Yesterday's decision by the Federal Home Loan Mortgage Corp. to end the assumability of mortgages it owns could be a dramatic blow to housing sales in the Washington area, local real estate experts said.
By contrast, a Supreme Court decision earlier in the week on assumability of conventional mortgages will have little if any direct impact on homeowners in the Washington area, they said.
That is because most conventional loans here--except those bought by Freddie Mac--have not been assumable at the old interest rate for some time. This made Freddie Mac loans particularly attractive in this market.
FHA- and VA-insured mortgages, which account about 20 percent of the market, remain assumable with no escalation of interest rates. These mortgages are controlled by rules of the Department of Housing and Urban Development, and officials this week said these are not due to change.
By rough estimates, Freddie Mac last year bought around 20 percent of the mortgages made in the Washington area. Until now, these loans were assumable with no escalation of the interest rate. By yesterday's announcement, they no longer will be assumable after Aug. 2. This means a sale must have gone to settlement by that date for the loan to be assumable, a Freddie Mac spokeswoman said.
"This is really a tough blow," said Washington Board of Realtors president G.V. (Mike) Brenneman when told of the Freddie Mac announcement. "It's obviously a blow to the [housing] industry and home sellers."
Freddie Mac said the new policy would be in the best interests of mortgage lenders, investors and home buyers and would help keep the cost of mortgage money generally down.
At issue is a homeowner's ability to pass a low-interest, fixed-rate mortgage to a new buyer when a home was sold. Since the late 1960s and early 1970s, lenders have routinely put "due-on-sale" clauses into mortgages, saying they can demand full payment of the balance of the loan when the houses are sold. This way, when rates have risen a lender can require that the new buyer take out another loan at a higher interest rate.
Older loans with no due-on-sale clauses would not be affected by this week's actions. The longer these have been held, the smaller the balance there is to be assumed, however, and the larger the difference the new buyer must make up between the balance that can be assumed and the new sales price.
Low-rate assumable loans can be worth thousands of dollars to sellers of homes, but it costs lenders money to keep these unprofitable mortgages in their portfolios. Proponents of due-on-sale clauses have argued that only a few sellers and buyers benefit from assumable loans and that other borrowers have to pay higher interest rates to make up for the lenders' losses on these deals.
The Supreme Court ruled in favor of the S&Ls, upholding a 1976 Federal Home Loan Bank Board rule allowing them to enforce their due-on-sale clauses despite state laws to prevent enforcement. The ruling applies to conventional mortgages made by federally chartered savings and loans, which fund the bulk of home loans in the country.
But it only directly affects these types of mortgages in a dozen states that tried to make the loans assumable even though lenders were trying tocall them in at the time of sale.
There are no laws in the District, Virginia or Maryland to prevent lenders from calling mortgages when property is sold, and enforcement of this type of clause was upheld last year in Virginia in the Fourth U.S. Circuit Court of Appeals in Richmond.
The Supreme Court ruling does, however, preclude states here and elsewhere from making future efforts to legislate assumability for those types of mortgages.
But local real estate experts pointed out that lenders frequently allow old mortgages to be assumed by buyers at higher interest rates than in the original mortgages. This acts as a kind of compromise, where the old rate is "blended" with the current market rate, so the buyer still gets a mortgage where the rate is below market levels.
Mary Howard, president of the Northern Virginia Board of Realtors, said that about 48 percent of sales in Northern Virginia use assumptions with an escalation of the interest rate. The average blended rate here has been around 14 percent, about the same as the national average on these types of assumptions.
Thomas Owen, chairman of the largest S&L in this area, Perpetual American Federal Savings and Loan Association, said his institution and others here will continue to offer blended rates.