Assumable and Portable Mortgages: Could They Fix the Housing Crisis?

Soon you may be able to take your mortgage with you when you move or take over someone else's mortgage when you buy their home.

At least those are ideas floated on X (formerly Twitter) this Sunday by Federal Housing Financing Agency (FHFA) Director William Pulte.

Yesterday, we reported on government plans to introduce 50-year mortgages. But ultra-long terms aren't the only idea senior officials are kicking around. They're also considering re-engineering assumable and portable mortgages.

What Is an Assumable Mortgage?

An assumable mortgage is one that can remain with the home after a seller has sold and moved on. The buyer takes over ("assumes") the mortgage under the original terms (including the rate) and makes the same monthly payments as the original owner for the remaining months of the loan.

Imagine if you could assume a 30-year fixed-rate mortgage originated during the week ending Jan. 6, 2021. You might be paying a mortgage rate of 2.65%, according to Freddie Mac. That's very different from current mortgage rates, which, on Nov. 10, stood at 6.31% for the same type of loan, says ICanBuy.

But assuming a loan won't be easy for most buyers.

There will likely be a gap between the value of the home and the balance on the mortgage being assumed. The seller will have made payments for years, and the home's value is likely to have appreciated, perhaps considerably.

For example:

Unless the buyer has big savings of $170,000 in the above example, he or she will need an additional loan (usually a second mortgage) to bridge that gap. And that loan will probably come with a high rate.

In the above example, the buyer would need a $125,000 second mortgage, assuming an equivalent 10% down. According to Bankrate, variable second mortgage rates are around 6.5% currently. That would put the principal and interest payment around $930 per month on a 20-year term.

The buyer would have to decide whether the assumed loan plus a second mortgage is better than simply financing the purchase with an entirely new loan.

Assumable Mortgage are Nothing New

A surprising number of mortgages are already assumable. Government-backed loans (from the FHA, VA and USDA) are generally assumable by anyone qualified.

Conventional loans (ones not backed by the government) are generally not assumable except by the beneficiaries of the late owner's estate.

Assumable Loan Hurdles

Cornell Law School's Legal Information Institute explains some of the hurdles a buyer must clear before assuming a mortgage:

• The mortgage must be assumable.
• The mortgage lender must approve the assumption.
• The buyer must meet the lender's financial requirements for borrowers.

Cornell has a caveat for sellers. "Sellers must be careful because they may still be liable for the mortgage even after the sale to the buyer, unless the creditors expressly release them from the mortgage."

There's a reason so many assumable mortgages aren't assumed. Often, the savings on offer don't match the extra hassle and upfront costs (usually for two mortgage applications) involved. There aren't many low-rate mortgages around because most of those homeowners refuse to move.

Or, as Cornell puts it: "Buyers also must consider the benefits of an assumable mortgage where the mortgage only covers a portion of the purchase price because they may still have to get their own mortgage to cover the rest." In some cases, "it may be cheaper and more practical
for the buyer to acquire their own mortgage for the whole purchase."

How the Government Might Improve Assumable Mortgages

The government is yet to share what ideas it's considering. But we wonder if it might:

• Make loans that comply with Fannie Mae and Freddie Mac's rules assumable.
• Direct Fannie and Freddie and the FHA, VA and USDA to create low-cost, top-up loans to bridge the gap between the existing mortgage's balance and the home's purchase price.
• Educate consumers, real estate agents and mortgage professionals about the pros and cons of assumable mortgages to help bring them into the mainstream.

There's one thing officials likely couldn't do, though: make changes to existing loans.

The Government Couldn't Make Previously Unassumable Mortgage Assumable

Creating an assumable mortgage now wouldn't help many current buyers.

The non-assumble, low-rate mortgages originated between 2020 and 2022 would remain unassumable. The government can't simply change loan documents, which are a legal, unmutable contracts between buyer and lender.

An assumable program now would make today's mortgages assumable, but those have rates between 6-7%. Few would want to assume those in the future, especially if rates drop to the high-5s or low-6s.

While making early 2020-vintage loans assumable would have been a good idea, "2020 hindsight" doesn't help much now.

What Are Portable Mortgages?

Portable mortgages allow buyers to transfer the loan on an existing home to their next one. In some ways, this is the opposite of an assumable mortgage because the low interest rate remains beneficial to the seller rather than the buyer.

It's a process that is already widely available in the UK. Speaking of UK lenders, Forbes says, "Most lenders offer this service, allowing borrowers to port their residential mortgage when they move, provided they meet eligibility andaffordability criteria."

Could it work in the U.S.?

Lenders would probably not like the idea. They rely on the churn in sales and purchases of homes for much of their income. So, it's likely to take some strong government intervention to make portable mortgages mainstream here.

And the process may not be easy for consumers, either.

Porting a mortgage would require the borrower to make a new mortgage application. And the lender will apply the same stringent financial requirements as for all mortgage applications. So, for example, if your credit score has taken a nosedive recently, you may not get approved.

Just as with assumable mortgages, there would be a gap between the purchase price of the home being purchased and the current mortgage balance. In that case, the borrower would need to cover that gap with cash, a home equity line of credit (HELOC), or another type of second mortgage.

The Future for Assumable and Portable Mortgages

There are undeniable advantages to streamlining assumable and portable mortgages. And easing the housing crisis is the government's stated policy.

But creating these options may be too little, too late. Neither feature is likely to help today's homebuyer. It may only benefit buyers in five or 10 years, and only if rates drop to 3%, then shoot back up to 7% by then.

Plus, legislators and the administration will likely be the object of intense lobbying from powerful real estate and mortgage bodies. And that could result in no changes or watered-down ones.

Already, some of the same bodies are responding sharply to the proposal to introduce 50-year mortgages, the most high-profile (but possibly least contentious) reform so far suggested.

"Lawrence Yun, chief economist for the National Association of Realtors® [NAR], says that the 'small savings' on monthly payments for a 50-year mortgage would 'come with significant trade-offs,'" according to Realtor.com.

"The slow equity build would make trading up or down very difficult," Yun continued. "It would also take almost 40 years to pay off half the balance, meaning most borrowers would not begin building meaningful equity until the final decade." Of course, most smart homeowners would refinance to a shorter-term loan once home price appreciation allowed them to do so.

Yun's colleague at the NAR, senior economist Joel Berner, summed up our position on these proposals. He told Realtor.com, "subsidizing home demand without increasing home supply" might only push up home prices.

The only sure way to fix the housing crisis is to build millions more affordable homes.