2 Mortgage Overhauls That Could Unchain Home Sales

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Key Points

• The Federal Home Finance Agency is evaluating options like assumable and portable mortgages to address housing affordability.
• Assumable mortgages allow buyers to take over a seller’s existing loan, potentially at a lower interest rate.
• Portable mortgages would enable sellers to retain their current loan when purchasing a new home, offering flexibility.

The concept of a 50-year home loan that was floated by President Donald Trump over the weekend wasn’t popular among analysts and economists. But another change to mortgage financing might be more popular—and would come with its own benefits and pitfalls.

The housing market has been blunted for several years because of a combination of high prices and mortgages. With buyers’ budgets stretched, politicians on both sides of the aisle have looked for ways to bring housing costs more in-line with their historic norm.

Mortgages with a term of 50 years, instead of the popular 30, would reduce monthly payments modestly, but equity takes longer to accrue and homeowners would end up paying more over the life of the loan, Barron’s previously reported. Home prices could shoot higher if lower monthly payments draw more buyers into a housing market that lacks options.

“We have a supply problem,” says Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School. “The benefits [of a 50-year mortgage] could easily be undone through a rise in prices.”

Another idea is to allow mortgages to be taken over by a home buyer. In a Monday statement to Barron’s, a spokesman for Federal Home Finance Agency, which oversees the secondary mortgage market giants Fannie Mae and Freddie Mac , said “we continue to evaluate all options to address housing affordability, including studying how to make mortgages assumable or portable.”

Expanding the use of assumable loans—which are currently available with some government-backed mortgages—to loans backed by Fannie Mae and Freddie Mac would allow a buyer to take on a seller’s mortgage.

Portable loans would allow sellers to keep their loan when they move. Both ideas are appealing in a housing market constrained, in part, by the quick rise of historically low mortgage rates that began in 2022.

“This is not a silver bullet—the assumable, portable mortgage idea—but I think it could possibly be part of the solution,” says Rick Palacios, Jr., the director of research at John Burns Research and Consulting. “The core part of that thesis is that you would actually bring some supply to the market at rates [at which] we know there is a lot of demand.”

But the way the mortgage market functions brings plenty of hurdles, particularly when it comes to applying the changes to existing mortgages.

The hope would be that allowing for loans backed by Fannie Mae and Freddie Mac could help ease housing logjams caused by dramatic changes in home financing costs. If, for example, someone had taken out an assumable loan at a 3% mortgage rate, that lower financing cost could be a selling point for buyers in today’s higher-rate market.

Alternatively, a homeowner with a portable mortgage could be less tethered to a house that no longer suits their needs. A portable loan could give them the ability to shop for a house without regard for market interest rates.

That, at least, is the ideal. But details are unclear. For buyers to secure lower rates from previous owners, mortgages would have to be made assumable retroactively—a far-from-certain assumption and likely logistically difficult given the way mortgages are packaged and sold to investors.

“To be effective, any such application of these clauses would necessarily have to apply to existing loans, and how this could be accomplished (given contract law and such) is quite unclear,” notes Keith Gumbinger, the vice president of mortgage website HSH.com.

Ignoring the difficulty of applying the change retroactively, first-time buyers vying for a home with an assumable mortgage would have to come up with a way to cover the difference between the house’s market price and its current mortgage, Evercore analyst Stephen Kim noted in a Monday report.

“Most very-low-rate mortgages have principal balances that are quite low relative to the current home price,” Kim wrote. “Any home buyer who assumes such a mortgage would still need to fund the rest of the home price somehow, either in cash or with a second mortgage.”

Homeowners taking a portable mortgage to a new home would also theoretically have to come up with a way to finance the gap, notes Bill Banfield, chief business officer of Rocket Companies. Unlike the government loan availability of assumable mortgages, portable mortgages in the U.S. “don’t exist today in any form or fashion,” he says.

Borrowers could also pay an additional price for the added flexibility, since underlying assumptions about duration and risk that go into pricing a mortgage could change. “What you would find is that there would be a premium rate for [portability],” notes Rocket’s Banfield. “Some people would say, ‘I just want the lowest rate and payment possible,’ so they would opt out of getting a portable option.”

The same could be true for assumable loans. “Assumability increases interest rate risk,” notes Wharton’s Wachter. Changes to loan offerings come with several levels of knock-on effects, she adds. “If you move one piece on the chessboard, it changes everything for your next move,” she says. “This is a complex system, and […] the secondary effects can be very large.”

The most appropriate form of government intervention in the housing market might not have to do with consumer mortgages, UBS analyst John Lovallo wrote in a recent note. “Government investment in housing infrastructure is likely still the best option,” Lovallo wrote. “Investment by the U.S. government in off-site manufacturing solutions could be among the most effective methods of addressing the U.S. housing shortage and affordability.”

Write to Shaina Mishkin at shaina.mishkin@dowjones.com