The Effects on Mortgage Repayments of Restrictions on the Enforcement of Due-on-Sale Clauses: The California Experience

Unexpected increases in the cost of mortgage funds have imposed substantial losses on mortgage lenders. The losses are compounded by the decline in mortgage repayments as homeowners hang on to their low-rate mortgages. The enforcement of due-on-sale clauses is one option lenders have had to inhibit reductions in the turnover of low-rate mortgages. Recently a California Supreme Court ruling restricted the use of due-on-sale clauses. As a result, California state-chartered associations can no longer use due-on-sale clauses to raise mortgage rates. At the same time, most federally chartered associations in California continued the unrestricted enforcement of due-on-sale clauses. This paper examines the behavior of repayment rates at restricted state and unrestricted federal associations in California. The results suggest that for each percentage point new mortgage interest rates exceeded rates on existing mortgages, repayment rates at federal associations declined by 1.532 percentage points. The inability to prevent mortgage assumptions caused repayment rates at state-chartered associations to fall 0.406 percentage points more than federal association repayment rates. The additional decline has added substantial income losses to California state associations.