With rates too high to make buying a home palatable, or even possible, we have a housing market that has been variously described as frozen or sick. What is certain is that many people are depressed about missing out on the interest rates that existed in 2021, and they fear that rates will never get that low again.
In the movie “The Firm,” Tom Cruise’s character, Mitch McDeere, is in a Grisham-esque world of hurt, threatened by both the mob and the FBI. He comes up with a plan and tells his wife, Abby, that he doesn’t have a way out, “It’s more of a way through.”
Proffered here is just that – a way through.
Asking for rate reductions: Why ask?
The administration has demonstrated its displeasure with Jerome Powell, a figure viewed as either intransigent or resolute, depending upon one’s line of sight. All readers are aware that after much sniping, the Fed finally lowered rates by a quarter point.
This, however, had little immediate effect on mortgage rates. They dropped a bit, then rose a bit, ending the week basically unchanged.
So how do we get low rates and a general goosing of our sick US housing market?
There may be an answer right in front of us.
Solution: Assumability
As conservator of Fannie Mae and Freddie Mac, the FHFA could direct that from this point forward, all loans currently held by the GSEs are assumable. FHFA has emergency powers, and they flexed these norm-breaking muscles to delay foreclosures during Covid.
If the president wants to invoke such powers again, Pulte should just declare that all loans held by the GSEs are now assumable. In other words, stop asking for a rate cut, and just deliver one.
With the stroke of a pen, Pulte could unlock a trillion-dollar inventory of sub-5% mortgages.
It is a proven concept
Assumable loans are not some fringe idea. We’ve employed this useful tool in VA and FHA loans for years. It’s a proven concept. We tie the loan to the property, and the next buyer to come along can apply and take over that loan.
In Canada, this is called a portable mortgage, because there, rather than tie the loan to the property, Canada lets the borrower take their 3% loan with them. Thus, the moniker “portable mortgage.” A similar concept is used in other nations around the world to finance residential real estate. Whether tied to the borrower (Canada, Australia, UK) or to the property (the US), the concept is valid and tested.
After Pulte declares all his GSE loans to be assumable, a $500,000 house with a $300,000 first at 3% would allow the borrower to take over that first. Then the borrower would take out a $175,000 second mortgage at a higher rate, say 7%, and put $25,000 down. The seller gets their proceeds at closing and the borrower gets a 3% first and a 7% second.
These systems aren’t perfect. They require administrative work and coordination. But they prove the point: tying a mortgage to a borrower (or a property) is neither fantasy nor untested. With the stroke of a pen, trillions of dollars in sub-5% loans would be on the market and available to buyers.
Who will object?
Let’s say Pulte does it. All GSE loans become assumable, pending borrower qualification. What happens? The 3% mortgages are back in circulation. Buyers can assume a low-rate first mortgage and supplement with a second, – yes, even if that second is at 8%.
Who wins? Buyers locked out of the market due to high rates. And sellers who want to move but need to entice offers. The entire liquidity of the housing system is reliving its glory days.
Who loses? Lots of people. Most notably to readers here – loan originators who now will be forced to originate seconds instead of firsts. Also losing are sellers, whether institutional or private parties, who own their home free-and-clear. They have no 3% loan with which to entice borrowers. This means that they might get less for their property than their high-LTV neighbor.
And don’t forget the MBS Investors who will say that you are changing my borrower – we didn’t agree to that! Perhaps they’ll argue that this is a taking prohibited by the 14th Amendment. Fine, but if we qualify the new borrower and we deliver the same payment stream to the MBS, I fail to see the damage.
Also, there’s a contract clause about “alienation of title,” stating that you can’t deed the property to anyone else without violating the terms of the contract. That seems a minor thing to paper (or insure) your way out of.
It’s not perfect. It’s not a way out – it’s a way through.
Everyone wants a rate under 5%. There’s a ton of them out there – but we currently plan to pay them all off when the next buyer comes along. Let’s not do that.
FHFA head Pulte should declare all of his loans, lock stock and barrel, to be assumable.
Seeding the US housing market with all these low-rate loans would have an immediate and profound effect.
This administration is known for bold moves. It has been unafraid to discard convention as it imposes its will on everyone from law enforcement to leadership of the Kennedy Center. If it acts boldly here, in order to help young buyers and the entire US housing market, the opposition, from BlackRock to Rocket, will likely push back hard.
It’s possible to free up all those sub-5% mortgages and start selling property again.
Crazy, but it might just be a way through.
Bob Simpson is the CEO of Daylight AML.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: [email protected].
