The Supreme Court heard oral arguments yesterday on a case that has significant economic as well as legal ramifications for the future of the housing industry.
The case, Fidelity Federal Savings and Loan Association v. Reginald de la Cuesta, focuses on whether a home buyer can assume an existing mortgage at a low interest rate or, conversely, whether the lending institution can enforce the due-on-sale clause in the contract by forcing the owner of the house to pay off the existing mortgage at the time it is sold to the new buyer.
The case involves a California lender who foreclosed after a homeowner transferred his house to a new owner, or third party, without the lender's approval. (This is not the same Fidelity S&L taken over by federal authorities two weeks ago.)
Although the contract contained a due-on-sale clause, de la Cuesta took the S&L to court on grounds that California law prohibited enforcement of such clauses. He contended that a regulation made by the Federal Home Loan Bank Board to govern federally insured S&Ls did not have the force of law. A state appeals court upheld the purchasers, stating that the California law preempted the FHLBB regulation.
Assumption of existing mortgages is permitted by law in at least a dozen states, although it may take place in others at the discretion of the lender. According to the National Association of Realtors, which favors assumption, the ability of buyers to assume mortgages under market rates or to blend them with new loans at higher rates was worth about $60 billion last year. Stated another way, if purchasers had not been able to assume mortgages, the $175 million worth of sales of existing houses in 1981 would have been 25 percent lower, and three quarters of a million fewer houses would have been sold.
The other side of the argument is made by the lenders. In a period of high interest rates, the only way a mortgage lender can increase the yield on his loan portfolio is by getting rid of the old, low-interest loans at the time of sale and making new loans, the U.S. League of Savings Associations contends. The league was unable to put a dollar figure on the value of enforcement of due-on-sale clauses but made clear that it believes that the precarious financial position of many of its members is attributable in part to assumptions.
The high court heard almost no discussion yesterday of the economic aspects of the case. Chief Justice Warren Burger alone asked whether the arguments for due-on-sale clauses had any connection with the solvency of savings and loans. The FHLBB holds that it does, but the attorney for Fidelity said that it does not.
Instead, the case was presented as a federal-versus-state issue. Lawyers for Fidelity and the bank board argued that federally insured S&Ls should be governed by federal regulations, superseding state laws. The attorney representing de la Cuesta contended that, although the FHLBB has the right to govern federally insured S&Ls, it doesn't have the authority to involve itself in the interpretation of contracts between S&Ls and third parties, or customers.