How the Canadian mortgage model could help unfreeze the housing market

• Making mortgages portable could help unfreeze the US housing market, experts say.
• Letting people keep cheap mortgage rates when they move could boost listings and transactions.

Copying the way mortgages work in countries such as Canada and the UK could help thaw the frozen US housing market, experts say.

Home listings and transactions have plummeted in recent years, as homeowners who've locked in cheap 30-year mortgage rates are loath to lose them by selling up and taking on a new mortgage when rates are now above 7%.

Prospective buyers are also balking at paying such high mortgage rates, especially when national home prices are near record levels, fueling an affordability crisis.

The US housing market differs from most because the vast majority of mortgages are not assumable, meaning a buyer can take on a seller's mortgage when they purchase their home. Nor are they portable, which means borrowers can transfer their existing mortgage to another property.

Offering portable mortgages would enable hesitant sellers to keep their rock-bottom mortgage rates when they move, potentially boosting overall inventory and transaction volumes.

"The main benefit of introducing a feature like portability is that it could 'unfreeze' housing markets to some extent by allowing homeowners to move without having to give up the low mortgage rates that they've locked in," Julia Fonseca, an assistant professor of finance at the University of Illinois Urbana-Champaign, told Business Insider.

As for buyers, portability could make purchasing a home more attractive, as they wouldn't have to worry about rising mortgage rates locking them into keeping their new home.

Potential downsides

Still, debuting portable mortgages might be harder than it sounds.

Fonseca warned that if the federal government rolled them out, it might have to compensate lenders and investors who already hold non-transferable mortgages and mortgage-backed securities to prevent a market revolt.

Moreover, she said that homeowners might shy away from selling if they face additional fees or a complex porting process, depressing instead of raising inventory and transaction volumes.

Portable mortgages would take time to introduce and might not be universally welcomed, Richard Martin, an associate professor of real estate at the University of Georgia's Terry College of Business, told BI.

"Adaptation would be slow and lenders don't really have the incentive to offer this option since the current situation in the US pretty much guarantees a new mortgage is originated at current market interest rates," he said.

New problems

In short, portable mortgages don't seem to be a panacea for the housing market's woes.

"Attempting to make them portable will not solve this problem without other problems," Susan Wachter, a real estate and finance professor at The Wharton School, told BI.

She said people would likely hold portable mortgages for longer than standard ones, as they could keep them when they move homes.

Loans that have longer durations increases the interest-rate risk to mortgage lenders, as they could be lumped with a lower-yielding asset for a long time if inflation jumps and rates rise, Wachter said. Equally, she noted that if rates fall and borrowers prepay their mortgages, lenders might see their income streams dwindle.

Lenders would likely pass on the increased risk of 30-year mortgages by charging higher rates to borrowers, in Wachter's view. That could further drive up mortgage rates, which have soared because the Federal Reserve hiked its benchmark interest rate from virtually zero to more than 5% to curb inflation.

Wachter noted that launching portable mortgages was likely to disrupt a mortgage market in which borrowers typically have to pay off their mortgages in full when they sell their homes because due-on-sale clauses are standard.

Portable mortgages could also harm the ability of people with poor credit to purchase a home — as lenders would likely focus more on individual creditworthiness and less on a single property's value, Wachter added.

She suggested the best fix for the frozen housing market will be if inflation cools, the Fed cuts interest rates, and mortgage rates fall to historical norms.

"Lock-in" effect

Wachter also defended the standard 30-year fixed-rate mortgage in the US, saying it protects borrowers from faster inflation and rate hikes forcing them to sell their homes.

On the other hand, the "lock-in effect" may have hampered the Fed's efforts to combat inflation. The central bank hikes rates partly because that increases monthly mortgage payments, leaving homeowners with less disposable income. That can help to temper consumer spending and cool the economy down.

However, long-term, fixed-rate mortgages dilute the impact of Fed hikes. Portable mortgages might dampen it even more by freeing Americans to sell their homes without taking on higher rates, potentially prolonging inflation.

Fannie Mae and Freddie Mac, the government-sponsored enterprises that direct the mortgage market, would have to be on board to make mortgage portability a reality, but that doesn't appear to be the case.

The two agencies remain in conservatorship, and a representative for the Federal Housing Finance Agency which supervises that arrangement, told American Banker late last year that the idea was not being considered at this time.

While portable mortgages have their benefits, their numerous potential downsides appear to limit the chance they'll be introduced in the US anytime soon.