A new federal effort to kill one of the few money saving tools available to home buyers and sellers in a tough real estate financing market -- mortgage assumptions -- has been quietly launched by the Treasury Department.
Last week, without a formal press announcement notifying the general public, Treasury issued proposed bank regulations that could significantly affect home finance. If adopted later this year, the proposals would nullify pro-consumer legislation and judicial decisions in a growing number of states that guarantee home sellers the right to pass on their existing mortgages to new buyers without massive interest rate increases.
In effect, the regulations published in the Federal Register tell the 4,600 national banks in the United States to pay no attention whatsoever to consumer safeguards imposed on them by their state legislatures or courts regarding mortgage assumptions.
If a state legislature limits the rate increases banks can charge consumers when home mortgages are assumed by new buyers (as have Georgia and Colorado, among others), national banks could ignore those limits.
If state courts rule against banks' attempts to prevent assumptions of low-rate loans by credit-worthy buyers -- as have courts in California, Florida, Michigan and Minnesota, to name only a few -- national banks could pay the court decisions no heed, under the Treasury's proposed regulations.
[A federal appeals court in California this week rejected efforts by the savings and loan industry there to overturn state court decisions that upheld assumable mortgages.]
This new hardline assertion of federal preemption power over state mortgage-lending laws puts Treasury shoulder to shoulder with the Federal Home Loan Bank Board, which regulates federally chartered savings and loan associations.
The two agencies are under intense pressure by lending institutions with federal charters to protect them against what they view as a rising tide of consumer-oriented mortgage finance reforms in state capitals and courtrooms.
The stakes involved are immense. On the one hand, lenders with large portfolios of 30-year loans from the 1970s carrying 7 percent to 10 percent interest rates are swimming in red ink. They want to get these loans off their books as fast as possible. And the fastest method is to prevent borrowers from passing on low-rate loans (via assumptions) to the subsequent buyers of their houses.
Lenders insist that the so-called "due-on-sale" clauses -- included in the boiler-plate fine print of most mortgages since the 1970s -- give them the legal right to demand full repayment of the loan amount whenever a borrower seeks to sell or transfer the title to the property to someone else. Should borrowers not comply, lenders assert that they have the right to foreclose on the property to get their loan money back.
State legislatures and courts in nearly 20 states have moved to limit lenders' powers to prevent assumptions. Several states have limited the amount of rate increase a lender can demand by 1 percent to 2 percent above the initial rate, provided that the new purchaser assuming the loan is credity worthy. Courts in more than a dozen states have defined anti-assumption clauses in mortgages as illegal restraints on the ability of borrowers to resell their property. California's "Wallenkamp" decision in 1978 was the first landmark judicial ruling of this type, but judges in another 12 states have taken similar positions in 1980 and 1981. (A handful of state courts, such as Massachusetts' supreme court, have ruled in the lenders' favor on the issue.)
Treasury's proposal to override state laws and judicial decisions on behalf of nationally chartered banks has tremendous financial significance for home sellers and buyers who might have wanted to use an assumption to avoid today's 17 percent to 18 percent interest rates.
The proposed rules, says a staff member of the office of the Comptroller of the Currency, represent "a clear signal to the banks not to be cowed" by laws or decisions that restrict their ability to call low-rate loans, and revive their mortgage porfolios.
"Get tough; fight back," is what Treasury is telling banks. Don't worry about the states. We'll back you up from Washington if you land in court.
At a time when the Reagan administration is calling for a return of decision-making power to the states, and a decentralization of regulatory authority, Treasury's message to the banks appears to run 100 percent in the opposite direction.
(Those who want to express an opinion on the new proposal may write to the Comptroller of the Currency, 490 L'Enfant Plaza SW, Washington 20219. The Docket number is 81-18. All comments are due no later than Nov. 23.)