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FIRST NATIONAL BANK OF VICKSBURG, VICKSBURG, MISSISSIPPI, AND D.W. ELLIS, TRUSTEE v. MICHAEL B. CARUTHERS & REBECCA R. CARUTHERS

DECEMBER 14, 1983

FIRST NATIONAL BANK OF VICKSBURG, VICKSBURG, MISSISSIPPI, AND D.W. ELLIS, TRUSTEE
v.
MICHAEL B. CARUTHERS & REBECCA R. CARUTHERS



BEFORE WALKER, BOWLING AND PRATHER

WALKER, PRESIDING JUSTICE, FOR THE COURT:

This is an appeal from the Chancery Court of Warren County wherein the court permanently enjoined the appellant, First National Bank of Vicksburg and D. W. Ellis (hereinafter the Bank), from exercising the power of sale as contained within a deed of trust securing certain property owned by the appellee. Aggrieved with this decision, the appellants have perfected their appeal to this Court. We reverse.

This case involves the enforceability of what the parties characterize as a "due-on-sale" clause contained within a deed of trust executed by the original mortgagors, Mr. and Mrs. Peoples, to First National Bank of Vicksburg. The original owners and mortgagors sold the secured property to a second purchaser, Mr. and Mrs. Wilcox, who, with the Bank's permission, assumed the balance due on the original indebtedness secured by the promissory note and deed of trust in question. Thereafter, Mr. and Mrs. Wilcox sold the subject property to the appellees, the Caruthers, who attempted to assume the outstanding indebtedness under the original promissory note and deed of trust. The Caruthers had full knowledge that the deed of trust contained the following provision, which they now challenge, as being unenforceable:

 14. The indebtedness secured hereby may not be assumed, nor may the property described herein be sold or conveyed in whole or in part, without Beneficiary's prior written consent, and a breach of either of said conditions shall, at Beneficiary's option, cause the entire indebtedness secured hereby to become due and payable.

 At the outset we emphasize the relationship of the parties to one another. The Caruthers were not a party to the original transaction between the Bank and the original mortgagors and the original mortgagors made no complaint about the contract entered into between themselves and the Bank. It is the Carthers' contention that enforcement of the due-on-sale clause is contrary to public policy, and that it can only be enforced to protect a legitimate security interest of the Bank in the property. They further contend that enforcement by the Bank of the provision for the purpose

 of increasing the interest rate and thereby increasing the Bank's yield on its loan portfolio is not the type of interest that may be protected by the clause.

 A majority of the states, approximately 22, now hold that this type of provision is enforceable as a valid and binding contractual provision voluntarily entered into by the original parties to the contract (deed of trust).

 The propriety of upholding similar clauses is summed up in Dunham v. Ware Savings Bank, 423 N.E.2d 998 (Mass. 1981) where it is stated:

 At the outset, we note that the historic purpose of the due-on-sale clause was to protect the lender's security interest (Holiday Acres No. 3 v. Midwest Fed. Sav. & Loan Ass'n, 308 N.W.2d 471, 480 [Minn. 1981]), but with the advent of inflationary increases in the cost of borrowing money the clause has been used to protect the lender against other risks involved in the long-term loans associated with home finance. "The interest rate fluctuation is evidently a, indeed the, principal underlying characteristic of home lending activities which leads lenders to insist on due-on-sale clauses" (emphasis in original). Williams v. First Fed. Sav. & Loan Ass'n, supra at 927. Also it is important to note that although mortgage loans are generally written for terms of twenty-five to thirty-five years, the average homeowner does not remain in one residence until his mortgage is repaid. In fact, figures submitted by amici curiae tend to establish that mortgages originating in the 1960's remained outstanding on the average from 6.5 to 9.8 years, depending on the year of origination. In 1980 the Federal National Mortgage Association bought thirty year mortgages at a yield based on a payoff within a twelve year period.

 Whatever the precise numbers, it is clear that lenders negotiate home loans with the realistic expectation that they will not be held to maturity, and interest rates are adjusted accordingly. The device used to activate the "early" (actually anticipated) payoff before maturity is the due-on-sale clause, which reduces interest rate risk by reducing the average

 time over which a mortgage loan is outstanding. Invalidating the due-on-sale clause would in effect extend the life of the average mortgage loan perhaps two or three times longer than the lender had originally anticipated, intensifying the lender's risk of interest rate loss. It is fair to conclude that because of the reduced risk, use of an acceleration device lowers the interest rate at which the bank is willing to loan money. Viewed from this perspective, it can be argued that the mortgagors have already had the benefit of the clause which they now seek to invalidate.

 Within the above context we turn to the policies which, on balance, make the clause reasonable and thus enforceable. They are: (1) the clause represents an equitable adjustment of rights between borrower and lender, (2) it may prevent State-chartered banks from operating at a competitive disadvantage with federally-chartered banks, and (3) it is a substantial benefit to the bank's depositors and to the future borrowers from the bank.

 423 N.E.2d at 1001-1002.

 In the present economic circumstances, the visibility of large institutional lenders often makes such institutions the focal point for community concern. The right of the lender to accelerate a mortgage debt in order to renegotiate the loan at market interest rates will only be utilized by lenders when interest rates have risen. However, this coincidence should not obscure the fact that inflation has many causes, and the right to enforce a due-on-sale clause no more causes rising interest rates than the exercise of a borrower's right to prepay his loan causes declining interest rates, or the carrying of an umbrella causes inclement weather. Both the right to prepay and the right to accelerate upon sale are protective devices relied upon by the community to moderate gains and losses in an uncertain economy. Because the due-on-sale clause is counterbalanced by the borrower's statutory right to prepay; because federally chartered institutions might continue to enforce it as a matter of Federal regulation irrespective of State court holdings; and

 because the clause offers substantial benefits to depositors and future borrowers, we conclude that if the clause does restrain alienation it does not do so unreasonably.

 Id. at 1005.

 Several jurisdictions, approximately 6, prohibit the enforcement of due-on-sale clauses, especially when used as a means to increase the rate of interest.

 The confusion resulting from the lack of uniformity among the states has prompted the Federal government, through the Congress, to preempt state due-on-sale restrictions and, with certain exceptions which are not present in this case, to declare such provisions enforceable according to the language of the contract. In its legislative history, the Congress noted that for lenders the due-on-sale restrictions extend the lives of older low-interest mortgages, preventing the lender from increasing the yields on those loans at the time the property is transferred. A recent study done by the Federal Home Loan Bank Board concluded that the imposition of such restrictions nationwide would create within a two-year period annual losses of $600 to $800 million for Federal savings and loans and $1 to $1.3 billion for all Federal and State savings and loan associations.

 The committee stated that for the borrowers, the due-on-sale restrictions provided an advantage for the existing home buyers at the expense of new home buyers. It noted that new home buyers pay for due-on-sale restrictions in one of two ways: either they pay an inflated price for an existing home with a lower interest rate assumable loan; or they pay a premium for a new loan for a new home, or an existing home without an assumable loan. In the first case, the home sellers inflate the price of a home with an assumable loan to recover losses which result when they take back a second mortgage at a lower market interest rate; or the price increases to reflect the value of the assumable loan. In the second case, the lenders charge a premium for new loans in states which restrict due-on-sale clauses because the earnings from the new loan must offset older loans and originating an assumable loan rather than a loan with an enforceable due-on-sale clause posed a greater risk to the lender requiring a higher price for the mortgage. The committee also noted that these restrictions adversely affect secondary mortgage markets which rely on uniform homogeneous mortgage documents to efficiently operate and provide mortgage money for lenders and home buyers. It also pointed out that the United States Supreme Court upheld the right of federal savings and loan

 associations to enforce due-on-sale clauses *fn1 and that this significantly disadvantaged state chartered and other lenders and created uncertainty among the home buyers and sellers regarding the enforcement of the due-on-sale. In its preemption of state due-on-sale restrictions, the Congress placed all lenders on a more competitive footing and eliminated the confusion which surrounded the enforceability of due-on-sale.

 This Act, enacted October 1, 1982, as Public Law 97-320, which has been entitled the Garn-St. Germain Depository Institutions Act of 1982 also provides for a "window period" *fn2 under section 341 (c)(1) for a period of three years permitting restrictions on enforcement of the clause where there has been state action, either by judicial decision, legislation or constitutional amendments which restrict the enforcement of the due-on-sale clause. Mississippi has not placed restrictions on the use of the clause by constitutional or legislative action.

 The appellees rely on the case of Sanders v. Hicks, 317 So.2d 61 (Miss. 1975) in support of their contention that the clause is unenforceable and that they came within the "window period" of the Garn-St. Germain Act.

 We have carefully considered the opinion in Sanders v. Hicks, and have reached the conclusion that the case was erroneously decided. Therefore, insofar as Sanders holds that the clause in the deed of trust which prohibited the fee owner from selling the real property without the written consent of the mortgagee was invalid and unenforceable and is hereby overruled. The right of persons to contract is fundamental to our jurisprudence and absent mutual mistake, fraud and/ or illegality, the courts do not have the authority to modify, add to, or subtract from the terms of a contract validly executed between two parties. *fn3 Weatherford v. Martin 418 So.2d 777 (Miss. 1982); United States Fidelity & Guaranty Co. v. Gough, 289 So.2d 925 (Miss. 1974); Citizens National Bank of Meridian v. L. L. Glascock, Inc., 243 So.2d 67 (Miss. 1971); Travelers Indemnity Co. v. Chappell, 246 So.2d 498 (Miss. 1971); Employers Mutual Casualty Co. v. Nosser, 250 Miss. 542, 164 So.2d 426 (1964); Phenix Ins. Co. v. Dorsey, 102 Miss. 81, 58 So. 778 (1912).

 The contract in question was entered into by the Bank and Mr. and Mrs. Peoples, the original mortgagors, who were satisfied with its terms, and we are not constrained to permit the Caruthers to invalidate and nullify that provision in their attempt to assume an undue advantage not enjoyed by other mortgagees by enjoying a much more favorable interest rate than that ...


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