Fannie Mae and Freddie Mac, two influential mortgage buyers the United States holds in conservatorship, are looking into doing more with loans transferred between buyers and sellers, according to Federal Housing Finance Agency Director Bill Pulte.
“At Fannie and Freddie, we are evaluating how to do
While loans backed by agencies like the Federal Housing Administration or Department of Veterans Affairs can be assumed, the government-sponsored enterprises Pulte oversees have restricted the practice to circumstances like death and divorce for fixed-rate mortgages.
If the enterprises allow new homebuyers to assume existing FRMs, it could move more homes in a market where many existing households have lower-than-market rates, but it also may introduce new risks and put pressure on mortgage companies’ margins.
Assumable vs. portable loans
In the United States, the small but growing use of loan assumptions in conjunction with homebuying involves situations where the seller transfers their existing mortgage to the buyer, whereas in a country like Canada, borrowers may “port” their existing loan to a new property.
“Assumability stays with the house. Portability stays with you,” said Emmanuel Santa-Donato, senior vice president and chief market analyst at
Differences between countries raise questions about how well its concept of portability would work in the United States, Santa-Donato said, noting that the U.S. market generally gives consumers the right to refinance into lower rates, but Canada has strict prepayment penalties.
Challenges for mortgage companies
U.S. lenders may want to avoid fixed-rate loan assumptions, however, because they’re less financially attractive than making a new mortgage would be.
Assumptions also extend the time the holder of the loan is stuck with a lower-than-market-rate asset.
Mortgage lenders and investors may want to have some incentive to take such risks, Santa-Donato said, noting that in some cases sellers of homes also may want something to offset the fact they’re giving up low rate financing they have to someone else.
In markets where sellers have the upper hand, assumptions might not necessarily make homebuying less expensive for new borrowers.
“I do think this thread can get lost in the conversation around assumable mortgages,” he said.
A specialist’s view of the market potential
In a market where 70% of borrowers have a rate under 5%, $9 trillion of loans transferred at an average rate of 3% would save the typical borrower $700 per month for 26 years or $200,000-plus over the life of the loan, according to Raunaq Singh, founder and CEO of Roam, a brokerage that specializes in assumable loans.
These loans do have some upsides for the industry given that companies that hold mortgage servicing rights would rather keep a loan in portfolio with a lower-than-market rate than see it go into runoff altogether.
“Servicers like assumable mortgages because they can collect 25 basis points per payment and retain their MSRs instead of having them paid off and sent elsewhere,” Singh said in an email. “Additionally, they can originate
A second mortgage might be needed to make up a difference between the original mortgage for a home and the house’s current purchase price if it’s notably higher, Santa-Donato said.
Buyers may want to run calculations for a weighted average interest rate based on what’s available for the first and second lien combined in those instances to determine how much or whether the two types of financing help with affordability.
What could determine whether assumption use grows
How attractive loan assumption is for homebuyers may depend on relative prices and whether they have an advantage over sellers in a housing market that’s softening in some areas.
Borrowers have to meet certain underwriting criteria to get an assumption and much will depend on what any requirements for them in government-related loan programs turn out to be, said Kara Snow, senior regulatory counsel at Covius.
If the housing market keeps softening and the enterprises that buy many mainstream loans in the United States do broaden the rules for fixed-rate loan assumptions, it could put more pressure on lenders to more routinely allow them, and make processing more efficient.
“If Pulte makes assumable mortgages a much bigger part of Fannie and Freddie’s portfolio, then assumable mortgages could get much more popular across the board,” Snow said.