In a victory for struggling savings and loans and a defeat for the hard-pressed real estate industry, the Supreme Court yesterday upheld a federal regulation allowing restrictions on assumable mortgages.
The 6-to-2 decision allows federal savings and loans to ban assumption of mortgages despite state laws permitting them.
Real estate interests had vigorously opposed yesterday's action by the justices on the grounds that assumable mortgages have enabled millions of home buyers to purchase at lower interest rates.
Lending institutions said the practice was draining them of millions of dollars in new and more lucrative loans at a time when they need money most.
In two other important rulings yesterday, the justices limited the obligations of local school districts to provide extra help to handicapped students and held unconstitutional the new bankruptcy court system created by Congress in 1978.
At issue in the mortgage ruling was a Federal Home Loan Bank Board regulation giving federal savings and loans a choice of allowing assumption of low-interest, long-term loans or of demanding payment in full when a home with a "due on sale" provision was sold.
The regulation had been challenged by laws and court rulings in 18 states, including Virginia, as part of an effort to protect consumers and the real estate industry from the paralyzing impact of high mortgage interest rates.
Those states, the justices said, are powerless to override a federal regulation. Justice Harry A. Blackmun wrote the opinion for the court. Justice Lewis F. Powell Jr., without explanation, did not participate. Justices William H. Rehnquist and John Paul Stevens dissented.
The case was one of the most important confronting the court this term and was a direct result of the hard times facing two of America's most crucial businesses: mortgage lending and real estate. Mortgage assumption allows the seller of a home to pass along to the buyer an existing home loan, sometimes negotiated years earlier at low interest rates. For example, an 8.5 percent loan obtained in 1975 might be assumed in 1982 when prevailing interest rates are 14 or 15 percent. Assumption is often the only way some purchasers can buy.
But assumptions, a boon to buyers and sellers, deprive the savings and loans of acquiring new customers at prevailing, or higher, interest rates. The practice, according to industry spokesmen, is costing them $800 million a year when they can least afford it. In addition, the lending industry said the practice forced rates up for millions of home buyers without access to assumable loans.
As a result of the practice, the Federal Home Loan Bank Board, which regulates all federally chartered savings and loans, promulgated a regulation in 1976 allowing the lending institutions to require payment in full of the old loan at the time of a home sale. The new buyer must then renegotiate at higher interest rates.
Yesterday's case, Fidelity Federal Savings and Loan Association vs. De La Cuesta, stemmed from a California appellate court decision rendering the "due on sale" clause unenforceable.
Blackmun said the conflict was a conventional one between federal and state authority and, as is conventionally the case, federal power prevails.
The fact that the controversy involves real estate, sometimes thought to be a matter of local or state control, does not change the requirement of federal preemption, Blackmun said.
"Congress delegated power to the Federal Home Loan Bank Board expressly for the purpose of creating and regulating federal savings and loans so as to ensure that they would remain financially sound insitutions able to supply financing for home construction and purchase."
Federal regulations, he said, "have no less preemptive effect than federal statutes."
Blackmun also rejected the argument that the federal regulatory board had exceeded its authority in promulgating the regulation. In setting up the regulatory framework during the Great Depression, Blackmun said, "Congress plainly envisioned that federal savings and loans would be governed by what the Board--not any particular state--deemed to be the 'best practices.' "
Justice Sandra Day O'Connor agreed with Blackmun's opinion, but wrote separately as well to say that the Federal Home Loan Bank Board's authority to preempt state law is "not limitless."
Rehnquist, joined by Stevens, said the board had overreached its authority. "Discharge of its mission to ensure the soundness of federal savings and loans does not authorize the Federal Home Loan Bank Board to intrude into the domain of state property and contract law that Congress has left to the states," he said.