FHFA evaluates presumptive and assumable mortgages

The comments come days after President Donald Trump shared an image on social media that hinted at a proposal for 50-year mortgages — an idea that quickly drew criticism for its limited impact on affordability given significantly higher interest costs over the life of loans.

‘Not a realistic option’

Assumable mortgages – which allow qualified buyers to assume a seller’s existing loan terms, including the balance and interest rate – have generated cautious optimism among industry participants. But transferable mortgages, which allow borrowers to transfer an existing loan from one property to another, face more skepticism.

“While details are limited, making conventional mortgages portable would likely reduce the number of new mortgages and put further pressure on an already struggling sector,” said Brendan McKay, Chief Advocacy Officer at the Coalition for Broker Action. “And while the idea may sound attractive given how low interest rates were recently, existing loans cannot be rewritten to make them transferable, so it would not provide immediate relief.”

Ron Gapp, partner at law firm Brody Gapp LLPadded that while portable mortgages are recognized in other countries such as Canada, they are extremely rare in the US

“The benefit is that the borrower can retain the original loan terms, which may be more favorable than current market conditions,” Gapp said. “However, almost all home loans issued in the United States today do not allow portability under their contractual terms. As a result, portable mortgages are not a realistic option for most borrowers today, given the terms they originally agreed to or what is currently offered.”

Bob Simpson, CEO of Daylight AMLrecently wrote in a HousingWire column that portable mortgages are “neither fanciful nor untested,” adding that they are common in countries like Canada, Australia and the United Kingdom

“They require administrative work and coordination,” Simpson wrote. “With the stroke of a pen, trillions of dollars of sub-5% loans would be on the market and available to buyers.”

Kevin Peranio, head of lending at PRMGadded that “it’s good if you’re a manager like us because 75% of sellers buy.” Meanwhile, 40% or more of purchases are going to first-time homebuyers, “so still a huge amount unaffected,” he added.

One of the biggest hurdles to introducing portable mortgages lies in the way loans are structured: they are secured by the property itself.

“The biggest obstacle I see with assumable mortgages is the way our mortgages work: they are backed by the collateral of the property,” said Matthew VanFossen, CEO of Absolute Home Mortgage Corp.

“So how do you lift a note and change it to another property? I don’t believe there is an actual vehicle or mechanism that would be within the director’s power or ability to even make a mortgage fully transferable. We have a mechanism for that now. It’s called paying off your current mortgage and applying for a new mortgage.”

Economics in services

Assumed mortgages are not new, but only certain loan types qualify.

Mortgages insured by the Federal Housing Administration (FHA) and the The U.S. Department of Veterans Affairs (VA) are generally plausible. Loans backed by the US Department of Agriculture (USDA) and some conventional adjustable rate mortgages (ARMs) may also qualify under specific terms.

In these cases, no appraisal is required, but the buyer must go through the standard underwriting process to qualify. Costs are typically lower than for new loans – a dynamic that could make the product less attractive to some lenders and loan officers.

“This feature may be particularly attractive in today’s market, where sellers may have locked in low interest rates during the COVID era, allowing buyers to avoid higher current market rates,” Gapp said.

But experts warn that making assumed mortgages more widely available would require addressing the economics for servicers. Currently, the FHA limits the fees that servicers can charge for processing, underwriting and closing a loan underwriting – increasing to $1,800 in 2024 from the previous limit of $900. But some say the new limit still doesn’t cover the actual costs.

“Only a fraction of applications are actually approved,” says VanFossen. “The biggest hurdle is the cost of origination – we know it’s over $10,000 per loan. You can’t get away with an assumption unless you’re willing to re-underwrite it at that fee. It’s not in a servicer’s best interest to allow that mortgage to go through.”

VanFossen also questioned whether conventional mortgages would be acceptable a year from now, when interest rates could drop to 5.75% or less. How attractive are these to adopt?
“Is there also a different fee structure? Are the valuations of an assumable and a non-assumable mortgage priced differently in the secondary market?” he asked.

Another challenge arises in markets where home prices have soared, as buyers may need significantly larger down payments to close the gap between the existing loan balance and current market value.