Real Estate: Q: What is the 2008 equivalent of a $50,000 mortgage in 1974? A: $217,837.

Posted By Cliff Tuttle | October 13, 2008

Posted by Cliff Tuttle

In 1974, Pennsylvania enacted an important piece of consumer protection legislation known as Act 6 of 1974. It defined a “Residential Mortgage”, as “an obligation to pay a principal sum of $50,000.00 or less evidenced by a security document and secured by a lien upon real property located within this Commonwealth containing two or fewer residential units . . .”

Among other provisions, Act 6 prohibited prepayment penalties upon Residential Mortgages. At the time, a $50,000 mortgage was considered to be quite substantial and I often heard the statement that someone who borrowed more than $50,000 could look after himself.

As times changed, the $50,000 figure became an anachronism. However, there was no strong movement to update the limit. Community banks, thrifts and credit unions typically did not charge prepayment penalties, even on residential loans much larger than the statutory amount.

But when the residential mortgage market was taken over by national lenders who typically sold loans to securitized pools, prepayment penalties became standard. Few loans were under $50,000 and many out-of-state lenders either didn’t know about Act 6 or simply ignored it.

That changed on July 8, 2008 when the Legislature enacted Act 57 of 2008, which became effective in 60 days — early in September. The statutory definition of a Residential Mortgage is now tied to inflation and will be updated annually by the Pennsylvania Department of Banking. In 2008 a “base figure” of $217,873 applies. I suppose that today you might say that anyone who can get a mortgage for more than $217,873 can look after himself or herself. A lot of things have changed since 1974.

It remains to be seen whether prepayment penalties on mortgages over $50,000 but under $217,873 written before September 2008 are enforceable. However, as real estate lawyers will tell you, residential house sales can’t wait for courts to decide such questions. Sellers will have to pay the penalty or lose the deal and so, will probably pay. Moreover, chances are excellent that national lenders are not planning to change their mortgage forms — they usually pay attention to changes in federal but not state law. Expect them to argue that loans without prepayment penalties do not qualify for pooling programs. Expect them to threaten to discontinue their most attractive residential lending programs if the prohibition is not abolished.

If the Act 6 prohibition is to be enforced, it is up to the Department of Banking and the Attorney General to do it. For the sake of Pennsylvania consumers, here’s hoping they do.

CLT

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CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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