Mortgage assumability -- the right of a home buyer to continue paying off the previous owner's mortgage at the same rates -- is being reluctantly allowed again by some state-chartered savings and loan associations in the West and Midwest as the result of suits brought by buyers. Federally chartered S & Ls have thus far resisted the practice, which assumes considerable importance in times of high interest rates.
To the buyer who has lower payments, to the seller who may charge a higher price because of a low-interest mortgage, and to the realtor who makes an easier sale, assumability is a boon. To lenders who cannot clear low-interest loans off the books, it's a curse.
In an earlier period, when mortgage interest rates were fairly low and steady, assuming a mortgage was common practice. But when interest rates began to rise rapidly in the early 1970s, lenders began to hold buyers to the (balance) "due on sale" clause frequently written into the contract, thus effectively preventing them from assuming the existing mortgage.
When some buyers began to take legal action, arguing that lenders had no right to demand the mortgage balance on sale, the Federal Home Loan Bank Board upheld that authority for federal S & Ls in 1976. The present trend, which began in California, involves only state-chartered associations. However, in order to stay competitive, federal S & Ls may eventually find they have to forego due-on-sale clauses.
Fairly recent court cases and laws in a half dozen or more states, primarily in the Midwest and West Coast, have accelerated the trend toward assumatiliby. There are no pending court cases in this area, according to the U.S. League of Savings Associations.
Also, several southeastern states have expressed interest in passing assumability legislation. Elsewhere, contracts often contain due-on- sale clauses that preclude a new buyer from continuing the mortgage payments. A District savings and loan executive said such clauses are standard in the Washington area.
Just how economical it is to pay off an old mortgage is shown by figures run up by Bill Neal of the National Association of Realtors chapter in New Mexico, a state that passed a bill in March.
If a new buyer takes over a 25-year $40,000 mortgage with a 7 1/2 percent rate after five years, the loan balance is approximately $37,000. The monthly payment at 7 1/2 percent interest is $273.43; at 10 percent, it becomes $357.07.
In some states assumption of an old mortgage also eliminates the loan origination fee, often a sizable part of settlement costs. New Mexico allows lenders to charge 0.5 percent. California lenders recently backed a bill to charge an assumption fee of 1 1/2 percent.
From the buyer's viewpoint, however, it is not always possible or advisable to assume a mortgage.
Take the example of a $100,000 house financed with a $80,000 mortgage; five years later, the market value of the house may have doubled. If the new buyer assumes the balance of the mortgage-say $75,000-he or she must either put $125,000 down or get a loan for a large portion of it. Second trust rates are higher than first mortgage rates, so in the end the buyer may well lose the advantage gained on the original lower interest $75,000 loan.
Assumability works best for the buyer within the first three years of the life of the mortgage. It's no wonder the trend began in California, where the population is very mobile. The average life of a mortgage there is five years, compared with seven nationally.
According to Oakland, Calif., lawyer Richard A. Goodman, assumability started becoming an issue in the early 1970s when, as the result of a court case, some lenders agreed to permit it. However, Goodman added, other lenders resisted the trent by "intimidating" potential borrowers. As the trend grew, lenders sought to recoup their losses by pushing variable rate mortgages, whose rates go up when the cost of funds does.
Assumability has become one of the most litigated issues in real estate today, according to the Mortgage Bankers Association. A year ago the California State Supreme Court ruled in favor of Cynthia Wellenkamp, a Riverside County homeowner, who had refused to comply with the Bank of America's demands that she pay 9 1/4 percent, instead of 8 percent on an existing mortgage.
While sympathizing with the Bank's wish not to get locked into a long term loan at low rates, the court said the bank was in the business of projecting interest rate increases. It added that when these forecasts "occasionally prove to be inaccurate, it would be unjust to place the burden of the lender's mistaken economic projection on property owners."
A similar view has prevailed in court decisions in Arizona, Arkansas, Florida, Michigan and Oklahoma. In new Jersey, which has a "due on sale" law, the court held that the lender could not raise the interest rate when the ownership of land was transferred from a corporation to its principal stockholder.
Other states have elected to pass laws outlawing "due-on-sale" clauses. These include Iowa, New Mexico and Georgia. A bill is also pending in Hawaii.
The Federal Home Loan Bank Board regulation affirming due-on-sale clauses is currently being challenged in a California suit involving Glendale Federal Savings and Loan. In that case the plaintiff, a developer named Fox, charged that the federal association should be bound by state law. The court ruled in favor of Glendale, but Fox is appealing. Should the decision be upheld, it would leave California with conflicting rulings. The Wellenkamp decision would permit buyers to assume mortgages made by national banks and state chartered S & Ls; but the Glendale ruling would not allow them to do so with mortgages made by federal S & Ls.
The question of federal preemption of state laws may ultimatel have to be decided by the Supreme Court. CAPTION: Picture, Complete with picket fence, this Williamsburg-style house is one of a new group being built by Brendan O'Neill on Glen Mill Road in Potomac. Called the Reid house, this is one of several models that O'Neill is building in a setting to resemble a street in Williamsburg. Outbuildings and hitching posts will be part of the trappings. The storage shed in back of this house was built to be a copy of a smokehouse. Prices range from $285,000.