Don't let the U.S. Supreme Court's landmark decision on mortgage assumptions rattle you out of a home sale or purchase this year.
Don't assume for a minute that "creative financing" is dead, or that there are no more low-interest-rate loans that can legally be transferred to new purchasers.
To the contrary, the court's ruling in Fidelity Federal v. de la Cuesta is likely to:
* Focus new attention on the millions of low-rate existing loans on homes across the country that can either be assumed at their original rate, or taken over at a modest increase far below prevailing rates. The owners of many of those houses haven't the slightest idea their loans are assumable.
* Stimulate new forms of creativity in mortgage financing rather than depress them. A California attorney, for example, has begun offering a copyrighted program for legally getting around the "due-on-sale" (anti-assumption) clause in mortgages. And a Northern Virginia realty broker says anyone can bypass the problem of a due-on-sale clause by placing ownership of the house into a "land trust" prior to obtaining financing from a lender.
The Supreme Court ruling should also prompt savvy savings and loan associations here and elsewhere in the country to initiate or expand "blended-rate" replacement loan programs.
These financing plans for new buyers not only get old, single-digit-interest-rate loans off lenders' books. They produce large doses of good will for participating lenders that should pay business dividends for years.
To understand the true impact of the Supreme Court's ruling on home-mortgage assumptions, you have to understand how limited it really was. The court didn't rule on mortgage assumability per se. It denied the state of California the right to tell federally chartered S&Ls operating within its borders how to handle mortgage assumptions.
It said that federal S&Ls march to a federal drumbeat--in this case a regulation issued by the Federal Home Loan Bank Board empowering S&Ls to block loan assumptions or to raise interest rates on assumed loans to whatever level they wish.
The decision had no direct impact on loans made by state-chartered S&Ls in California or elsewhere. (They represent about half of the 4,000 S&Ls operating nationwide.) It also had no impact whatsoever on FHA-insured or VA-guaranteed loans, which are all assumable at their original rates.
Nor did the Supreme Court's decision affect the estimated 2 million homes eligible for the Federal National Mortgage Association (Fannie Mae) cut-rate "resale-refinance" program. Your house, or the one you'd like to bid on this summer, could be one of the 2 million, so consider the facts:
If Fannie Mae owns the underlying conventional mortgage on the home, the property can be resold with a discounted "blended rate" on a new, larger loan, even though the original mortgage contained a due-on-sale clause (which most do).
Let's say, for instance, that you own a small conventionally financed suburban town house worth $65,000, whose original 8 percent mortgage has been paid down to $30,000. When you last checked the mortgage documents, you confirmed that the loan carries a standard anti-assumption clause (paragraph 17) barring you from selling the house and passing along the 8 percent rate.
What you weren't aware of, though, was that, like thousands of others around the nation in recent years, your loan was quietly sold to Fannie Mae in Washington. Your lender continued to collect the monthly payments, but the real owner of your loan is Fannie Mae. (Fannie Mae owns roughly one out of every 20 American mortgages. In some neighborhoods, that proportion is as high as one of every 10 loans.)
Rather than being hindered by the Supreme Court's decision, your loan now qualifies for a special form of quasi-assumption: a Fannie Mae resale loan. Your purchasers can obtain a new $58,500 loan--nearly twice the size of your existing mortgage--at a discounted rate of 12 3/4 percent. The old 8 percent loan disappears, and you walk away with all cash and a full price, and don't have to hold any secondary seller-takeback loan paper.
To find out whether your home (or the house you want to buy) qualifies for the rapidly growing "resale-refinance" program, ask either your original lender or get help from a real-estate broker. The lower the rate on your original mortgage or deed of trust, the lower the "blended" rate for which your purchaser may be able to qualify.
If Fannie Mae doesn't own your loan on the property you want to sell or buy, try negotiating with your bank or S&L to blend the rate. Even a two or three percentage point cut in rate in a market like this can make a home sale feasible, particularly when combined with other creative techniques, such as one- or two-point buy-downs of the rate by the seller.
Let's say, for example, that your lender agrees to provide the prospective purchasers of your house with a 15 percent rate on the replacement loan (and a larger loan amount) in exchange for getting your old 8 1/2 percent mortgage off its books. Your purchasers, however, aren't wild about 15 percent. What to do? Buy down the rate yourself for two years to 12 or 13 percent.
A small part of the sale price, in other words, will be used to subsidize the buyers' monthly interest payments for 24 months. The subsidy will be the difference between the 15 percent blended rate offered by the S&L and the 12 to 13 percent required by the purchasers.
The bottom line is this: You sell your house at close to the asking price you wanted; your buyers get attractive, below-market rates for at least the early years of their ownership. All this despite the Supreme Court, and despite the widespread public impression that financing housing is nearly impossible without low-rate assumptions.
NEXT SATURDAY: Getting around due-on-sale via the real estate underground.