With mortgage lending ground to a halt in the face of rising interest rates, many in and around the banking and real estate industries are looking for ways to unlock the market. Some say the answer lies to the north — in Canada.
These market participants say many of the sector’s woes could be resolved if U.S. lenders and regulators emulated their peers in Canada and some other advanced economies by allowing homeowners to carry mortgages with them from one property to another.
Mortgage portability is a feature available to borrowers in Canada as well as Australia, the United Kingdom and other countries. It allows them to retain the deal, the interest rate or — in some cases — the entire loan after selling one home and buying another.
If brought to the U.S. today, Andy Heart, CEO of North Carolina-based Delegate Advisors and a former banker, said this option would remove the “golden handcuffs” from homeowners who — despite continued property value appreciation — are unwilling or unable to foot the bill for new mortgages should they move.
“That low-cost mortgage becomes low-cost housing for the remaining term of that mortgage,” Heart said. “It’s like all of a sudden you’ve turned your biggest liability into your biggest asset.”
Yet, while the adoption of portability would benefit existing homeowners and potentially boost the broader for-sale housing industry, some policy experts say the shift would create more problems than it would solve.
Mark Calabria, the former head of the Federal Housing Finance Agency, said incentivizing borrowers to hold their loans longer would amplify risks for any entity with mortgages or mortgage-backed securities on their balance sheets.
“It’s a fair amount of interest rate risk you’re taking on,” Calabria said. “Pre-record low rates, pre-pandemic, the typical 30-year mortgage only really was around for about seven years before people refinanced or prepaid. Portable means, from the lender’s perspective, that 30-year [mortgage] may actually turn into 30 years.”
Proponents of portability argue that duration risk is baked into the origination or purchase of a 30-year mortgage. Anyone engaged in the space, they say, when interest rates were at record lows during and following the COVID-19 pandemic should have hedged against the risk of slower repayment times.
“Whether it’s a five-year mortgage or whether it’s a 30-year mortgage, you’re still doing the same job from an interest rate risk management perspective. Duration of the instrument doesn’t matter to me, you should be understanding that the price volatility and sensitivity of your earnings to a change in interest rates is higher when the duration is longer,” Heart said. “I don’t have a lot of sympathy for people who didn’t do the job on the asset-liability matching front.”
But industry participants note that they do incorporate interest rate volatility into their underwriting, but they have done so under the current regime, which does not allow for portability.
Christopher Maher, CEO of Toms River, New Jersey-based OceanFirst Bank, said the U.S. mortgage market is directed by the government-sponsored enterprises Fannie Mae and Freddie Mac, which dictate the standards mortgages must meet to be eligible for purchase and securitization. They also set expectations for investors in mortgage-backed securities, one of which is that all qualifying mortgages have a due-on-sale clause, requiring loans to be satisfied when a property is sold.
Maher said the GSEs could change their standards to allow for portability, but doing so would have to be done carefully so as not to disrupt the markets that supported the low-cost, long-term mortgages in question.
“Fannie Mae and Freddie Mac are still in conservatorship, so the owning investor there is the U.S. government,” he said. “If they were motivated to do something [with portability], they would have an opportunity, but I think it’d be a very complicated thing for them to figure out.”
A spokesperson for the Federal Housing Finance Agency, the entity that oversees the GSE conservatorship, said it is not exploring mortgage portability at this time.
Mortgage portability as a solution to a lack of housing supply remains a fringe theory; no policymaker, regulator or industry group is championing the cause. But the concept has made its way into various corners of the housing finance landscape.
Pete Mills, senior vice president of residential policy and member engagement at the Mortgage Bankers’ Association, said the trade group is exploring the potential impact of portable mortgages in response to an uptick in member inquiries. Specifically, the MBA is looking into the “legal, constitutional and investor implications” of the practice.
Allowing borrowers to port their mortgages would necessitate a host of procedural changes in the mortgage sector. Processes would have to be developed to handle mortgages while they are being transferred from one property to another and appraising newly purchased properties. Some speculate the change could shift the focus of underwriting away from the collateral value of underlying properties to the creditworthiness of individual borrowers. There’s also a matter of establishing a fee structure for porting.
There would also be unknown implications on mortgage-backed securities. While some fear a sweeping change in mortgage terms would be detrimental to mortgage-backed securities holders, some research — including a study from the analytics firm MSCI this past summer — suggests portability could be a boon to valuations.
Skeptics of portability are quick to point out that the U.S. housing finance system differs significantly from other markets.
In Canada, for example, most mortgages have five-year terms amortized over 25 years, meaning they must be renewed, refinanced or sold off every five years. Unlike the 30-year mortgage seen in the U.S., borrowers face a prepayment penalty if they sell their home and pay off a mortgage before their term is up.
“The resulting penalty could wipe out tens of thousands of dollars from the proceeds of the sale,” said Clay Jarvis, a Canadian real estate and mortgage expert with the personal finance firm Nerdwallet. “But if you port, prepayment charges shouldn’t be an issue because you’re technically not breaking your mortgage.”
While portability is meant to offset the challenges created by Canada’s five-year term regime, Jarvis noted that not all mortgages are portable. Variable rate loans and certain restrict-rate mortgages cannot be ported. Also, he said the feature is not widely known or used by homeowners in the country.
Much of the debate over whether the U.S. should adopt mortgage portability centers on the degree to which the so-called lock-in effect that has gripped the housing market will reshape mortgage borrower activity and for how long.
According to the home listing company Redfin, more than 90% of homeowners have a mortgage rate below 6%, including 82% with 5% or less and 63% with rates below 4%. Rates are currently more than 7.5% after peaking above 8% in October. As a result, home sales volumes and mortgage originations have cratered to their lowest levels in 10 and 20 years, respectively.
Portability advocates say these dynamics could lead many borrowers to hold mortgages for their full terms anyway. They argue that portability would create more lending opportunities in the form of second-lien mortgages to make up the gap between the values of the existing mortgage and the new home.
Some banks and other lenders, on the other hand, would rather wait out the current conditions and see how prepayment rates evolve. Maher said eventually consumers will adapt to higher rates and homeowners will encounter reasons to give up ultra-low rate mortgages.
“Time has a way of marching on, and we’ve already been in this higher rate environment for more than a year now,” Maher said. “Eventually, people will make life decisions to sell their homes and give up 3% mortgages for a variety of reasons.”
Others who are active in the housing space say the option is a needed solution for the housing sector. Drew Uher, CEO of HomeLight, a tech platform that connects real estate agencies with buyers and sellers, said the shift would benefit individual homeowners as well as the various industries that have been decimated by the sharp drop in transaction activities.
“Mortgage portability is not only an opportunity for consumers to rejoin the housing market, but also sets up a unique opportunity for real estate professionals — specifically real estate agents and lenders — to continue to grow their businesses and be at the center of the transaction,” Uher said. “There needs to be innovation for agents and lenders to offer this solution to their clients to support the restabilization of the market as well, as they guide clients towards smarter financial decisions and homeownership.”
Heart said the shift to portability would have to be initiated by Congress and implemented by federal regulators, but he noted there is precedent for such a shift. He points to reforms enacted after the Savings and Loan Crisis of the 1980s and ’90s that made commercial loans on bank balance sheets liquid, a move that facilitated the creation of the senior secured loan market.
He argues that such policies should be politically feasible given the benefits to consumers and the broader economy.
“Who wouldn’t want to go into the ’24 election saying, ‘Hey, by the way, I voted to give you low-cost housing for the next 20 to 30 years, thank you very much,'” Heart said.