The Supreme Court agreed yesterday to decide whether federally chartered savings and loan associations can force homeowners to pay off their entire mortgage if they attempt to let a buyer assume their loan.
The case also is expected to settle the broader question of who has ultimate authority over regulation of federally chartered savings and loans--the Federal Home Loan Bank Board or the states.
The federal agency contends that the court's ruling could restrict its authority over S&Ls and determine the ability of lenders to select customers, set interest rates and determine the terms of mortgages such as those in the new variable-rate loans.
At issue is whether FHLBB regulations allowing mortgages to have due-on-sale clauses can be overruled by state laws forbidding such clauses.
Due-on-sale clauses allow savings and loans to force property buyers to pay their mortgages in full when they allow others to assume their mortgages or in some other way transfer their property to another party without the lender's authority.
In this way, lenders--particularly at times of high interest rates--can be assured that when the property is sold they can charge new, higher interest rates.
The case to be decided involves property buyers who took out mortgages containing due-on-sale clauses from Fidelity Federal Savings and Loan Association in California. The purchasers then transferred their property to a third party without Fidelity's approval.
Fidelity demanded that the purchasers pay the balance of the mortgage, then it foreclosed on them. The original purchasers took their case to court, alleging that California law prohibited burdensome restrictions on property such as the due-on-sale clause.
Although under the U.S. Constitution, federal law preempts state law, the purchasers said regulations made by a federal agency don't quite have the force of law made by elected officials.
A state appeals court, siding with the purchasers, held that the California law preempted the FHLBB regulation.
Neither Virginia, Maryland nor the District have prohibitions on due-on-sale clauses, according to the U.S. League of Savings Associations.
"The continuation of spiraling interest rates which increase the cost to savings and loan associations of acquiring money and the existence of fixed, long-term loan commitments at lower interest rates has placed the entire federal savings and loan system in a precarious financial situation," the FHLBB said in a friend-of-the-court brief.
"The due-on-sale clause is one of the few contractual tools available to these associations to update the conventional mortgage portfolio in an attempt to remain financially viable."
The less time remaining to pay on a mortgage, the more valuable it is when sold in the secondary market. The automatic due-on-sale clause reduces the number of years remaining on the note because most people generally sell their homes before the 25- or 30-year maximum length of the mortgage, according to the savings and loan industry.
A state's law forbidding due-on-sale clauses would make the loans in that state less appealing to the secondary market.