Portable Mortgages Face Hurdles Despite Appeal to Homeowners
WASHINGTON, D.C. - A potential solution to “mortgage lock-in” – the disincentive for homeowners to sell due to low interest rates - faces significant practical and financial obstacles, according to a recent analysis. The concept of “portable mortgages,” allowing homeowners to transfer their existing interest rate to a new property, is gaining traction as a way to address affordability challenges in a shifting housing market, but experts warn widespread implementation could destabilize the mortgage-backed securities market and ultimately increase borrowing costs.
The idea behind portable mortgages is simple: when a homeowner sells, instead of the buyer obtaining a new mortgage at prevailing rates, the seller’s existing mortgage terms - crucially, the interest rate – transfer to the new owner. this would alleviate the lock-in effect,where homeowners are hesitant to move and perhaps lose a favorable rate,contributing to limited housing supply. However, this seemingly straightforward solution introduces complexities that could ripple through the financial system.
According to a report by FHA risk modeling expert edward Krimmel,allowing mortgages to become portable would fundamentally alter the risk profile of mortgage-backed securities. “If a mortgage became portable, the ‘collateral (and thus the risk profile of the entire pool) would change midstream,’ wich would break the logic of securitization,” Krimmel stated.
Securitization relies on predictable loan performance. Portable mortgages would disrupt models used to forecast payoff speeds and loan duration – both critical factors in valuing these securities. Krimmel explains that moving would no longer necessitate buyers securing new mortgages, “extend[ing] the duration of these loans sharply and unpredictably.” This uncertainty would compel investors to demand higher returns, translating to “mortgage rates higher, first abruptly and than structurally through wider spreads over the 10-year Treasury.”
Beyond market impacts, practical challenges abound. Krimmel points to increased complexity in mortgage origination and servicing, as obligations related to liens, escrow, taxes, and title are all tied to specific properties.
“portable mortgages might seem like a good way to mitigate the lock-in effect – a niche issue unique to current market conditions; but widespread implementation would introduce thorny technical problems and significant unintended consequences – many of them worse than the issue they’re trying to solve,” Krimmel concluded.
