Recent news reports reveal that the supply of houses for sale is much lower than the demand, and that this problem is accelerating. The problem is due in part to the fact that interest rates are over 7 percent, and people are not selling their existing homes because a new mortgage would double the interest rate they are paying. If they can’t get a comparable low rate on a new mortgage, their monthly payments will go up dramatically. Can you blame them?
In fact, 85 percent of all existing mortgages currently carry a rate under 5 percent. That means that most of these folks’ homes are priced out of the market due to unfavorable financing conditions. With this pressure keeping homes off the market, prices on the few houses being put up for sale are much higher.
Real estate brokers, bankers, potential home sellers, and potential buyers are all throwing their collective hands in the air. What can we do about this? The market is the market, and as long as interest rates remain high, solutions are few and far between.
One answer could be “mortgage porting.” A clause in most home mortgages allows the mortgage’s financial balance, along with its existing interest rate, terms, and payment length, to be transferable to a newly purchased home. This method of financing is actually common in other countries, including Canada, and it works very well. It makes the mortgage people-centric rather than property-specific, allowing the mortgage to stay with the borrower rather than be tied to a specific property.
Why is this not popular in the United States? First, mortgage brokers make a living by underwriting new mortgages. They do not get paid on the “ported amount” of a mortgage. They have a vested interest in maintaining the existing practice of discarding old mortgages for new ones. Second, the rules of each financial institution that “owns” the mortgage can be different and may need to be modified. Third, in some cases, regulations may need to be modified to accommodate and facilitate the process on the broadest scale.
All of these obstacles can be overcome. In Canada, for instance, the same regulations were in place, but did not stop the porting process from growing in popularity, the regulations merely slowed down wider adoption.
In most cases, direct lenders that have not accepted federal guarantees on a mortgage can port that mortgage at will under current law in the United States. Most traditional mortgages on homes that were financed with a 20 percent down payment, should currently qualify for porting without changing any laws. The only requirement is a willing lender.
For mortgages with smaller down payment amounts, porting may require action by the federal government to make certain that all stakeholders are protected. For lenders, the best mortgages require great credit and high appraised value, which remains constant when porting.
For example, if a borrower still owes $300,000 on a home, that borrower can take up to that $300,000 and carry it forward to a new mortgage loan and simply use the new property for collateral. The borrower will likely pay, at the lender’s discretion, a one-time “fee” for the carry forward/transfer privilege.
Assuming the borrow still meets all qualifications, the lender could allow the mortgage to follow the borrower to the new purchase at little to no additional risk. Of course, if the homeowner needs to borrow more money to complete the purchase of the new property, that additional balance would be financed at prevailing interest rates. Even so, the new “blended” mortgage payment will be much more affordable for the buyer, and just as important, no added expense to the lender.
With more people taking advantage of the existing portability feature in their mortgage, mortgage bankers will seek to meet that demand with more innovative mortgage offerings. If more people become aware of the possibility of mortgage portability, it could go a long way toward breaking the logjam in the current real estate marketplace.
Michael Peters has over 35 years of experience as a business consultant in both the private and government sectors. He is retired and lives in Orlando.