What began last spring as a minor misunderstanding by the D.C. City Council is threatening to turn into a multimillion-dollar mess for the Washington residential real estate business.
If the worst fears of the real estate community are confirmed, thousands of D.C. home buyers may soon be claiming they are entitled to refunds for part of the closing costs they paid on homes purchased between March 1984 and January 1985.
Last week, one family collected more than $2,000 after complaining that they had been required to pay more "points" on their mortgage than was permitted by District law. A point is a fee of 1 percent of the total amount of the mortgage that is paid up front by the borrower.
D.C. officials say the City Council never intended to put a limit on mortgage points, but did so by accident last spring during a routine rewriting of the District's lending laws.
Accident or not, the law that went into effect last March 14 said lenders could charge only one point on a residential mortgage loan except in special cases.
The one-point ceiling was lifted last month when the City Council passed emergency corrective legislation at the urging of the real estate industry.
But by that time, thousands of District home buyers had taken out mortgages, and many of them had paid two, three or even four points to get their loans.
Some local lenders observed the one-point limit, but others -- perhaps a majority -- continued to charge more. Published reports of mortgage interest rates last fall show many lenders asking more than one point. Several people who bought homes last year said they paid more than one point.
Home buyers never knew they were being overcharged. Because the ceiling was imposed by mistake, it was not mentioned in news reports on changes in the D.C. lending laws. Even when the limit was discovered, it drew little attention. City officials made no effort to inform consumers of the new limit and, as far as can be determined, the city did nothing to see that lenders were complying with the one-point limit.
Why did banks, savings and loan associations and other lenders ignore the new law?
Some claimed they didn't know about it -- though anybody who has passed high school civics can tell you that ignorance of the law is no excuse.
Others said they knew the council didn't mean to set a limit on points, so they didn't pay any attention to the actual wording of the law. Many apparently relied on the advice of the Washington Board of Realtors, which last spring sent a letter to its members saying lenders were free to charge as many points as they wanted.
The Board of Realtors told its members exactly what they wanted to hear.
Mortgage money would have dried up quickly in the District had the one-point limit been enforced. Without mortgage money, home sales would have halted, and the real estate industry would have been hurting. Lenders would not make loans in the District if they could not charge the same points they collect elsewhere. The up-front fees are one of the most important ways for lenders to make money on mortgages. The points provide an immediate payback for the lender, who may have to wait 30 years to collect the rest of the loan.
The real estate and mortgage people say they relied on the advice of City Councilmember John Wilson, who assured them the council did not mean to impose a one-point ceiling. Wilson chairs the finance and revenue committee, which drafted the legislation.
A committee chairman's word is not law, however, and last November the District's Corporation Counsel ruled that the word from Wilson was wrong. "It is my view that D.C. Code Sec. 28-3301 (e)(2) establishes except as provided therein, a one-point limitation on federally related mortgage loans," said Counsel Inez Smith Reid. "If this result is contrary to the intention of the Council, legislation should be enacted to resolve the problem."
The problem, however, was not resolved by the legislation passed by the council late last month. The council repealed the limit effective immediately, but did not make its action retroactive, leaving in limbo all mortgages made between mid-March and the end of January. More than 6,000 residential mortgages were issued in the District during that period; without looking at each mortgage, it's not possible to tell how many buyers paid more than one point. With home prices hovering in the $100,000 range, if even half the buyers paid one extra point, the potential overcharges could add up to $3 million.
City officials say they are getting a growing number of requests for copies of the law and the Corporation Counsel's ruling from home buyers who want to try to get their money back.
One couple who paid three points when they bought a house in December said they called their lender after seeing a story by Post reporter Ann Mariano in the real estate section on Jan. 26. Without admitting the extra points were illegal, the savings and loan immediately repaid two points, plus interest.
The savings association holding the couple's mortgage acknowledges it has given one refund, but insists that decision does not set a precedent. Requests for refunds will be considered on a case-by-case basis, said the S&L's chief executive. Like the home buyers involved, he agreed to discuss the dispute on the condition he not be named.
Real estate sources say there have been few requests for refunds so far and -- to the best of their knowledge -- no lawsuits have been filed against lenders who allegedly violated the one-point ceiling. With only a couple of thousand dollars at stake, few individual borrowers can afford to take their case to court. What the industry is worried about is a class-action suit on behalf of all home buyers who paid more than one point.
There is also talk of asking the council to take the lenders off the hook by making repeal of the one-point ceiling retroactive to last March. Advocates of that approach say home buyers seeking a refund are just trying to take advantage of the City Council's mistake to save a few bucks. There was no one-point limit before, there was never intended to be one and there is none now, so why should people who bought houses during this nine-month period pay less than others before or after them?
Why? Because the law is the law. We believe in this country in the rule of law, not the rule of men. We believe that our laws mean what they say, even when that may not be what their authors intended. Retroactively legalizing the overcharges would be outrageously unfair to the many local lenders who obeyed the letter of the law, even though it would have been in their economic interest to do otherwise. And it would be unfair to those responsive mortgage holders who have already given refunds to customers who asked for them.
The City Council made one mistake when it accidently set a ceiling on mortgage points, but it has wisely avoided the greater error of rewarding those who chose to ignore the law as it was written. If there is any doubt, the courts should decide whether refunds are due to home buyers who paid more than one point while the law was in effect.