By ERIN FLYNN JAY
The concept of mortgage porting, or transferring the terms of an existing loan over to a new property, has gained popularity as Americans locked into low interest rates try to figure out ways to navigate the current housing market.
It is estimated that trading up to a 25% more expensive home would more than double the average mortgage holder’s monthly payment at current interest rates. Even moving to a similarly-priced home in the same neighborhood would increase principal and interest payments by 40%.
Advocates for portable mortgages say if homeowners could keep their current interest rates, they would be more likely to sell their homes and buy a new one. That, in turn, would help unfreeze the current housing market.
But portable mortgages, which are common in Canada and the UK, may not work here in America, as there are fundamental differences in how mortgages work worldwide.
Rick Sharga, founder and CEO of CJ Patrick Company, and Mike Fratantoni, chief economist for the Mortgage Bankers Association, recently spoke with The Mortgage Note about the topic.
Sharga said that portable mortgages could help alleviate the ‘rate lock’ that is preventing many American homeowners from listing their properties for sale.
“Having the ability to take their current mortgage with them would probably encourage more homeowners to list their properties for sale,” said Sharga. “This could increase inventory, which, in turn, could help lessen the current supply/demand imbalance which is driving prices higher.”
Although that sounds promising, it’s also very likely that none — or almost none — of the 53 million active mortgage loans that exist today include language allowing them to be ported, Sharga said.
Fratantoni explained that is because the mortgage market relies on clauses requiring loans to be paid off when a property is sold. As such, homeowners don’t have the choice to just bring their mortgage with them when they move into a new home.
Fratantoni added that portable mortgages are made on a prospective basis and don’t apply retroactively to loan agreements.
“They could only potentially apply to loans made at today’s rates,” Fratantoni said. “They would not be applicable for current homeowners that have 3% mortgages and are hence reluctant to list their properties.”
Fratantoni said expanding the use of portable mortgages may not help homeowners today, but he can see benefits for their use in the future.
“Perhaps it would reduce lock-in if the move from record low mortgage rates to higher rates repeated itself in the future,” he said.
Could a switch to more portable mortgages work in America?
Sharga explained that in the UK and Canada there are long-term mortgages, but interest rates are reset at shorter intervals, allowing lenders the opportunity to increase rates if market conditions change.
In America, everything is based on the concept of 30-year fixed-rate loans. Lenders, and the investors on the secondary market who buy these loans or mortgage-backed securities, rely on the fact that most borrowers will either move or refinance their properties at some point during that three-decade timeframe.
A switch to more portable mortgages could be problematic for non-bank lenders, who need to sell or securitize their loans in order to raise capital to issue new loans, Sharga said.
“These lenders — who today account for the majority of mortgage loans — rely on a healthy level of demand from investors, something that’s not a certainty if there’s a strong possibility that the investor’s funds might be locked up for periods as long as 30 years,” said Sharga.
Fratantoni said investors in mortgage-backed securities would want to be paid more to compensate them for taking on additional risks if the use of portable mortgages expanded.
“This cost would ultimately be borne by borrowers,” said Fratantoni.
Sharga added that in order for portable loans to work in America, Fannie Mae and Freddie Mac would need to be involved to ensure success. The Federal Housing Finance Agency has said on behalf of the entities that portable mortgages are not under consideration.
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