Portable Mortgages Faceโข Hurdles Despite โAppeal to Homeowners
WASHINGTON, D.C. -โ A potential solution to “mortgage lock-in” – the โคdisincentive for homeowners to sell due โto lowโ interest rates -โ faces significant practical and financial obstacles, accordingโ to aโ recent analysis. Theโค concept of “portable mortgages,” allowing homeowners to transfer theirโฃ existing โinterest rate to a new property,โ is gaining โtraction as a way to address affordability challenges in a shifting housing market, but experts warnโ widespread โขimplementation could destabilize theโ mortgage-backed securities market and ultimately โ increase borrowing costs.
The โidea behind portableโฃ mortgages is simple: when โa homeowner sells, instead of the buyer obtaining a new mortgage at prevailing rates, the seller’s existing mortgage terms -โ crucially, the interest rate – transfer to โคthe new owner. this would alleviate the lock-in effect,where homeownersโฃ areโ hesitant โto move and perhaps lose โขa favorable rate,contributing to limited housing supply. However, this seemingly straightforward solution introduces complexities that could ripple through โคthe financial system.
According to a report by FHA risk โmodeling expert edward Krimmel,allowing mortgages to become portable would fundamentally alter the risk profile of mortgage-backed โคsecurities. “If aโ mortgage became portable, the ‘collateral (and โฃthus the risk profile of theโ entire pool) would change midstream,’ โฃwich would break the logic of securitization,” Krimmel stated.
Securitization relies on predictable loan performance. โขPortable โmortgages would disrupt models used to forecast payoff speeds and loan โคduration – both critical factors inโ 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 wouldโข compelโ investors to demand higher returns, translating to “mortgage rates higher, first abruptlyโ and thanโ structurally through wider โขspreadsโฃ over the 10-year Treasury.”
Beyond market impacts, practical challenges abound. Krimmelโข points to increased complexity โin mortgageโค origination and โฃservicing, as obligations related to liens, escrow,โค taxes, and title are all tied to specific properties.โ
“portable mortgages might seem like a good way โto mitigateโ the lock-in effect – a niche issue unique to current market โconditions; โขbut widespread implementation โฃwould introduce thorny technicalโ problems and significant unintended consequences – many of them worse than the issue they’re trying toโข solve,” Krimmel concluded.
