As policymakers and the Trump administration look for solutions to spur a stagnant housing market, two mortgage instruments have come under consideration: assumable mortgages and portable mortgages. Both instruments seek to encourage home sales by reducing mortgage lock-in—a situation where owners with low interest rates have little incentive to sell in a high-interest-rate environment, thus reducing market liquidity.

Assumable mortgages reduce lock-in by allowing a buyer to take over the existing homeowner’s mortgage and their interest rate (which we discuss in another article), but portable mortgages allow a homeowner to transfer their existing mortgage balance and interest rate to a new property.

Of the two solutions, we believe portable mortgages are the more promising product to spur housing market liquidity, but they face many of the same disadvantages as assumable mortgages. Here, we outline the benefits portable mortgages offer and the challenges they face to become a reality. As with assumable loans, we discuss implementation only for new mortgages going forward, without trying to make existing loans portable ex post.

Three ways portable mortgages can prevent lock-in

Let’s assume a borrower has a 3.5 percent mortgage interest rate in an environment in which rates are 6.5 percent. Normally, the borrower would be reluctant to sell the home, as monthly principal and interest payments on a $300,000 mortgage would increase from $1,350 to almost $1,900. With a portable mortgage, the borrower could transfer the 3.5 percent rate to their new home, thus overcoming the lock-in effect. This process offers three key advantages over assumable mortgages:

1. Portable mortgages prevent lock-in more effectively than assumable mortgages

In a high-rate environment, owners who have outgrown their starter home may not have the means to support a new mortgage at a higher rate. But a portable mortgage allows owners to keep their low rate and apply any accumulated equity on their current home toward a higher down payment, potentially avoiding the need for a second lien.

With an assumable mortgage, the potential seller can monetize their low rate only if the buyer pays a higher price, which can pose appraisal issues and force buyers to make even higher down payments. Low take-up of existing assumable mortgage offerings from the Federal Housing Administration (FHA) and the US Department of Veteran Affairs (VA) indicate that this solution is not enough to prevent lock-in.

If FHA and VA mortgages were portable instead of assumable, it’s likely that currently locked-in starter homes would be freed up. But first-time homebuyers would have to seek a mortgage at current interest rates, meaning they could be at a disadvantage when bidding for homes against a repeat buyer with a portable mortgage rate. Though in most cases, the repeat buyer will likely not be looking for a starter home. 

2. Portable mortgages allow buyers in distress to move to cheaper housing markets more easily

Locked-in homeowners have constrained mobility, potentially preventing them from taking a new job or pursuing lower-cost housing opportunities in another part of the country. Portable mortgages solve this problem, especially for homeowners moving to a similarly (or lower-) priced home. Because the homeowner would not need reapproval for a new mortgage, a record of recent job insecurity or credit score declines would not prevent them from purchasing a home in another part of the country, which could increase their financial stability. As a result, portable mortgages could reduce credit default losses for Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs).

3. Portable mortgages reduce the costs of mortgage originations

Originating a mortgage costs lenders around $12,000, on average, with much of that cost going toward loan officer compensation (PDF) and other lender personnel (e.g., underwriting and processing). Roughly 4 million purchase mortgages are originated each year, and about half are for first-time homebuyers. Unlike assumable mortgages that require new underwriting, portable mortgages could save repeat borrowers much of that $12,000 when moving (with the notable exception of homebuyers who are upsizing and need to borrow additional funds). Borrowers would still need to pay third-party costs (e.g., appraisals and titles), as they do now.

Overall, a portable mortgage option could save borrowers as much as $20 billion a year that currently pay for direct fees like origination and underwriting and implicitly appear in a higher spread between mortgage-backed security (MBS) coupons and mortgage rates.

Challenges facing portable mortgages

Portable mortgages would be more effective in eliminating the lock-in effect than assumable mortgages, but both types face similar challenges. Like assumable mortgages, portable mortgages would apply only to new mortgages as the terms on existing securities cannot be altered. Additionally, both solutions would require the following:

• Additional funding to make up the difference between the balance on the existing mortgage and the home price. Portability would require a robust second-lien market to enable repeat buyers to take out a new mortgage on a more expensive home, but portability is not as limiting as assumable mortgages, which would also require higher down payments from first-time homebuyers.
• Higher mortgage rates at the inception of the mortgage (by as much as 40 basis points) to account for the longer duration and slower prepayments of this product in higher-interest-rate environments.
• Widespread GSE take-up to benefit from liquidity in the MBS market. As fringe products, both solutions would carry higher mortgage rates because of the longer duration and the lower liquidity. This suggests most borrowers will likely continue to choose the less expensive traditional mortgage.

In addition to these shared challenges, portable loans face a unique barrier: they don’t exist in the US. Versions of portable mortgages exist and work in other countries, including Australia, Canada, and the UK. Creating a similar US version should be a low-risk change for the GSEs and the Federal Housing Finance Agency, especially because the GSEs already guarantee credit risk for MBS investors and do not price-discriminate geographically. Some guardrails would be necessary: the property must include an appraisal (or an automated valuation model at the insurers’ discretion), remain a one-to-four-unit home, and not increase the loan-to-value ratio.

Legally, a portable mortgage option could work, as the Garn-St Germain Act of 1982 does not explicitly require due-on-sale clauses but merely allows for their enforcement when they do exist. One lender introduced a portable mortgage in the US after 1982. Although it failed because the product could not expand without GSE backing, its attempt suggests that legal constraints could be overcome.

Portable mortgages cannot solve housing supply problems

The portable mortgage may be more useful than the assumable mortgage for alleviating lock-in, but the barriers to adoption are high. Further, widespread assumability or portability could increase liquidity in the home market, but neither would increase the net housing supply, as almost every seller would need to buy a replacement home.

The real solution to affordability is to increase supply by catalyzing new construction through changes that loosen zoning code and building regulations. The sooner policymakers address supply through cheaper and more dense construction, the quicker we can address the nation’s affordability crisis.