This Could “Break” the Housing System as We Know It

Dave:
Imagine you have a super low mortgage, like two or 3%, which is not only locked in for 30 years, but you can also take it with you when you move to a new house. It sounds amazing, right? This is the idea behind portable mortgages, the latest concept to help unlock the housing market and improve housing affordability. That’s currently being explored by the Trump administration, but will portable mortgages actually work? Is it feasible to implement them in the United States, and if so, who will benefit today we’re digging into portable mortgages. Hey everyone, welcome to On the Market. I’m Dave Meyer. Thank you all so much for being here. We’ve got a fun episode for you today. We’re going to be talking about a new concept that’s being floated right now to address housing affordability and housing affordability has really come to national attention in recent weeks on this show.
In our world as real estate investors and industry leaders, industry service providers, we know affordability in the housing market is a huge issue and regular Americans know that too. But in just the last month, the Trump administration has really focused on housing affordability. First, they called for a 50 year mortgage. We released a whole episode about that a week ago if you want to hear my thoughts on that and just get some information on that, but it’s been a few weeks since that proposal was floated and you should know that it didn’t get a very warm reception from the industry. It still might happen, but from the research I’ve done, people I’ve talked to, even if it does come to fruition, it’s probably not going to have that big boost to affordability or unlock the housing market as much as we really need right now.
And so the administration has actually put out a new idea, which is portable mortgages. Just last week, bill Pulte, the head of the FHFA, which oversees Fannie Mae and Freddie Mac said that his team is working on portable mortgages. If you haven’t heard of this term before, the idea here is to adopt a type of mortgage that is used in different countries. It’s used in Canada, the United Kingdom, New Zealand, and homeowners there can take their mortgages with them. So imagine that you get your amazing mortgage, something you locked in during COVID, two, three, 4% mortgage and now you want to move, you can bring it somewhere new and this sounds great, right? It’s super appealing to homeowners and borrowers because no longer would they have to pay a much higher mortgage rate if they wanted to move, and therefore, in theory at least it could potentially break the lock in effect, it could drive up transaction volume and potentially even help housing affordability.
But how would this work? Is there a chance that this can happen? Would the intended impacts come to fruition? Are we on the verge of finally bringing some life back to the housing market or is this just noise Today? We’re going to dig into this. First we’ll just go over what a portable mortgage is, then we’ll talk about how they actually work. There are examples of this. Then we’ll talk about why the US doesn’t currently have these portable mortgages to make sense of whether or not this can actually happen, which we’ll talk about. And then lastly, I’ll give you my opinion on whether I think this is going to work. So let’s do it. First up, what is a portable mortgage? It’s basically you get out of mortgage, you take out a mortgage to buy a home. After two or three years maybe you want to go and sell that home and instead of having to go pay off this one mortgage with your proceeds from your sale and then go out, take out another mortgage, when you go out and buy a property, you actually get to bring the mortgage with you.
The way to think about it is the mortgage travels with you as a person. It is not necessarily attached to the home. Now, it is not all magic. This doesn’t just work. Like you could go, say you bought a $300,000 home and you have a 3% interest rate and then you go buy a $500,000 home. You don’t just get to take that rate. In that scenario, you obviously have to modify your loan a little bit. They do something they call the blend and extend, which is basically, let’s just use round numbers. Let’s say you had $250,000 of debt on that first purchase. You can keep your 3% interest rate on that two 50, but if you have to go out and borrow another 150 grand to buy this new more expensive home, you’re going to get that at current rates. But still there is a benefit to that because you’re blending your old rate, which is lower with this higher rate, and you’re still getting a better rate than if you went out and got a new mortgage.
The other thing that you should know is that the amortization does usually restart, so you are going to start paying more interest again as well. So that’s kind of the high level picture of what’s going on with the portable mortgage. Let’s talk a little bit about what it actually looks like in Canada, for example, because it is very different from what we do here in the United States, and I think that’s one of the key things to remember throughout this episode is it’s not like in Canada they have 30 year fixed rate mortgages that people are porting around. That is not what is happening in Canada. When you have a portable mortgage, they’re usually five year fixed rate mortgages. So already just right off the bat, we are already seeing that the potential benefit in Canada, in the Canadian system is not as great as you would want it to be here because in the United States, what’s so valuable about our mortgages is that 30 year fixed rate debt in Canada, they don’t really have an example of that ever working, and I’m going to explain why they do it like that in just a minute.
In addition to the term being much shorter, five years instead of 30 years, in most cases, there are big prepayment penalties, meaning that if you choose to refinance your loan or you sell the property and pay off your mortgage before you intended, you get fined and these fines, the penalty that you could pay for prepayment. Anyone who’s gotten a commercial loan or a DS CR loan probably recognizes prepayment penalties. In the United States, we are lucky we do not have prepayment penalties for conventional mortgages, but in Canada, if you pay off your mortgage early, you could have to pay four, sometimes five figure fees to be able to do that. And this is really critically important. This is the way that the lenders protect themselves in this case to them, a portable mortgage, that is something they can offer borrowers, but they don’t want to originate a loan only for them to keep hoarding it around a bunch of times, then paying it off before they really earn enough interest to justify making that loan in the first place.
And so they put in these prepayment penalties to make sure that doesn’t happen. So keep that in mind as well. So again, five year terms instead of 30 year terms, and there are prepayment penalties. Next, what you should know is you do need to requalify for those mortgages. So it’s not like you just check a box, you actually need to go and do underwriting again. And then the key feature, really important thing that I feel like everyone who’s talking about portable mortgages right now has completely missed, and this is a very, very important piece. Portability is a lender feature. This is not a right that you have. This is something that lenders can offer borrowers but do not have to. So when you look at this, whether it’s Canada or the uk, you see that it’s very different and it’s because these countries designed portability around their loans, which are short-term fixed products with prepayment penalties, which is again totally different from the American mortgage system. So why is the American system so different? We’re going to talk about that in just a minute, but we do have to take a quick break. We’ll be right back.
Welcome back to On the Market. I’m Dave Meyer here talking about portable mortgages. This is something that has gotten super popular in recent days. I see a lot of people very excited about this, but as I just showed before the break, the examples that we have seen of portable mortgages in other countries look very different than they do in the United States. As I said before, the break, it’s shorter terms. There are prepayment penalties and critically, this is not something lenders have to do. It is something they are able to offer. Now I want to talk a little bit about the American mortgage system and why it is constructed in the way it is and some of the pros and cons of our system. And by doing that, it will help us understand if portable mortgages could actually work here in the United States. And this might get a little bit technical, I’m sorry, but we have to talk about how the mortgage industry actual works.
Most mortgages in the United States conventional mortgages have to meet certain requirements. Then they are sold to Fannie Mae or Freddie Mac or Ginnie Mae, and then they’re pooled together into mortgage backed securities, also called MBS, and they’re sold off to investors who actually hold onto those mortgages. So most of the time when you’re getting a mortgage from a broker, that broker or even the bank that you are getting that mortgage from, they’re not holding onto your mortgage and servicing your mortgage. If you’ve bought a house before, you’ve probably noticed that you might get your first mortgage payment from one servicer and then like two months later they’re like, actually, we sold your mortgage. Now so-and-so is your servicer. This happens all the time. This is kind of a feature of the American mortgage system and the people who go out and buy these mortgages are banks.
Yeah, they’re holders of mortgage backed securities, but it’s also pension funds, insurance companies. You have family offices, you have hedge funds, you have sovereign wealth funds. They are buying these securitized assets, and I won’t get into all the details of this, but this process of securitization bundling these loans into mortgage-backed securities generally is believed to lower mortgage rates. It lowers the risk by pooling them all together, by increasing liquidity in the markets. It is generally believed to lower mortgage rates. And so we don’t know because we haven’t had this in a long time, but if we broke the securitization of mortgage-backed securities, it is likely that lenders would see that as riskier and they would demand higher mortgage rates. So that is one reason we do this in the United States. There are other reasons, obviously financial reasons for the investors, but it is generally believed that it has a benefit to homeowners and to investors who use these mortgages because it lowers their mortgage rates.
Now, this whole system of securitization depends on predictability. That is kind of the whole idea. That is why when you get underwritten for one of these loans that is going to be sold, they ask the same question and they have very rigid underwriting because they need it to fit in this neat little box. So it can be sold off to investors. These investors, they don’t want exotic mortgages. They don’t want a million different types of loans where you have to go and figure out how risky is this type of loan versus how risky is this type of loan? Or is this person perfectly qualified for this kind of loan? No, they just want one loan product and they want to be able to underwrite that one loan product. That is largely how the mortgage market works in the United States. So that predictability of the loan product and knowing that those mortgage payments are going to stay the same and not really change is really important.
The other piece of this really underpins the American mortgage system is that prepayment of these mortgages are a known variable and they are priced in. I know that in the United States, you know this too, that most common mortgage is a 30 year fixed rate mortgage, but the lenders who underwrite these or the investors who go out and buy mortgage-backed securities are not counting on holding that loan for 30 years. Americans generally speaking, stay in their homes or stay in their mortgages, I should say between seven and 10 years. So they either sell and move or refinance usually seven to 10 years. There’s some variance in that, but that’s generally what it’s, and that is critical to the interest rates that we get on 30 year fixed rate mortgages. If people stayed in their home for 30 years and actually paid off their mortgage to 30 years, our mortgage rates would be higher.
I won’t get into the super details of this, but just think about this logically. If you were a blender and you wanted to lend to someone for seven to 10 years, that comes with some risk, right? It’s very hard to predict what’s going to happen seven to 10 years from now. But if you were lending for someone for 30 years, that is even more unpredictable, right? So you would want higher interest rates, but because we bundle these loans, because they’re so standardized, it is easy for lenders to price in what they’re willing to lend at, knowing that for all these conventional mortgages that are out there, that they will get paid off between seven to 10 years. That’s just how the underwriting and pricing for mortgages works in the United States. If you follow this show, and I always say that mortgage rates are tied to the yield on the 10 year US Treasury.
Why? Because 10 years is the benchmark for how long they are lending to. And so these people who buy mortgage backed securities are basically saying, do I want to lend to the US government in the form of a 10 year US treasury, or do I want to lend to homeowners by buying mortgage backed securities? That’s why these things are so closely correlated. Anyway, this system exists for several reasons. It provides a lot of liquidity. It does keep us mortgage rates lower. It enables things like a 30 year fixed rate mortgage, which no other countries really have. I’ve talked about this a lot on this show, but that is a very rare mortgage feature. The US has really built on this 30 year fixed rate mortgage. And without this securitization, without collateralizing our loans, that would be very difficult. So there are definitely benefits to the securitization model, but it also comes with trade-offs.
There are constraints here too. When a mortgage is packaged and bundled to be sold in mortgage backed securities, it is required that the loan is collateralized with a specific property. If you haven’t heard this word collateralized or it’s basically when you take out a mortgage, that loan is backed by the property that it is helping you buy, meaning that if you default on your mortgage payments, the bank can go after your collateral and they can foreclose on your house basically. And that is a key component of the securitization of our loans in the United States, is that the collateral is explicitly identified. That’s really important. The other thing is that the repayment schedule, what you’re paying and when is already established and it doesn’t really change. The probability of that prepayment is already modeled in and the investor yield is priced. They know what they’re going to make on that.
So this is the trade-off, right? We get lower mortgage rates because lenders get predictability. And the reason why portability could potentially sort of break the American mortgage model is that lenders would lose that predictability, right? They would not have that same level of assuredness. They would not be able to forecast or predict prepayments or how long people will hold onto these mortgages if they’re allowed to just port them and bring them from one house to another. Because if you detach the mortgage from the home, the collateral that we were just talking about changes, whenever you port that mortgage, the duration of how long you are going to hold onto it becomes really unpredictable. The investors may not understand when the prepayment is going to come, what they’re willing to pay for these mortgage backed securities is all of a sudden going to become inaccurate. Basically, portability would be very difficult to work into the American mortgage system as it stands today. Now, could that change? Could the government or could lenders agree to change this? That’s an interesting question, and we’ll get to that right after this quick break. Stay with us.
Welcome back to On the Market. I’m Dave Meyer talking about portable mortgages. Before the break, we were talking about why portability doesn’t really work with the system that we have for mortgages in the United States, which is securitizing mortgages, selling them as mortgage backed securities. Before the break though, I did mention could that change? And the answer is yes, but I want to ask you, if you were a lender, would you want this to change? Because I get portability sounds great for borrowers or as homeowners, I would want to use it as a homeowner or as a borrower. I think everyone would agree that’s great for borrowers, but borrowers are only half of the mortgage market. Unfortunately. We also have to put ourself in the shoes of lenders, and when I see all these takes, people talking about this on social media or even the mainstream media talking about portable mortgages, oh, these are amazing.
It can help the housing market. Yeah, they’re putting themselves in the shoes of a homeowner and a buyer, but you have to put yourself in the shoes of a lender to understand if this is really feasible and if it actually would work in the first place. So let’s just imagine that you lent money to a homeowner in 2021 and they’re paying you a 3% mortgage rate, and when you originated that loan, you thought, yeah, they’ll probably pay me off in seven to 10 years. Let’s use seven years as an example. So that was 2021. I’m lending to you at 3%. It’s supposed to pay off in 2028. Now, if someone came to me and said, Hey, can I port this mortgage over to a new home and keep that 3% interest rate as a lender, you are obviously saying no to that, right? Rates right now are at six, six and a half percent.
If you could get them to prepay that mortgage instead and then take out a new loan, you’re going to be doing much better As a lender. I can’t speak for everyone who owns mortgage backed securities, but I imagine they’re all very eager to get those three and 4% interest rates off their books so that they could lend that money back out at a higher interest rates. So in addition to portability, sort of breaking the securitization model and really kind of throwing the entire American mortgage system into disarray, there is very little incentive for lenders to want to do this at all. And so when I think about this, I think that portable mortgages for existing mortgages remains very unlikely. I just don’t see this happening unless lenders are incentivized to do this. That is the only way this happens, right? They’re not going to be willingly extending or porting over loans when they could lend out that same exact money for more money.
There’s just no way they’re going to do that. And the only way they’re going to incentivize that if you pull this thread a little bit is if the government incentivizes them to do that. I don’t know what that looks like. I’ve never seen something like that, but we can imagine maybe the government provides tax incentives or just straight up pays the lenders to make these mortgages portable, and that could work, I guess. But at that point, if you’re just giving away money to make the housing market more affordable, I personally think there are better uses of money to help solve the housing affordability challenges that we have. Then giving banks money, and it’s probably involves either giving homeowners or borrowers money or using that money to figure out ways to build more affordable housing to drive down the cost of construction and permitting to increase the supply of homes.
Those are real long-term solutions to affordability rather than just giving money to the bank. So that’s my opinion on existing mortgages. I think the idea that people are going to be able to take their low rates from COVID move them to a new home without massive government intervention is very unlikely. I wouldn’t be counting on this, even though I agree that as a homeowner and for borrowers, this would be very appealing. I just don’t think it works. It doesn’t gel with the American mortgage system. Now, could we blow up the whole mortgage system? Sure, but I don’t think anyone wants that. Any changes to our mortgage system is likely going to increase risk, increase uncertainty for those lenders. And what do they do when there’s more risk and there’s more uncertainty? Mortgage rates go up. And so even the idea of this is that maybe it would help affordability for people who already have homes.
Mortgage rates would probably go up for everyone else. Not to mention if you did this, even if they somehow magically made this work, it would only help existing homeowners. It would not help anyone who’s struggling to get into the housing market right now because they’d be paying current rates anyway. So I do not see this as a solution to housing affordability. Yes, in theory, if they magically did it, it could break the lockin effect. It could help increase transaction volume, but I don’t see it as a fix for housing market affordability overall. I just think for existing mortgages, it remains very unlikely. Now, is it possible going forward that banks will offer portable mortgages? Sure. I think that might come of this. Maybe a couple of lenders, a couple of banks will say, Hey, that’s a good idea. We want to offer this to our borrowers.
But I promise you this, there is no such thing as a free launch, especially when you’re working with giant banks and lenders. So they will find ways to implement new fees and new costs to compensate for the convenience that they are giving you by allowing portability that will probably come in the form of one shorter terms, two prepayment penalties and three higher mortgage rates. Or in other words, it would look like the Canadian mortgage that I was describing to you before, which may have benefits. It may appeal to certain homeowners. But when you look at the Canadian model, I’m not looking at that and saying That’s way better than a 30 year fix that we have in the United States where I can choose to refinance at any time. Frankly, as an investor, I’d rather take the 30 year fix the thing that we have in the United States right now.
And so yeah, maybe going forward we will have new portable mortgages, but those mortgages will be underwritten differently. The fee structure will be different. The cost structure will be different. It’s not going to be magic. I can tell you that I don’t know exactly what it’ll look like, but it’s not like all of a sudden banks are going to be like, you know what? We’re going to make less money lending to people. That has never happened and is not going to happen. And so if happens at all, it will just be like the current mortgage markets is now, where there are pros and cons, there are trade-offs to different loan products, and maybe having one more loan product could be good for the housing market, but is not magically going to fix everything. So I know people are talking about this. I know people are excited about this, and trust me, I am not excited to rain on this parade.
I don’t want to shoot this down. When I first saw it, I was like, Hey, that’s kind of a good idea. I would like that as a homeowner. But when you think about it, if you really understand the mortgage market, you see that this just isn’t going to happen. It is very, very unlikely to work with our system, and if it did, if they rebuilt the whole system, there are going to be all sorts of negative consequences. Like I said, there just aren’t free lunches with this. If there was an easy fix to the housing market, if there was an easy fix to home affordability, someone would’ve done it already. This is not just something you could snap your fingers and all of a sudden things are going to get fixed. Instead, we need to think about adding more supply to the housing market. We need to bring down the cost of building so more supply can come.
We need to focus on reducing inflation and our national debt so that mortgage rates come down naturally. These are the things that can provide sustainable improvements to housing affordability, which don’t get me wrong, I think is a huge problem. We need to restore affordability to the American housing market, but if you’re asking me, portable mortgages are not the solution, I would love to know your take. So let me know what you think about portable mortgages in the comments. Thank you all so much for listening to this episode of On The Market. I’m Dave Meyer. I’ll see you next time.