If you're a homeowner with a mortgage under 12 percent -- or a potential buyer of a house with attractive financing on it -- two new developments in the nationwide legal war over mortgage assumptions could prove important to you.
First the good news: A landmark court decision has upheld a state legislature's right to stop mortgage lenders from exercising their controversial "due-on-sale" powers against consumers.
The due-on-sale clause contained in most American mortgages since 1970 gives lenders the power to prevent borrowers from passing on their low-interest rates to new home buyers via loan assumptions. Since home buyers and brokers in most real estate markets find sales difficult with today's 15 percent to 16 percent mortgage rates, assumptions of existing loans have become increasingly important tools.
The new court decision on the issue -- from the Supreme Court of Minnesota -- holds that when the people of a state expressly limit lenders' rights to raise interest rates on existing home mortgages at the time of assumptions, all lenders in the state have to follow the law.
The court rejected the argument put forward by a federally chartered savings and loan association in Minneapolis that federal regulations preempt state laws and that S&Ls can ban assumptions or raise rates no matter what a state legislature says.
The Minnesota decision is significant because lenders in dozens of other cases pending in court around the country -- including Virginia, California, Florida, Georgia, Colorado and Massachusetts -- have made the same argument. They maintain that the Federal Home Loan Bank Board alone has the legal power to tell them how to write their mortgages, and it allows them total freedom in setting rates or blocking assumptions. State laws to the contrary are binding on state-chartered S&Ls and banks, they argue, but on no one else.
Minnesota's Supreme Court ruling won't directly affect legal battles outside its borders, but it could encourage legislators elsewhere to pass "pro-assumption" laws similar to Minnesota's. State law in Minnesota prohibits any rate increase by a home lender when a borrower transfers a loan to a new buyer, provided the new buyer is creditworthy and the lender's security in the property isn't impaired.
Legislators in six other states (Illinois, Michigan, Georgia, South Carolina, New Mexico and Colorado) have put similar restrictions on lenders' powers or have limited the amount of rate increase a lender may charge at the time of a loan assumption. Consumer advocates believe that as many as 20 or 30 additional states would consider passing pro-assumption laws if they were convinced the courts would uphold their constitutionality.
Minnesota's decision isn't the final word by any means -- the legal war over "due-on-sale" won't be over until the U.S. Supreme Court gets involved -- but it's an important bit of encouragement.
Now the bad news: The Reagan administration has joined the fight over mortgage assumability -- on the side of the lenders.
A new policy report delivered to Congress by the Department of Housing and Urban Development (HUD) opposes any form of state or national restrictions against lenders' rights to raise rates or block assumptions.
The report on due-on-sale -- requested by Congress last year during debate over 1980's federal housing bill -- warns that the financial stability of the nation's home lenders would be jeopardized severely if states or Congress forced them to allow assumptions without rate increases. Portfolio losses at the nation's state-chartered S&Ls alone could top $10 billion if every state adopted laws similar to Minnesota's or Michigan's, according to the HUD study.
The report to Capitol Hill also suggests that S&Ls and banks would have to charge new buyers even higher rates than they do today if they weren't allowed to prevent assumptions. Although lenders' existing investment pools of 7-to-11-percent home mortgages produce red ink, those mortgages with legally binding due-on-sale clauses tend to be short-term losers, according to the study. That's because typical American homeowners move and sell their property once every five to seven years, thereby permitting S&Ls to write new loans on the homes at higher interest rates.
Turn those same relatively short-term loans into freely assumable mortgages, warns HUD, and lenders will be stuck with them for their full 20- to 30-year terms. Homeowners with 8 percent loans simply will pass them on, from buyer to buyer, almost indefinitely. The red ink would run for decades, and S&Ls would have no choice but to raise the prices they charge buyers who need new financing.
While the Reagan administration's warnings and policy recommendation are likely to get close attention on Capitol Hill, they're not likely to produce legislation. The report endorses the longstanding positions on the issue staked out by the federal banking regulatory agencies and the thrift industry, but calls for no new initiatives from Washington.
The key arenas for action will continue to be in the state legislatures and the courts, where the fights between lenders and consumers are certain to intensify in the coming year.