements. These clauses make the balance of the loan due and payable when a house is sold. This way, lenders can get low-interest loans off their books so they can use these funds more profitably.
Federal courts generally have ruled that federally chartered institutions can enforce due-on-sales clauses to prevent assumptions, while other court rulings have let individual states disallow the clauses at state-chartered institutions. Some of the cases are likely to be appealed to the Supreme Court.
The proposal being worked on by the administration mainly would affect persons with mortgages at state-chartered S&Ls in some 17 states where due-on-sale clauses may not be enforceable.
In times of soaring interest rates, an assumable loan can be worth hundreds of dollars to home buyers and can be a strong selling point. For example, a $100,000 mortgage at a 10 percent interest rate entails a monthly payment of $877; at today's 17 percent rate, the payment would jump to $1,425.
Gordon Luce, chairman of the presidential commission's private-sector financing committee and head of San Diego Federal Savings and Loan Association, acknowledged that an end to assumability would be unpopular with home buyers and sellers but said assumptions prevent thrifts from making money and staying healthy.
"We can't have it both ways," Luce said. "When you put $5,000 in an account, you want to get 16 percent, but when you go to get a home loan, you want it at 8 percent."
The financing committee will recommend that the commission endorse the idea of pre-empting state laws and upholding due-on-sale clauses of all S&Ls, Luce said.
Bank board and administration officials are working on details of such a proposal, which could be ready next week, an FHLBB spokeswomen said.
Assumability will be the subject of House Banking Committee hearings next month, a spokeswoman said.
The housing commission met yesterday and adopted a statement of principles that reads like a treatise by the Adam Smith of housing, stressing free-market approaches and private-sector solutions.
"Reducing the rate of inflation through long-term and consistent fiscal and monetary restraint, which will reduce mortgage and other interest rates, is the most important contribution government can make to housing stability and to the economy as a whole," it stated, for example.
At the urging of former senator Edward Brooke, a member of the commission, the panel amended the statement, however, to state that government has a continuing role in addressing the shelter problems of the poor.
The commission must make a preliminary report to the president and the secretary of Housing and Urban Development by Oct. 31.