Assumable Loan Window Closing; Silence Deafening

The silence, as the saying goes, has been deafening.

The silence from mortgage lenders, that is, calling public attention to the fact that--unless the “window” period is extended by legislative action beyond Oct. 15, 1985--all of those home mortgages shouldered, or assumed, in California during the four-year-period between 1978 and 1982 can only be resold with “new” money at current interest rates.

While it has been widely thought by both home buyers and sellers that passage of the Garn Act on Oct. 15, 1982, killed off assumable mortgages in one fell swoop--making the due-on-sale clause in mortgages immediately enforceable--it has been just as widely forgotten that a “sweetener” was thrown into the legislation.

And the sweetener came in the form of an escape hatch for home buyers in 12 states who had bought homes with assumable mortgages (or had assumed such loans) during those years when the issue was being fought inconclusively in state and federal courts. Because they had bought in good faith--frequently on the assurance of realtors and lenders alike that the enforceability of the due-on-sale clause lacked the necessary votes for passage--these buyers were given a grace period during which--Garn Act or no Garn Act--they, in turn, could sell and pass on the same assumability to their buyers.

Thus, in California, buyers who bought homes with assumable mortgages (or assumed a mortgage with this right built into it) between Aug. 25, 1978 and Oct. 15, 1982, with money obtained from state-chartered lending institutions, have until Oct. 15, 1985 to sell their homes and pass on this assumability, just as if the Garn Act didn’t exist.

(Not affected are home mortgages financed through federally-chartered banks and S&Ls;, which were never assumable in the the first place, nor VA and FHA-guaranteed mortgages where, contrarily, the assumability is built-in for the life of the loan.

(By somewhat the same token, assumable mortgages which were written by state-chartered S&Ls; and which subsequently got into trouble, and had their loan portfolios parceled out by regulators to federally chartered institutions, retain their assumability--until October--regardless of the switch. Such was the case last year, for instance, when San Marino Savings & Loan bellied up and its loan portfolio was taken over, in its entirety, by the Federal Savings and Loan Insurance Corp.)

What bothers Washington state-based real estate attorney James Robert Deal about the slamming shut of the window on Oct. 15, is that little action, legislatively, is being taken to extend the grace period in most of the 12 states affected by the Garn Act.

“To the best of my knowledge,” said Deal, who has picked up the assumability cudgel as an act of consumer advocacy, “only the states of Washington and Arizona have attempted it.” And, in fact, only Arizona has such an extension firmly in place. Although, Deal adds, the measure in Washington, “is out of the Banking Committee on an 11-to-2 vote and has now gone to the House of Representatives with strong support.”

Ramrodded by Deal, with strong support from Washington’s realtors, that state’s proposed extension of the assumability window--as now written--would have no time limit. “We’re trying for permanency” on those mortgages written, or assumed (in Washington’s case) between Aug. 19, 1976 and Oct. 15, 1982.

But in Arizona, a prominent spokesman for the mortgage lending industry suggested, any such hint of permanency in the assumability of mortgages “would have been regarded as a very serious thing,” and that state’s extension of the assumability feature would have resulted in a much more bitter struggle than, in fact, it was.

Arizona Compromise

“What we came up with here,” according to Gary Driggs, president of the $4-billion, Phoenix-based, Western Savings & Loan Assn., “was a compromise between the lenders and the realtors--a two-year extension until Oct. 15, 1987. And a major feature of what made the compromise possible was an unrealistic window in the first place.”

An arbitrary time frame in all of the 12 states affected by the Garn Act, the window supposedly reflects the time period during which the courts gave confusing signals on the enforceability of the due-on-sale clause in standard mortgages.

Thus, in Utah, the window covers only a 17-month period: for those mortgages shouldered, or assumed, between May 12, 1981 and the passage of the Garn Act Oct. 15, a year later. Most of the other states settled on a four-, five-, or six-year window affecting, for the most part, those mortgages taken on between 1976 and 1979 and the 1982 legislation.

But, for reasons that are unclear, Arizona’s window covered a whopping 11-year span--for those mortgages taken on between March 13, 1971 clear up to passage of the Garn Act in the fall of 1982.

Thought It Mistake

“We think it was a mistake,” Driggs added, “and the realtors, I think, knew it was a mistake, too. So, we compromised on the two-year extension with the proviso thrown in that lenders can accelerate the interest rate 1/2% every time one of these assumable mortgages changes hands between now and 1987.

“It wasn’t all that great a victory for the realtors, nor that great a loss for the lenders to lose the due-on-sale right for a couple of years. But we would have regarded a perpetual extension of the assumability--the approach Washington state is looking at--a lot more seriously.”

Just how badly the lenders in any of the 12 states might be hurt by a selling wave of houses carrying those old four-, five-, six- or, in Arizona’s case, 11-year-old assumable mortgages is anybody’s guess. The consensus, however, seems to be: not much.

“In the first place,” Deal, said, “most of those mortgages have already been sold off by the originators into the secondary market--to Fannie Mae or Freddie Mac (the Federal National Mortgage Assn. or the Federal Home Loan Mortgage Assn.) so the lenders don’t have anything to lose on that score.”

New Instruments

Also, according to Dean Cannon, director of the California League of Savings Institutions, “there are probably not too many of those older mortgages still on the books, anyway. I really think it’s less important today than it would have been at one time, anyway, because of the new, flexible, mortgage instruments available today.”

These are two key reasons, Cannon guesses, why the Washington-style drive to press for a legislative extension of the window has drawn such limited enthusiasm in California. A realtor-backed drive to get such an extension attracted a flurry of interest “about two years ago,” a spokesman for the California Assn. of Realtors said, “but it didn’t go anywhere and, frankly, I’ve heard very little about it since then.”

But the most important reason why the upcoming closing of the assumability window is unlikely to trigger a wave of selling to capitalize on it, all hands agree, is pure and simple economics.

As the League of Savings Institution’s Cannon puts it: “On a lot of those older mortgages--certainly on those that were assumed back in 1978 and 1979--the equity would be so great that not too many people can assume them anyway. Not, certainly, without bringing in new money.”

‘Wad of New Money’

It’s a view also echoed by Arizona’s Driggs, speaking from a state with such a lengthy window that it goes back to the days of 8 1/2% and 9% mortgages--and even lower than that in the case of mortgages, again, assumed in the early 1970s.

“So,” Driggs adds, “the new buyer comes in and takes over, say, a 9% mortgage. He’s not going to be able to do that without raising a wad of new money at current rates, so what you end up with is a blended rate not all that much lower--if any lower at all--than you can get today with a flexible rate.

“I think both sides--the realtors and the lenders--have exaggerated the importance of extending the window,” Driggs concludes.

“Still and all,” the league’s Cannon concedes, “all the lenders in California want is for Oct. 15 to come and go as quietly as possible.”