Portable Mortgages: A Proposed Solution to the Housing Lock-In Effect in the US

The Federal Housing Finance Agency (FHFA) is exploring a radical solution to the frozen US housing market: portable mortgages. This concept would allow homeowners to transfer their existing low-interest mortgage to a new property, addressing the "lock-in effect" that has millions of homeowners reluctant to sell. While potentially beneficial for a select group, experts warn portable mortgages are unlikely to solve the market's core affordability crisis and could introduce significant financial system risks.

What is a Portable Mortgage?

A portable mortgage is a type of home loan that a borrower can transfer from one property to another. When you buy a home, you typically secure a mortgage specific to that property. Selling means paying off that loan. A portable mortgage breaks this link, allowing you to take your loan's rate and terms with you. This is the opposite of an assumable mortgage, where a buyer takes over the seller's existing loan. Portability directly targets the lock-in effect, where homeowners with rates significantly below today's market average are disincentivized from moving.

How Would a Portable Mortgage Work in Practice?

In theory, portability is straightforward. Suppose you have a $500,000 mortgage at a 4% interest rate. If you purchase a new home for $400,000, you could transfer the entire existing loan balance and keep the 4% rate. However, complications arise with unequal home values. If the new home costs $750,000, your portable mortgage would only cover the remaining balance of your original loan. You would need to finance the difference—$250,000 in this example—with a second mortgage, likely at a much higher current market rate, or with cash.

What Are the Potential Benefits of Portable Mortgages?

The primary benefit is increased market liquidity. Based on our experience assessment, enabling homeowners with ultra-low rates to move could free up inventory, particularly for starter homes. This would allow families to reoptimize their housing needs without facing a severe financial penalty. For the qualifying homeowner, a portable mortgage represents substantial savings, preserving a favorable interest rate that may be a once-in-a-generation opportunity.

What Are the Major Obstacles and Risks?

Despite the apparent upside, the implementation of portable mortgages in the US faces steep challenges.

• Systemic Financial Risk: The US housing finance system relies heavily on mortgage-backed securities (MBS), which are investment pools backed by groups of mortgages. If a mortgage becomes portable, the underlying collateral (the specific property) changes, altering the risk profile of the entire MBS pool. This disrupts the securitization models that help keep borrowing costs lower for everyone.
• Worsening Affordability: Portable mortgages would primarily benefit existing homeowners with low rates. This could increase their purchasing power, potentially driving home prices higher for all buyers. Meanwhile, first-time homebuyers and renters, who do not have a low-rate mortgage to transfer, would face these higher prices plus today's elevated interest rates.
• Market Distortion: If borrowers could carry a single 30-year loan for decades, the volume of new mortgages and refinances would plummet. Investors would demand higher compensation for this risk, leading to structurally higher mortgage rates for new borrowers over the long term.

How Do Portable Mortgages Compare to Other Proposals?

Portable mortgages are not the only idea being debated. The recent proposal for 50-year mortgages has also been met with skepticism. Critics argue that while lower monthly payments might seem attractive, borrowers would pay significantly more interest over the life of the loan, potentially creating a financial burden for their heirs. Both proposals aim to ease payment pressure but fail to address the fundamental issue of high home prices relative to income.

Portable mortgages present a complex trade-off. While they could unlock movement for some homeowners, they are not a silver bullet for the housing market's deep-seated affordability problems. The core takeaway is that any viable solution must address the needs of all market participants, not just a select few, without destabilizing the financial system that supports the entire housing ecosystem.