Higher
Mortgage assumptions have been on the rise this year. More of these transactions — whereby the buyer of a home takes on the existing mortgage, interest rate included, of the departing seller — closed during the first nine months of 2023 than in any full calendar year since the subprime mortgage crisis, if not longer, according to data from the Department of Housing and Urban Development.
For banks and other lenders, this uptick has the potential to open up opportunities in the form of supplemental mortgages and other activities, a welcome change in an otherwise
But it may not be as simple as that. Mortgage assumption introduces new costs and complexities for lenders and servicers — including regulatory hurdles — that could make it difficult for mortgage assumptions to reach meaningful scale.
"In theory, the concept sounds awesome. It makes my house considerably more desirable and attractive. I've even seen real estate agents marketing that a house has a [Federal Housing Administration] loan that may be assumed," said Matt Van Fossen, CEO of the Fairfield, N.J.-based independent mortgage bank Absolute Home Mortgage Corp. "But assumptions are few and far between. When you look at the greater share of the market, it's not even prevalent."
Assumability is not offered in most conventional mortgages, but it is a feature in loans backed by the Federal Housing Administration and the Department of Veterans Affairs. These two types of mortgages — which are originated by banks, credit unions and other lending institutions, and then insured by government agencies — typically account for about a quarter of annual home sales.
Through the first three quarters of 2023, a little more than 3,800 FHA mortgages have been assumed. In the context of the broader housing market — which is on pace for just under 3.8 million sales this year, according to the National Association of Realtors' latest data — the assumption market is tiny.
Even so, the pace of assumptions is up considerably. Despite overall home sales tumbling from nearly 7 million in 2021 and just over 5 million in 2022, the volume of assumed mortgages has been trending upward. Assumptions are already up more than 67% from last year and more than 100% from 2021.
Mortgage bankers and subject experts say the trend is to be expected in light of the Federal Reserve's swift campaign to raise interest rates from
The potential savings for homebuyers for assuming a mortgage rather than securing a new one in the current environment are substantial. For a $400,000 mortgage with a 7% interest rate, borrowers would pay $2,661 monthly for interest and principal. The same loan at 3% would cost the borrower $1,686 per month.
In practice, however, arranging for an assumption is easier said than done.
"Assuming a mortgage is a great option for those who can take advantage, but the stars have to align to make sense for both buyer and seller," Christopher Thomas, a Grosse Pointe, Mich.-based mortgage advisor said. "Bridging the gap between the existing mortgage balance and the sales price will be the biggest challenge for those looking to assume a mortgage."
Between property appreciation and the amount of principal paid down by the original borrower, it is rare that an assumed mortgage can provide all of the debt needed to finance a home purchase. To make up the difference, buyers either have to bring a larger down payment to the table or take out a second loan to cover the difference — if the terms of the mortgage or servicing agreement even allow for that.
Brad Blackwell, a former executive in Wells Fargo's home lending division, said the price differences between today's mortgages and those of the near past mean assumers could still have lower monthly payments with two mortgages than with a single new loan.
"You look at what the blended rate would be, and if the borrower got the loan, say, in the last five years and the appreciation is not that big, chances are that blended rate is going to be quite a bit lower than prevailing market rates on a new first mortgage today," Blackwell said. "Particularly for new FHA loans."
FHA-backed loans are intended to help borrowers who might struggle to qualify for conventional mortgages. Many borrowers are first-time homebuyers or low-income households. Those looking to assume an FHA mortgage must meet certain eligibility criteria around debt-to-income ratios and credit scores, but those familiar with the criteria say the qualification standards are less onerous to assume a mortgage than to take out a new one. There are also fewer fees and closing costs.
VA-backed loans are similar, except they are deemed a benefit for military veterans. Anyone can assume a VA mortgage, but if the assumer is not also a veteran, the seller loses the ability to get another VA loan until the previous mortgage is satisfied. The VA could not immediately provide data about mortgage assumptions.
Assumptions of all types have been a relative nonfactor in the mortgage space since the 1980s, the last time interest rates were increased dramatically in the face of runaway inflation. In recent decades, the feature has been most often used in cases of death or divorce.
Still, assumptions have ticked up before as interest rates have risen. In 2018, after the Fed began a short-lived monetary tightening campaign, more than 2,500 FHA loans were assumed, a jump of 1,000 from the previous year. The total climbed again to more than 3,000 in 2019 and was still elevated in 2020.
Some say the reason assumptions have not been even more prevalent is because many — both in the real estate world and within the general public — are not aware of the feature, and because there is not an established market for trading them.
Earlier this year, Raunaq Singh sought to fill that void by launching Roam, a startup aimed at matching up prospective homebuyers with interested sellers with assumable FHA loans. The company, which was established in September, advertises the ability for purchasers to cut their monthly mortgage payment "in half" by assuming an existing mortgage.
While some customers have long been familiar with assumable mortgages, Singh said education has been a focal point for his company's early days.
"I try to encourage everyone to know that this is a government benefit given to you by law," Singh said. "There's no loophole. This is a legitimate way to be able to purchase a home."
Roam provides a searchable database of homes with FHA mortgages attached to them. It also works as an authorized third-party contracted by both buyers and sellers to expedite the closing process, for which it collects a fee from the buyer of 1% of the purchase price at closing.
A spokesman for Roam declined to say how many transactions it has closed since launching, but said it is processing "tens of thousands of leads."
Another reason assumptions are not more common is because there is little incentive for lenders or servicers to push for them. Fees that can be collected on these transfers cannot exceed $900, a level that industry representatives say would force servicers to operate at a loss.
Pete Mills, senior vice president of residential policy for the Mortgage Bankers Association, said more assumed mortgages could be a positive for the home lending industry, but noted that policy changes are necessary for it to be financially feasible.
"Right now, there's a fee cap involved that makes it noneconomic, and so we've asked FHA and VA to reevaluate the assumption fee that lenders can get," Mills said. "That and better clarity on underwriting the secondary financing, and then some education of realtors, buyers and loan officers would give some lift to the assumability feature in FHA and VA loans."
Proponents of assumability say services should be incentivized to allow for mortgages to be assumed, because it protects their revenue streams. But, Van Fossen said underwriting each new loan holder costs thousands of dollars. Because of this, he said, few servicers would likely consent to transfers and thus he encourages consumers to be wary of any business or broker who says the process is simple or foolproof.
"It's natural that assumption requests would go through the roof, but how many of those were actually processed?" Van Fossen said. "If it's a very low ratio, I would be extremely cautious. Would you say an experimental drug with a 1% success rate was viable? Probably not."
But how much power servicers have in changing the rules around assumability to their liking is up for debate. Singh said as long as an interested assumer meets the eligibility criteria, services are legally obligated to process the request. And, given the limited transaction volume, servicers should think twice about discouraging assumptions, Singh said.
"The way I frame it to servicers is, you've always thought about this division as a cost center, as a way to squeeze heads and squeeze costs. Start to think of it now as revenue retention," Singh said. "Why, as a servicer, in a moment when the industry is contracting, would you be willing to finance away that loan, send it off to somebody else to get collected, instead of collecting that paycheck yourself?"
