Before reading today’s Housing Headwinds, it’s important to note that the concept I’m sharing is not currently available in the U.S. housing market, yet it has gained traction in news and print.
In recent weeks, I’ve received numerous inquiries about a concept known as mortgage porting. I believe it is important to understand the concept as your clients may start asking questions on the topic.
Understanding Mortgage Porting
This discussion of porting a mortgage aims to facilitate movement in the housing market and ease the “lock-in” effect, which currently restricts housing activity. The Federal Housing Finance Agency, along with Fannie Mae and Freddie Mac, are evaluating the possibility of portable mortgages that would allow homeowners to transfer their existing mortgage rates to a new property. This initiative would seek to alleviate the “lock-in” effect, where homeowners with lower mortgage rates hesitate to sell and move due to the higher current rates. Nearly half of current borrowers have rates below 4%, while the average 30-year fixed rate is in the low 6% range. These developments indicate a growing interest in portable mortgages as a potential solution to the current housing market challenges in the United States. My usual response to inquiries about this topic is to advise caution, as it is quite complex.
What is Mortgage Porting?
Mortgage porting is the process of transferring an existing mortgage from one property to another. This allows homeowners to sell their current home and buy a new one while retaining the same mortgage terms and interest rate. While mortgage porting is common in countries like Canada and the UK, it has not been widely adopted in the United States. To clarify this concept, let’s break it down into simple terms. Currently, mortgage porting is NOT an option in the U.S.; however, here’s how it could work if adopted:
Key Characteristics of Mortgage Porting
- Process: Homeowners check if their mortgage is portable, sell their current home, apply to port the mortgage, and, upon approval, transfer the mortgage to the new property.
- Benefits: Homeowners can maintain a lower interest rate, avoid prepayment penalties, and potentially experience a quicker application process.
- Drawbacks: Porting is limited to one lender, involves tight timelines for completion, requires requalification based on current financial circumstances, and offers limited flexibility in changing mortgage terms.
Why is Porting Uncommon in the U.S.?
- Lender Profitability: U.S. lenders prefer issuing new, higher-rate mortgages rather than allowing borrowers to retain lower rates, especially in a high-interest environment.
- Securitization: Many U.S. mortgages are bundled and sold to investors, complicating the extraction of individual loans for porting.
- Property-Specific Loans: Mortgages in the U.S. are typically tied to specific properties, making the structural changes necessary for porting difficult to implement.
- Limited Alternatives: The closest equivalent to porting is an assumable mortgage, available primarily for government-backed loans like VA and FHA loans.
Historically, mortgage porting has never been common in the U.S. The combination of lender practices, securitization issues, and property-specific loans has hindered its adoption. Recently, discussions around mortgage portability have gained traction due to high interest rates and concerns about housing affordability, but widespread implementation remains unlikely. While mortgage porting offers potential benefits in markets where it is standard, it has not gained traction in the U.S. due to economic and structural factors.
I hope this was informative in this very basic explanation. Have a wonderful week.
