Assumable Loan Deadline Nears : CAR Chief Gives Tips to Buyers and Sellers of Homes
The assumability of home loans originated by California-chartered financial institutions will end Oct. 15, the California Assn. of Realtors reminded consumers in an announcement by Raymond D. Spinelli, president of the 100,000-member organization.
Generally, the deadline applies to certain loans made by institutions that were state-chartered when the loan was made. Savings and loan associations which have since converted to federal charters also are included, under terms of a three-year grace period provided by the Garn-St. Germain Act of Congress.
The CAR president’s notice is part of a consumer awareness program initiated by the association to alert buyers and sellers of homes to expedite transactions prior to the deadline.
Buyers have until Oct. 15 to assume loans made during a “window period”--Aug. 25, 1978 to Oct. 15, 1982, according to Spinelli. The Garn-St. Germain Act made due-on-sale clauses in assumable mortgages enforceable by lenders, severely restricting buyers from assuming existing loans which invariably had lower interest rates than rates which would be in force at a later date.
Spinelli also cautioned that borrowers obviously have a very limited amount of time left to qualify for assumable loans.
The CAR prepared a list of questions and answers to help the public understand the issues involved. They follow:
Question: Will the Oct. 15 end of the “grace period” affect the assumability of all loans?
Answer: No. End of the “grace period” only affects real estate loans that contain a valid due-on-sale provision in the loan documents. If the loan documents do not expressly provide that the lender can call the loan due on sale, then the lender has not right to call the loan due on sale (before or after Oct. 15).
For example, VA and FHA loans will remain assumable since VA and FHA loans do not contain due-on-sale provisions.
In every transaction, the loan documents (note, deed of trust, any written modifications, etc.) should be reviewed carefully for due-on-sale provisions. If no due-on-sale provision is found, then verify with the particular lender that the loan is assumable.
Q: What is a “window period” loan?
A: Loans which were originated by any lender (other than a federal savings and loan, federal credit union, or national bank), and were originated, assumed or transferred “subject to” between Aug. 25, 1978, and Oct. 15, 1982, and contain a due-on-sale clause, are window-period loans.
Q: What is the “grace period?”
A: The “grace period” is the three-year period during which “window period” loans may be assumed by a qualified buyer. The “grace period” for “window period” loans ends Oct. 15.
Q: What about transactions involving “window period” loans entered into and/or in escrow prior to Oct. 15?
A: It depends. If the escrow closes and title to the property is recorded in the name of the new buyer prior to Oct. 15, the loan may be taken over by a qualified buyer (who meets “customary credit standards”) at its present interest rate and terms. However, if the transaction involving the “window period” loan is entered into to the Oct. 15 deadline, but does not close until after the deadline, then the answer is not entirely clear.
Q: What about “window period” lenders who choose to be arbitrary by refusing to allow transactions pending prior to Oct. 15 to close after that date?
A: Even though such an arbitrary position would be inherently unfair to consumers, a few “window period” lenders may take this position. In such instances, it is important to attempt to get the buyer qualified by the lender as soon as possible in order to close the transaction prior to the Oct. 15 deadline. The following practical suggestions may help speed along the assumption process:
--Consider requesting a formal statement of condition (beneficiary statement) from the lender as soon as possible, perhaps even prior to negotiating a specific contract.
--Along with ascertaining the lender’s position regarding transactions pending prior to Oct. 15, formally request an assumption package from the lender. This also can be done prior to the transaction actually being negotiated in order to make it available as soon as possible after the buyer and seller agree to terms in writing.
--Prospective buyers can also be counseled to begin filling out a standard FNMA/FHLMC (Fannie Mae/Freddie Mac) residential loan application form. This form is used by many lenders in the assumption process and may be obtained very easily from most local boards of realtors as well as the CAR order desk.
--It is important to communicate in writing with the “window period” lender regarding requests for assumption packages, as well as other related matters.
--The loan package and other related communications should be couriered, specially delivered, express mailed, or similarly delivered to the lender. A dated receipt should always be requested.
Q: What if a transaction involving the “window period” loan closes “subject to” prior to Oct. 15 without the lender’s approval?
A: Obviously, the safest way to proceed would be to obtain the lender’s formal approval prior to closing the transaction. It is possible to close a “window period” loan transaction prior to Oct. 15 without the lender’s formal approval; however, this should never be done without a thorough consideration of the risk factors involved.
The Garn-St. Germain Act and the Federal Home Loan Bank Board regulations provide that a “window period” lender may enforce a due-on-sale clause on any transfer of property prior to the end of the “grace period” if the buyer fails to meet customary credit standards or the buyer fails to furnish the lender, within 15 days after such lender’s request, information sufficient to establish that the buyer does in fact meet customary credit standards.
Q: Are there any practical suggestions for dealing with a “window period” lender who appears to be “stalling” the transaction in anticipation of the Oct. 15 deadline?
A: It is anticipated that most “window period” lenders will act reasonably and in good faith in the process of legitimate assumption transactions. In dealing with those few lenders who elect to be arbitrary and “stall,” the following should be considered:
Technically, the Federal Home Loan Bank Board regulations give a “window period” lender a maximum of 30 days from the time of receipt of the completed loan application to approve or disapprove the prospective purchaser. Even though there are no specific regulations dealing with how long a lender has to respond to a request to provide an assumption package to a prospective buyer, equitable legal principles would prevent a lender from intentionally stalling in an attempt to block the close of the transaction. In this regard, it is important that every aspect of the transaction, especially communications to and from the “window period” lender, be documented in writing.
The CAR counseled that persons involved in transactions prior to the deadline, satisfy themselves that they have been properly advised.
