A brief history of loan assumptions
Letter to the Editor
By Inman News, Tuesday, June 15, 2010.Re: 'Could mortgage handoff cure foreclosure crisis?' (June 11)
Dear Editor:
Up until the early 1980s, at least here in California, VA, FHA and almost every loan created by a savings and loan was assumable.
Some lenders tried without success to get people to give them an assumption fee to take over loans. But it was shown that any state-sanctioned bank or savings and loan permitted their trust deeds to be assumed.
Realtors continued to sell property by assuming the existing financing and having the seller carry back a junior note and trust deed if necessary.
A law (passed) that made all savings and loans and banks federally sanctioned.
From that time, loans became unassumable without the lender's approval. Many buyers continued to buy properties subject to the existing loans, but the banks enforced the new law, and all succeeding mortgages and trust deeds had the (due-on-sale clause) as part of the note.
Richard C. Dennis
Broker
Sun City, Calif.
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Submitted by Jack Marinello on June 28, 2010 - 9:25pm.
I presume the intent of the above opinion is to suggest that "assumable" loans would be a viable financing alternative in today's real estate market.
Yet, as a California real estate licensee since 1978 I have somewhat of a different recall of the events that took place. See Wellenkamp v. Bank of America; Invalidation of Auto0matically enforceable Due-on-sale Clauses at http://www.jstor.org/pss/3480063
Many lenders had "due-on-sale clauses" in their trust deeds for years leading up to the landmark decision by California Supreme Court in 1978.
In 1975 Cynthia Wellenkamp hired attorney Fred Crane to represent her as a defendant in a case where Bank of America was the plaintiff. BofA attempted to enforce the due-on-sale clause found in the trust deed signed by the prior owners Birdie, Fred and Dorothy Mans. Ms. Wellkenkamp had not assumed the existing loan, but merely took title to an owner occupied home, "subject to" the $19,100 loan from BofA. The case went all the way to the California Supreme Court.
In 1978, the court ruled BofA could not justify calling the note due and payable. One reason was that BofA had more security for their loan than they did when they made the loan to the original borrower and Ms. Wellenkamp had kept the payments current on the loan.
This ruling opened the flood gates in California for buyers to take title "subject-to" existing loans. No formal loan assumption was required on loans from state chartered institutions. Yet, the prior owner/borrower was still held ultimately responsibility for the promissory note they had signed and responsible for any deficiencies.
The non-enforceability of the "due-on-sale clause" was overturned in 1982 when a federal law entitled the "Garn/St. Germain" bill originated in the US Senate and was passed by Congress. It put the enforceability back into the deeds of trust in California. This had a serious dampening effect on the market.
FHA and VA loans allowed non-qualifiers to take loans "subject to" until the end of the 1980's. VA loans could be assumed by another Veteran who substituted their "VA eligibility" which had the effect of releasing the original VA borrower from liability on the loan. A simple "subject to" purchase did not release liability.
Today the "due-on-sale clause" is alive and well. Yet many buyers are taking title to properties subject to existing liens. Why aren't lenders automatically enforcing their right to call the loan due and payable? It is simple. To do so they might have to initiate a foreclosure action. If the new owner on title is current on their payments and the lender is receiving a higher yield than today's historically low rates; why would a lender pursue such a course?
Perhaps someday when prices have stabilized and some appreciation has returned to the market; and, interest rates are above 8%, lenders may consider enforcing the "due-on-sale clause" that is still found in a trust deed.
Jack Marinello, DREI
Real Estate Educator