The Financial Stakes in Due-On-Sale: The Case of California's State-Chartered Savings and Loans

On August 25, 1978 the California Supreme Court ruled that enforcement of due-on-sale clauses unduly restricts the right of homeowners to sell their homes. On June 28, 1982, the U.S. Supreme Court ruled that the Federal Home Loan Bank Board could permit due-on-sale enforcement because such enforcement was important to the financial stability of savings and loans. Both courts' decisions, though contrary in their effect on the clause, are based on the economic importance of the clause. Just how important is the clause? This paper calculates how much money the 1978 California decision (Wellenkamp) transferred from affected savings and loans to homebuyers. The yearly transfer by 1981 is estimated at between $58 and $170 million. For the lenders, this amounts to between a tenth and a quarter of total 1981 losses. For affected homebuyers, the savings average 25% of mortgage interest payments. On the basis of these calculations, both courts are correct about the importance of the clause.