Could Assumable Mortgages Offer Housing Relief? Experts Weigh Benefits & Risks

By Michelle Bell

As housing affordability continues to plummet, a growing chorus of industry experts and advocacy groups are revisiting a once-common practice: assumable mortgages. With interest rates remaining stubbornly high, the ability to take over an existing, lower-rate mortgage is gaining traction as a potential lifeline for prospective homebuyers – and a way to inject liquidity into a sluggish market. But this isn't a silver bullet, and a return to assumable loans comes with complexities and potential risks.

Earlier this week, the California Association of Realtors (C.A.R.) issued a statement urging the wider adoption of assumable mortgages, particularly for loans backed by Fannie Mae and Freddie Mac. “In a market where even modest rate drops can significantly impact affordability, allowing buyers to assume existing loans at favorable rates is a common-sense solution,” the statement read.

A Blast From the Past

Assumable mortgages weren’t always rare. Prior to the 1980s, they were a standard feature of the housing market. Buyers could simply assume the seller's existing mortgage, avoiding the need for new loan origination and its associated fees. However, as interest rates fluctuated wildly and the secondary mortgage market evolved, assumability became less common, particularly for conventional loans. Today, FHA and VA loans are the most readily assumable, offering a precedent for a broader revival.

How It Works – and Why It Matters

For buyers, the appeal is straightforward: access to a lower interest rate than what’s currently available. In a market where even a half-percentage point reduction can translate to hundreds of dollars in monthly savings, this is a significant advantage. “The biggest draw is the rate,” explains one housing economist, speaking anonymously. “If someone locked in a 3% rate a few years ago, and current rates are over 7%, that’s a massive difference.”

The process isn’t without caveats. While buyers avoid origination fees and potentially appraisal costs, they typically need to cover the difference between the outstanding mortgage balance and the sale price. This requires a cash payment or a second mortgage – a factor that can diminish the affordability benefits. “It’s not free money,” cautions a mortgage broker. “You still need to qualify for the assumption, and you need to have the funds to cover any equity gap.”

The Role of Government-Backed Loans

FHA and VA loans already offer assumability, providing a roadmap for potential expansion. VA loans, in particular, have unique considerations. “The seller's VA entitlement remains tied to the loan until it’s paid off unless the veteran substitutes their entitlement,” explains one VA loan specialist. “This can impact their future ability to use their benefits.”

The Federal Housing Finance Agency (FHFA) appears open to exploring the idea. Director Bill Pulte recently indicated that the agency, along with Fannie Mae and Freddie Mac, is “evaluating how to do assumable or portable mortgages in a safe and sound manner.”

Potential Risks and Challenges

Despite the potential benefits, a widespread return to assumable mortgages isn’t without risk. One major concern is credit risk. Combining an assumed mortgage with a second mortgage to cover equity could leave buyers overextended. “Lenders need to carefully underwrite these transactions to ensure borrowers can comfortably manage the combined debt,” says one risk management expert.

Another challenge is market complexity. Assumable loans introduce a wrinkle into the typical homebuying process. “Buyers are limited to the terms of the existing loan,” explains a real estate attorney. “They can’t shop around for the best rate or terms.”

Furthermore, servicers may be reluctant to process assumptions, especially if it requires more effort than originating a new loan. The Consumer Financial Protection Bureau (CFPB) has flagged instances of servicers delaying assumption requests or pressuring borrowers to refinance at higher rates.

Impact on the Mortgage Market

The reintroduction of assumable mortgages could also impact the broader mortgage market. Increased assumption activity could reduce new loan origination volume, potentially affecting lender profits. Additionally, the impact on mortgage-backed securities (MBS) needs to be carefully considered.

“The prepayment speeds on MBS could be affected,” explains one mortgage-backed securities analyst. “Assumptions could lead to faster prepayments, which could impact investor returns.”

A Solution for Some, Not a Panacea

Ultimately, assumable mortgages aren’t a silver bullet for the housing affordability crisis. They’re a potentially useful tool, particularly for buyers who can qualify for an assumption and cover the equity gap. However, it’s crucial to address the challenges and risks associated with this practice to ensure it benefits both borrowers and the broader housing market.

“It’s not going to solve all our problems,” concludes the housing economist. “But it’s a step in the right direction. It offers a viable option for some buyers and can inject some much-needed liquidity into the market.”

As the FHFA continues its evaluation, industry stakeholders are urging a cautious and well-considered approach to ensure that any changes benefit both borrowers and the stability of the housing finance system.