The beleaguered savings and loan industry, which won a major moral victory in the Supreme Court yesterday, may not be able to take full advantage of the court's ruling, which takes away the right of home buyers in some states to assume existing, low-interest mortgages, housing experts said.
The court ruled that federally insured savings and loan associations can prevent mortgage assumptions by enforcing the due-on-sale clause in the contract. This obliges the owner of the house to pay off the existing mortgage at the time it is sold to the buyer. Federal Housing Administration and Veterans Administration mortgages, which are assumable, are not affected.
Almost half of the sales of existing homes last year involved assumable mortgages combined with new loans, bringing the average interest rate paid by the new owners to between 13 and 14 percent, well below the current market rate of about 17 percent. The National Association of Realtors has calculated that, if all assumptions were abolished, the resulting increase in interest costs would cause sales to drop by 500,000 units, or 22 percent, inflicting a tremendous blow to the already reeling savings and loan industry.
Trade groups representing mortgage lenders hailed the decison. The Federal Home Loan Bank Board, which regulates federally insured S&Ls, declared it a "major victory for the home buyers and the nation's housing finance industry." Bank Board Chairman Richard Pratt said enforcement of due-on-sale clauses will eliminate a two-tiered market composed of those who pay the going rate and those who get a bargain through assumption. It also will enable hard-pressed lenders to get rid of low-interest mortgages more quickly.
William Call, a Richmond real estate dealer, expressed his view more succinctly, if less elegantly. "Joe Public loses; all your lenders win," Call said.
The National Association of Realtors announced that it was "extremely disappointed with this decision because it could significantly increase the cost of housing at a time when many Americans do not qualify for home mortgages because of high interest rates."
The case originated in California, one of about 18 states that restricted lenders from enforcing due-on-sale clauses. Aaron Peck, an attorney for Fidelity Savings and Loan, which foreclosed after a homeowner transferred his house to a buyer without Fidelity's approval, said he believes that a curb on assumptions will cause prices to drop. It is said to be common practice for homeowners with assumable, low-interest mortgages to raise the price of the house to reflect the financing bargain the buyer is getting.
Pratt expressed confidence that federally insured S&Ls--which he said have been keeping mortgage rates up to compensate for assumptions-- will lower them in the future. He declined to predict by how much. Linda Tsao Yang, California's savings and loan commissioner, predicted that state-chartered S&Ls there will press for a due-on-sale law so their federal counterparts will not keep a competitive advantage.
The NAR, which had foreseen dire consequences for the housing industry if the Supreme Court ruled against assumptions, yesterday called on S&Ls to use moderation in enforcing due-on-sale clauses "in a way that will minimize foreclosures. We urge the blending of existing mortgages and market rates." It also said it would explore the possibility of congressional action to bring back assumptions.