In what appeared to be a significant legal setback for federally chartered savings and loans in California, a state appeals court in San Francisco ruled this week that the associations cannot prohibit buyers from assuming old, low-interest mortgages when they purchase a home or other property.
The broad ruling in effect will apply to federally chartered S&Ls the same standards determined for state-chartered associations in the 1978 Wellenkamp decision by the California Supreme Court. In that case, state-chartered S&Ls were prevented from enforcing due-on-sale clauses except in rare instances.
If the Monday ruling is upheld by the California Supreme Court -- and the case is certain to be appealed -- homeowners with existing low-interest mortgages at federal S&Ls may have an easier time if they decide to sell. Moreover, many buyers who have assumed existing mortgages without notifying the lending institution can breathe easier.
At the same time, it would remove at least one incentive for state-chartered S&Ls to convert to federal S&Ls as many are now rushing to do. [Last week a federal appeals court in Richmond upheld lenders' right to a due-on-sale clause in mortgage contracts. The case involved a Fairfax, Va., home sale.]
While the California case, Panko v. Pan American Federal, involves a mortuary that was bought for investment purposes and converted to rental housing, the legal principles would apply to residential property purchased by owner-occupants, lawyers for purchaser Stanley Panko said.
The ruling is the first state appellate court decision on the applicability of the Wellenkamp ruling to federally chartered S&Ls in California.