I’m not your typical homebuyer. The home I live in is the one I bought in 1981. I have not moved, although I’ve refinanced a number of times along the journey and I do own a second property that is a condominium rental.
Not being a serial homebuyer who constantly tries to move up to a bigger home has, quite frankly, put me out of the loop on a number of very basic issues.
For example, I didn’t realize that home loans could no longer be "assumed" until I received an e-mail from one of my readers who had what he says was a way to solve the foreclosure crisis.
The reader, Steve Hicks, a broker with Keller Williams Realty in El Paso, Texas, wrote: "A simple solution that will stop at least 50 percent to 60 percent of all foreclosures today is the assumption of all federally backed mortgages.
"Allowing these loans to be assumed without qualifying will result in sales and transfers to buyers. The risk in nonexistent. These homes will go into foreclosure if there is no market for them anyway."
The idea made sense to me so I gave Hicks a call.
"It’s not hard to assume a loan," he told me from his El Paso office, "it is just not doable because all of your deeds of trust on existing mortgages have a due-on-sale clause that says, if the owner sells any part of the property or even leases it for a period of longer than three years, then the lender can call the note due and payable in 90 days."
This is what I get for being out of the market for almost 30 years — I didn’t realize due-on-sale clauses had become a mandatory feature in mortgages.
The history of this phenomenon is quite interesting because it goes to the mindset of the banks: A mortgage is a money-making instrument and lenders want every single penny that could possibly be squeezed from the loan. That’s OK — it’s their right to do so.
Back about three decades ago, when there was a major increase in interest rates and a 30-year, fixed-rate mortgage was carrying interest rates of 13 percent to 16 percent, assumptions were extremely valuable and widespread because if you could just take over someone else’s existing loan at a 6 percent to 7 percent interest rate that would be so much more advantageous that having to get a new loan that was twice as expensive.
This trend line put lenders in a tizzy because an assumption was a sale that was beyond their control and over the long term was costing them money.
At first the lenders went to court to try to prevent assumptions, and when that didn’t work they changed their practices and began to insert in all new mortgages due-on-sale clauses stating that if the property is sold, the mortgage is due — even in the case of an assumption.
"The lenders put in that due-on-sale (clause) years ago to stop people from assuming mortgages," and it was self-serving for banks to do so, says Hicks. "It wasn’t because it would hurt the loan."
For Hicks, one way to avoid foreclosures is to reinstate the ability to do assumptions. "The simplest way to do this is set aside due-on-sale clauses in all federally backed mortgages for one or two years," he explains. "If it works, expand the program."
It sounded plausible, but I decided to check in with an expert: Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania and a fellow columnist for Inman News.
Although Guttentag says he understands Hicks’ point of view, the whole thought of suspending due-on-sale clauses made him apoplectic.
First off, he exclaims, if the federal government suddenly steps in and says due-on-sale clauses are null and void, "it would mean the government would be getting involved in private contracts and that is so scary it would create a ‘firestorm’ of controversy.
"The lenders would have a conniption because what you are doing is having the government set aside private contracts. That would be viewed as really bad news."
On a more practical level, Guttentag notes, "the rule that exists now says that to allow a buyer to assume your mortgage, the buyer has to have acceptable credit and be approved by the FHA. If you change the rule and say any buyer can assume a mortgage, you are going to make assumptions a little more attractive."
But, he adds, that would impose new risks on the FHA and probably increase its losses. That’s no small problem considering there are concerns the FHA’s reserves are already considerably depleted.
(Older FHA loans can still be assumed if a buyer qualifies. In effect, the lender qualifies the buyer the same as if he or she was getting a new loan. There are some transfer fees involved, but they are not onerous. Otherwise, most FHA loans cannot be assumed.)
Of course, there’s the most obvious problem: Many loans are underwater. I mean, who would assume a $200,000 loan when the house is now worth only $125,000?
That’s not the point, says Hicks. Suspending due-on-sale clauses would not save those people who are holding mortgages that are worth far more than their homes, but it would be a lifeline to "marginal" foreclosures.
"In many cases that I see," he explains, "the owner has very little to no equity in the home. If (such owners) put it on the market for as much as they owe, they are going to have to bring a check to the closing to pay for all the fees.
"If you are dealing with owners who have lost their job or have had to move, they don’t have the money for closing fees — even if the house hasn’t lost value. If someone could assume the loans, the owner could be saved from the closing fee and it could still be a better deal for the buyer than getting a new loan."
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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