A legal issue that could sharply affect the price you pay for your next home -- and the price you get for your present one -- has just been accepted for review by the U.S. Supreme Court.
The same issue is on Congress' spring docket and the Reagan administration's latest legislative wish list. So it bears close watching if you have anything to do with residential real estate or mortgage financing.
The issue involves mortgage assumptions: consumers' rights to pass along low-rate, existing home loans to new buyers. It also involves the rights of state legislatures and courts vis-a-vis federal regulatory agencies.
Boiled down to essentials, the controversy amounts to whether federally regulated lenders such as savings and loan associations and banks can thumb their noses at state laws designed to protect individual homeowners and buyers.
And, can lenders prohibit mortgage assumptions--the key ingredient to home resales in many parts of the country--when state law expressly guarantees citizens the right to make use of them?
The Federal Home Loan Bank Board, the Treasury Department, the Reagan White House, the President's housing commission, the Department of Housing and Urban Development, and the entire banking industry all want lenders to be free to prohibit mortgage assumptions.
Sen. Jake Garn (R-Utah), who chairs the Senate Banking Committee, has sponsored legislation that would override all state laws restricting lenders' abilities to block assumptions. Under Garn's bill, states like California, Colorado, Georgia, New Mexico and others whose legislatures have restricted banks' powers in this area, would have those laws "preempted," pushed aside. Federal law would take precedence over states' rights, and there'd be no further assumptions of conventional loans if lenders didn't want them.
On the other side of the controversy are thousands of homeowners (who have sued lenders or been sued over attempted mortgage assumptions), the National Association of Realtors, court systems in a handful of states, and various consumer-protection groups and lawyers.
The two sets of combatants have strong legal and economic arguments to back them up. Federally chartered thrift institutions say that the Depression-era Homeowners Loan Act of 1933 put them under the exclusive regulatory wing of the Federal Home Loan Bank Board.
The bank board's rules--which allow savings and loan associations and mutual savings banks total freedom on assumptions--have always preempted state law, according to industry proponents. A number of federal and state courts have handed down decisions during the past two years supporting that point of view.
Underpinning the lenders' legal position are economic arguments, and a not-so-veiled threat. The S&Ls and banks are holding billions of dollars of single-digit-rate, money-losing mortgages in their portfolios. If the original borrowers on those loans are allowed to pass them along with their houses from successive buyer to buyer, the lenders say, those 7 and 8 percent loans will still be around in the 1990s and beyond.
The American mortgage-lending industry, which is in bad financial straits today, would collapse long before then, according to banking lenders. "If every loan from the 1970s on our books were guaranteed assumable for the next 20 to 25 years, we'd all close down," says the president of a major federally chartered western S&L. "The states and the realtors would have won their case, but there'd be no lenders, there'd be no economy, there'd be no housing market. They'd have cut off their nose to spite their face."
Consumer advocates respond to the bankers' arguments in pithy terms. "Baloney, pure baloney," says Fred Crain, a Riverside, Calif., lawyer who has turned bank battling into his legal speciality.
Crain's law firm is handling more than 600 mortgage-assumption cases in California alone, all on the side of the homeowner or seller.
Crain was the lawyer who won the landmark Wellenkamp v. Bank of America case before the California Supreme Court in 1978. The decision held that California state law prohibited lenders from stopping assumptions.
He is also the lawyer whose latest major case, Fidelity Federal Savings and Loan v. De La Cuesta, was accepted by the Supreme Court for review Jan. 25--the first time in history the top federal court has agreed to get directly involved in the mortgage-assumption controversy.