Are Assumable Mortgages the Way Out Of The Housing Mess?
Wednesday, September 20, 2023
Are assumable loans an effective tool to combat the "lock in" effect that has throttled the housing market in the current high interest rate environment? As background, an assumable mortgage in theory can create inventory because it can allow a Seller to transfer a lower interest rate loan to a Buyer when a home is sold. In addition to adding value to an existing home, more assumable mortgages would create much needed inventory to jumpstart the housing market.
While most commercial mortgages are assumable, only a sliver of residential mortgages can be transferred. Those eligible include VA loans and FHA loans. The government publishes data on all FHA loans written in the last several years. https://www.hud.gov/program_offices/housing/rmra/oe/rpts/sfsnap/sfsnap The Excel spreadsheets in the database lists the loan's city, state, county, lender, loan type, loan amount and interest rate. As an example, the December, 2021 FHA dataset contains over 65,000 loans, including 1,059 loans written in MA. The interest rates are typically in the 2.5% - 3.5% range. The spreadsheet does not contain the borrower's name or the property address.
A closer examination suggests that most assumable mortgages will not be transferred. According to the Wall Street Journal, the FHA has processed just 3,349 assumable loans for the fiscal year ending September 30th. Additonally, the mortgage insurance premium "MIP" that a FHA homeowner pays adds an extra layer of costs to a Buyer, cutting into the cost effectiveness of the transfer. Finally, most secondary market service providers are not equipped to handle the back office end of the assumption process.