Your ability to sell your home at the price it's really worth -- or to buy a house in the first place -- is at stake in a rapidly growing series of legal battles under way in courtrooms around the country.
The protagonists are federally regulated finaincial institutions on one side and homeowners and buyers on the other. The issue is the price of mortgage money. Should lenders be allowed to prohibit home buyers from taking over current owners' loans at their original interest rates, which may be 7 to 10 percent?
If you have bought a home within the past eight years and financed it with a conventional (non-FHA or VA) mortgage from a federally chartered savings and loan association (S&L) or bank, your mortgage documents probably prohibit assumptions without rate increases.
You may not have noticed the boiler-plate language in "paragraph 17" of the standard deed of trust or mortgae form now in use in all 50 states. But its importance to you -- and to your lender -- has been increased dramatically during the past year by the rapid rise in interest rates.
Paragraph 17, prescribed by two congressionally chartered financial corporations based here, allows lenders to demand immediate payment of your loan if you sell or "transfer" any of your interest in the property to someone else. It also allows lenders to raise the interest rate on the loan to any level desired as the price for permitting an assumption by another buyer.
In practical terms, paragraph 17 means that if you're selling your home with an 8 1/2 percent mortgage in the midst of a market with 12 to 14 percent rates -- and buyers can take it over with the property -- you've got a big leg up over other sellers. If your loans isn't assumable at a below-market rate, on the other hand, you've got a potential problem.
When rates jumped to 16 to 18 percent three months back, some sellers with assumable, low-rate loans could actually command premium prices for their houses. Such a property sold for more than it otherwise would have commanded because the underlying loan was so attractive in a dismal loan market.
Sellers whose loans were subject to paragraph 17, however, typically had to cut their asking prices or let the property sit unsold for months. Buyers couldn't qualify for a new loan at the going rates and pay the fully inflated price for the home. Sellers often took 5 to 15 percent less for their home.
Lenders defend their right to prohibit low-rate assumptions as vigorously as consumer advocates denounce it. Federally chartered S&Ls view the power to raise rates to market levels as sacrosanct, vital to their financial existence. They also see it as a federally guaranteed right, expressly granted to them by the regulations of the Federal Home Loan Bank Board.
The lender may have written the loan at 8 percent three years ago, when the cost of his deposit -- the average interest rate paid to savers -- was 6 percent. But the cost of new money in early 1980 jumped to 13 to 14 percent. That 8 percent loan, a losing proposition for most of its life, became a big loser in 1980. Multiply that 8 percent loan by hundreds, or by thousands in the case of larger S&Ls, and you can see why some institutions operated in the red during late 1979 and most of 1980.
Home sellers and buyers who have been hit with increases at assumptions that took the rate from 7 to 8 percent to 14 percent increasingly have taken their S&Ls to court. Dozens of cases are popping up around the country, challenging the application of paragraph 17 to a wide variety of assumptions, as well as attacking the legal basis for its existence.
The S&Ls have the strong backing of the Federal Home Loan Bank Board, which submits "friend of the court" briefs in major cases. Consumers are getting legal help from local realty brokers and have state laws on their side limiting rate accelerations in Georgia, Colorado, Minnesota, Arizona and California, among others.
Neither side will be able to claim victory until the issue is ruled on by the U.S. Supreme Court. That probably won't occur for two years.
In the meantime, what's a sane course for S&Ls and their home owning and buying customers to pursue? There's no question about it: Both sides need to be flexible on assumptions. Sellers can't reasonably expect an S&L to swallow a long-term, avoiding loss. Nor do S&Ls need to accelerate rates on assumptions to the maximum market levels.
It is far better for S&Ls to offer partial rate increases, as some are doing here now, from a 7 percent loan to a 10 1/2 percent rate or a 9 percent loan to an 11 percent rate. And it is far better for their customers to go along with moderate increases and avoid long, drawn-out lawsuits that nobody really wins except lawyers.