The controversial mortgage market "double whammy" that has threatened homeowners across the country for two years is dead -- or will be in 30 days.
Pushed by Congress and consumer groups, the Federal Home Loan Bank Board last week issued final regulations that will curtail mortgage lenders' rights to impose heavy prepayment penalties on homeowners seeking to transfer their loans to new buyers.
The double-whammy technique used by mortgage lenders has affected thousands of consumers and has generated protests.
The lenders' technique works like this: Say you own a home and have a mortgage or deed of trust from a local savings and loan association. The mortgage contains a due-on-sale clause. It permits your lender to demand immediate, full payment of your mortgage -- or to raise the rate without limit -- if you sell or otherwise transfer your ownership interest in the home. The S&L thereby can prevent you from passing on your favorable rate and loan terms to new buyers via an assumption of your mortgage at the time of purchase.
Your loan documents, however, contain still another block of fine print: a prepayment-penalty clause, which allows the S&L to charge you a substantial chunk of money -- often from $2,000 to $5,000 or more -- if you pay off the loan early.
Now comes the full double whammy. When you call and ask your lender to allow you to pass on your existing mortgage to a fully qualified new purchaser via an assumption, your lender tells you "absolutely not." The lender also warns you that, if you do transfer your loan, it will foreclose on you, using its due-on-sale powers. Blocked from an assumption, you sell the house without the loan attached and prepay the mortgage. At settlement, however, your lender demands -- and gets -- a prepayment penalty from the loan proceeds that runs into several thousand dollars.
The lender, in effect, gets its cake and eats it, too. By threatening foreclosure, it forces you to prepay a loan it really didn't want on its books and walks away with a load of penalty cash to boot. That's the double whammy, and it's been used by lenders -- particularly savings and loans -- with increasing frequency.
To end a practice that Congress -- and now financial regulators -- have found to be unfair, the bank board promulgated the following last week. As of 30 days from the date of publication of its double-whammy regulation in the Federal Register, mortgage lenders no longer will be allowed to levy prepayment penalties if they:
*Exercise the due-on-sale clause by written notice on a loan.
*Begin a foreclosure proceeding to enforce a due-on-sale clause.
*"Fail to approve within 30 days the completed credit application" of a qualified new purchaser, and later, within 120 days of the lender's receipt of the application, the homeowner sells the property to the applicant and prepays the loan in full.
In the words of the bank board, the net effect of the new rules is that, if a mortgage lender "wishes to impose a prepayment penalty, it may not enforce a due-on-sale clause."
The expected effective date of the new rules is sometime in the final week of November. Up until then, lenders are free to use the double whammy, and consumers need to be on their guard against it. Once effective, the rule will cover all "outstanding" mortgages on owner-occupied dwellings -- that is, loans predating formal adoption of the new regulation -- as well as all future loans.
In a key concession to the mortgage-lending industry, the board decreed that homeowners who previously have been victimized by the double whammy will have "no basis to claim a refund" of prepayment penalties collected by lenders under circumstances that would violate the new rule.
Beyond the obvious consumer protections provided by the board, the language of its new regulation appears to open important new opportunities for buyers and sellers of homes with below-market-rate, nonassumable loans carrying prepayment penalties.
A seller of such a property now can have a financially qualified prospective buyer fill out an application to assume the mortgage on the property and submit it to the lender. If the lender "fails to approve it" within a month, the seller should be free of any worries of a prepayment penalty in connection with an assumption by the applicant anytime within the next four months.
For lenders, the new bank board rules will require exceptional vigilance regarding loan-assumption requests. If they "sit on" such requests -- as consumer groups charge they often have -- they could find the double whammy has become a new tool in the hands of sharp buyers, sellers and realty brokers.
Ironically, therefore, the double whammy then could allow consumers, rather than lenders, to have their cake and eat it, too.