Researchers seem to agree that low-rate mortgages that millions of Americans are locked into is suppressing home sales, according to a report by the Urban Institute.
Some stakeholders are floating what seems to a workable solution — assumable mortgages that allow a qualified homebuyer to assume a seller’s remaining balance at the seller’s current interest rate.
Sounds good in theory, right? After all, a seller could monetize the value of their low interest rate by asking for a higher selling price, with the buyer saving money on monthly payments.
The Urban Institute noted that on a $300,000 existing mortgage, monthly principal and interest is about $1,900 at 6.5 percent interest but roughly $1,350 at 3.5 percent interest. It said that if the lower-rate mortgage were assumed, the buyer might be willing to offer more for the home because they would save $550 on their mortgage payment monthly. That’s equal to about a $33,000 lump sum, discounted and accounting for the typical mortgage duration, Urban Institute said. That higher price might induce the current owner to consider selling.
Hold on.
The Urban Institute said in reality, assumable mortgages would need considerable policy accommodation to be an attractive option, likely would cause higher monthly payments for new borrowers who aren’t assuming existing mortgages, and would not dramatically alleviate housing supply concerns.
Here are four shortcomings the Institute outlined concerning the assumable mortgage option that policymakers would have to address for the policy to be effective.
Applicability to Fannie Mae and Freddie Mac Loans is Limited to Future Loans
The Institute said that existing mortgages sold and securitized through Fannie Mae or Freddie Mac have a clause requiring the mortgage to be due on the sale of the home, and this rule cannot be changed retroactively by the Federal Housing Finance Agency or by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, themselves.
Also, most GSE mortgages have been sold into securitized pools, without any provision to change contractual clauses. Urban Institute said even if a mechanism did exist, mortgage-backed securities (MBS) investors would not agree to it.
Appeal to Sellers, First-time Buyers is Limited by Appraisal Issues and Down Payment Constraints
Existing assumable mortgage options indicate that a broader assumability policy may not dramatically change behavior on future loans. Mortgages backed by the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA), and the US Department of Agriculture are already assumable, yet few of those loans are assumed. In fiscal year 2024, fewer than 6,000 FHA loans were assumed out of 7.8 million outstanding mortgages.
Two main obstacles make it hard to assume a mortgage, with both disproportionately affecting first-time homebuyers who are low on cash and are often putting less than 10 percent down.
First, Urban Institute said the buyer must make up any difference between the assumed mortgage amount and the purchase price—the equity gap.
Secondly, even if the buyer is willing and able to pay more for the home because it comes with a low-rate first mortgage, the additional offered value likely would not be supported in the appraisal. That could scuttle the sale or require the buyer to make an even larger down payment.
Current Mortgage Rates Would Rise if Future Lock-ins are Prevented
Even if the obstacles above were overcome and assumable mortgages become the standard, national mortgage interest rates would likely increase as a result. Currently, MBS investors provide the funding for most of the US mortgage market. Those investors’ main risk is the situation that has transpired the past few years: low interest rates on 30-year mortgages suddenly skyrocket, leaving investors with a much-depreciated low-yield stream of payments.
In a high-rate environment, investors want their money back quickly to reinvest at the higher rate. But refinances are slow, and home sales are a major source of prepayment activity. Assumability would significantly depress home sale–driven prepayments in a higher-rate environment, so investors would need a wider rate spread to compensate.
Assumable Mortgages Would Not Address Supply Shortages
The Urban Institute said that assumable mortgages, even in a future where everyone has one, would not solve the housing supply problem because sellers still need a place to live. It said that nearly all locked-in homeowners would buy another home if they sell their current home, so they are sellers and buyers at the same time. That means that lock-in reduces real estate market liquidity by taking both buyers and sellers out of the market and reallocates supply. Simply put, lock-in does not reduce the overall supply.
The post Could Assumable Mortgages Help Stimulate the Housing Market? first appeared on The MortgagePoint.
