What if you could move to a new home but keep the mortgage that you took out on the old one, with the same balance, interest rate and time remaining? You would probably be more willing to move. That would benefit both sellers and buyers. At the moment, the market for existing homes is partly frozen because people who have 3 percent mortgage loans don’t want to give them up for 7 percent loans on new homes.
Making mortgages portable sounds unrealistic. After all, mortgages are tied by contract to particular pieces of property. When I raised the idea with the Federal Housing Finance Agency, which oversees the big mortgage securitizers Fannie Mae and Freddie Mac, I got a one-sentence email back saying that the idea “is not under active consideration.”
The Mortgage Bankers Association also dismissed the idea. “We’re getting this question a lot, even from our own members,” Mike Fratantoni, the group’s chief economist, told me. Nevertheless, he said he couldn’t imagine that owners of securitized loans would go along with the idea. “I think the prospects are pretty dim.”
Actually, though, there’s a remarkable, recent piece of research that finds that borrowers wouldn’t have to pay the owners of their loans very much money to make it worth their while to port a loan from one property to another.
The report, which appeared in December in The Journal of Fixed Income, is by Jiawei David Zhang, Yihai Yu and Joy Zhang (no relation to David), all of whom work in securitized products research at MSCI, a company that provides market indexes and data analysis tools for investors.
I interviewed David Zhang, a managing director based in New York. He gave the example of a $500,000 mortgage that’s been packaged up with similar loans, turned into a security, and sold off to investors all over the world. Right now by law there’s no way to detach that loan from the property that serves as its collateral and reattach it to a new property.
But if borrowers had the option to pay a “portability exercising fee,” both they and the investors in mortgage-backed securities would benefit, Zhang said. An upfront fee as low as 3 percent on a $500,000 loan — that’s $15,000 — might be enough to induce the security holder to allow you to apply your mortgage to a new home given current market conditions, the authors found.
A key benefit to borrowers is that most mortgages in the United States feature the right to prepay them — that is, to pay them off ahead of schedule. Prepayment rates soar when interest rates fall, because people can save money by taking out a new loan at a lower rate. Prepayment rates fall at times like the present, when a new loan would be more costly than the existing one. Investors are stuck earning low returns when they would rather that the loans be paid off so they could use the proceeds to make higher-rate loans. They fear portability would prolong their pain by making loans even less likely to be prepaid.
The key insight in the MSCI paper is that the portability option wouldn’t reduce borrowers’ likelihood to prepay as much as investors might fear. Let’s say you’re at year five on a cheap 30-year loan. Under current rules, you can keep that cheap loan for 25 more years by refusing to move. Now add in the portability option: You still have only 25 years maximum remaining on that loan.
True, mortgage investors would lose money on people who would have moved and paid off their mortgages and now instead would port their loans to their new homes. But investors would make money on the 3 percent fees paid by a potentially bigger group: people who would have stayed put and stuck with their cheap loans, but now would pay the premium to move and bring those loans with them. Also, many people who sell a house don’t buy another one, so they don’t need to port their mortgage. They would continue to prepay as usual, to investors’ benefit.
That’s the economics part. The legal part is more challenging, but the MSCI paper points to the success of the Home Affordable Refinance Program that was instituted in 2009 during the global financial crisis and rewrote the terms of mortgage loans, albeit in a different way.
Portable mortgages are already common in Canada and Britain, although that’s partly because typical loans in those countries have rates fixed for no more than five years (so investors don’t have to worry so much about getting stuck holding loans with low fixed rates).
I hope what Zhang, Yu and Zhang studied gets the attention it deserves. Mortgage portability could be, as David Zhang told me, a “win-win” for borrowers and investors.
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