The American mortgage market's costly double whammy is still alive and well, one full year after a federal agency announced a widely publicized plan to kill it.
The double whammy is a legal Catch-22 that ensnares large numbers of families nationwide: When they ask their mortgage lenders for permission to pass along their loans to new purchasers of their home via an assumption, even at a higher interest rate, the lenders refuse.
Pointing to the existence of the so-called "due-on-sale" clause in the fine print of mortgage documents, the lenders warn borrowers that they'll lose the house in a foreclosure proceeding if they try to transfer their existing loan to a new buyer.
The due-on-sale clause permits the lender to demand immediate full payment of the mortgage amount, or to raise the rate without limit, if borrowers sell their interests in the home financed by the loan.
Then comes the double whammy. Blocked from selling their house with the mortgage attached, the owners sell the property without it, only to learn that their lender now plans to hit them with a prepayment penalty of from $2,000 to $5,000. The penalty is paid to the lender directly out of the sale proceeds of the house, before the sellers get a cent.
Under pressure from key members of Congress, the Federal Home Loan Bank Board issued tough proposed regulations in August 1984 designed to outlaw the double whammy. The proposal said, in effect, that lenders can't have it both ways: They can't tell a homeowner that he or she has to terminate the loan to sell his or her house, and then turn around and collect thousands of dollars extra in loan-termination penalties for early payoffs that they directly forced.
The board's proposal also prohibited lenders from collecting penalties when they "fail to consent within a reasonable time to the written request of a qualified purchaser to assume the loan in accordance with its terms."
The bank board's explanatory comments accompanying the regulation noted that consumer complaints to the federal government and in the courts against the double whammy had been rising sharply, and that "some lenders" apparently have sought these large prepayment fees as a way "to improve their weakened financial condition."
The board's rules carried a proposed effective date of Aug. 10, 1984, and asked for comments from the public and the lending industry by Sept. 5.
Nothing further was heard from the bank board on the issue until Nov. 29, when it published a brief statement. Given the "technical complexity" of the double whammy, the board said, it was extending the period for public comment until Jan. 28, 1985. Ominously, the notice also revoked the proposed Aug. 10, 1984, effective date for the new regulation.
Since last November, the board has been mum on the double whammy. Spokesmen for the agency have repeated the explanation that the matter is complicated and under review. They have refused to say when the agency plans to come out with its final rule, or to discuss the specific technical problems that are holding up their work. The bank board attorney who is listed as the principal draftsman of the stalled regulations, Joseph Longino, did not return repeated phone calls.
In the meantime, according to officials from groups as diverse as Consumers Union and the California Association of Realtors, the double whammy still is being used by lenders and still is costing homeowners dollars and grief. Chandler Visher, a San Francisco lawyer who is suing a major California savings and loan association for its alleged use of the double whammy against Los Angeles homeowners, called the bank board's delay "extremely harmful" to unsuspecting homeowners.
The sheer magnitude of the prepayment penalties that can be imposed by lenders in some states makes resolution of the issue particularly urgent, according to consumer groups.
For example, a Union City, Calif., couple, Esther and Manny David, were hit with a $5,115 penalty on an $84,500 mortgage payoff on July 31. Their fixed-rate deed of trust was four years and three months old -- barely nine months short of Coast Savings' five-year prepayment-penalty cutoff date.
The family needed all the proceeds of their home sale to buy a new one and asked the lender how they could avoid the penalty. Coast Savings offered no help, according to Manny David, and took its full loan balance, plus six months' punitive interest (the $5,115) out of the escrow proceeds.
A mortgage officer for Coast Savings confirmed the Davids' story in a telephone interview.
What's behind the continuing delay on the double whammy prepayment issue at the Federal Home Loan Bank Board? Why has a problem that merited quick regulatory action on consumers' behalf last August been allowed to drag on for a full year?
As of last week, no one at the bank board, including the top public information official or the general counsel's office, had any answers.