Dunham v. Ware Savings Bank: Economic Policy and Federal Law Justify Enforcement of Due-on-Sale Clauses by State-Chartered Institutions

Economic policy should replace state property doctrines as the controlling factor in determining enforceability of due-on-sale clauses. A due-on-sale clause provides mortgagees (lenders) with the means to accelerate the term of a mortgage upon transfer of the original mortgagor's (borrower's) interest in the mortgaged property. Lenders originally used due-on-sale clauses for the purpose of evaluating whether the party to whom the original borrower sought to assign the mortgage was creditworthy. As interest rates have risen, lenders increasingly have used due-on-sale clauses to terminate their commitments to lend mortgage funds at relatively low interest rates. Mortgage instruments secure a borrower's promise to repay a mortgage loan issued by a lender. Because the basic transaction between the parties involves financing real estate transactions, property law traditionally has controlled litigation concerning enforcement of due-on-sale clauses. The issues in due-on-sale clause litigation have multiplied as the residential real estate market has been adversely affected by volatile money markets. Concern for the economic health of the residential real estate market has begun to pervade due-on-sale litigation. Consequently, state courts have been forced to abandon the general practice of limiting the use of mortgage foreclosure to those cases in which lenders successfully demonstrate that the mortgaged property is endangered. This Comment examines the incorporation of economic policy into the developing body of law regarding enforcement of due-on-sale clauses in conventional residential mortgage instruments. After a brief history of litigation concerning enforcement of due-on-sale clauses, the development of federal law authorizing enforcement of such clauses and the development of secondary mortgage market policies concerning enforcement are examined in detail. The Federal Home Loan Bank Board (Bank Board) regulations and the policies of the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) pervade this field of law. Both must be considered by a state court or legislative body deliberating whether due-on-sale clauses should be enforced.