California-based Carrington Mortgage Services (CMS) sees a window of opportunity in the mortgage market.
The Federal Reserve (Fed) actions that resulted in millions of borrowers receiving mortgage rates below 4% gave way to Fed actions that… triggered mortgage rates to rise above 7% in the fall of 2022.
The duality of the Fed has resulted in a mortgage rate lockdown: homeowners with low mortgage rates aren’t motivated to sell when home prices are high and mortgage rates remain in the 6% range. And many buyers are waiting on the sidelines, paralyzed by low housing inventory and high rates.
CMS is going heavy on a rarely used mortgage product to solve this market problem – the assumable mortgage.
The product is not new. In fact, it was fairly common a few decades ago. It essentially allows qualified buyers with a government loan to purchase a home by assuming responsibility for the sellers’ mortgage terms, including the current balance and interest rate.
The fees are typically lower than in new loans, and no appraisal is needed. The buyer must submit to the application and underwriting process to qualify, just as they would in any new mortgage.
In a paper published by the Urban Institute in October, Ted Tozer, the former head of Ginnie Mae, argued that government changes to assumable loans could benefit the market. Assumable mortgages enable the value of the mortgage savings to be partially capitalized into the home’s sales price, allowing the owner-occupant to outbid even a cash investor. It also allows home sellers to receive top dollar for the home, he said.
CMS announced on Tuesday that it’s engaging with eligible homeowners in their servicing portfolio to let them know a new buyer can assume their low-rate mortgage, as most of them do not realize they have this option.
The mortgage company is also educating agents in its real estate division, Vylla Home, about the details of the program so that they can work with prospective buyers and sellers.
Strict rules limit use of assumable mortgages
Assumable mortgages seem perfect for times when rates are surging, like now. So why is this program so rare? In short, its popularity is held back by strict rules and product limitations.
For starters, not all types of mortgages are assumable – only Federal Housing Administration (FHA) and U.S. Department of Veteran Affairs (VA) mortgages are assumable. United States Department of Agriculture (USDA) and conventional adjustable rate mortgages (ARMs) may be assumable under specific conditions.
Because Fannie Mae and Freddie Mac loans – nearly two-thirds of the mortgage market – are not eligible to be assumed, it’s a niche product.
There are some significant “infrastructure” updates needed to grow loan assumption volume, experts say. Servicers can only charge up to $900 to process, underwrite and close a transaction that includes a loan assumption. That isn’t enough to compensate servicers for their costs, let alone make a reasonable profit, Tozer argued.
By the Mortgage Bankers Association’s estimate, it takes on average about $2,500 to process, underwrite and close a government loan. Tozer suggested “a fee of 1.3% of the balance of a loan being assumed would be fair to both the borrower and the servicer.”
Other stakeholders want even higher fees so they can compensate loan officers. In a June 2022 letter, nonbank trade group Community Home Lending Association suggested increasing the lender fee to 2%, plus a $500 underwriting fee.
There’s also the matter of handling piggyback mortgages since the sales price in most deals will exceed the mortgage’s unpaid balance. Currently, piggyback loans have more stringent credit requirements. That too would have to change for assumable mortgages to gain greater popularity.
While the real estate agent gets a commission, whether an LO gets paid from an assumable mortgage depends on their individual lender’s setup. And as a result, few mortgage loan officers have experience or comfort with the product.
“The little that I’ve dabbled in assumable loans, they are very difficult to maneuver,” Rochelle Gano, a Vancouver, Washington-based loan officer at Movement Mortgage, told HousingWire.
Gano added that FHA loans seem “a little more workable” than the VA and USDA options. “I have a client who is taking her ex-significant other off the FHA loan and having her parents assume a portion of the loan,” Gano said. “So far, that is going good, but it will take more time than a normal mortgage.”
CMS said that in the case of an FHA loan being assumed at the company, CMS offers a simultaneous second lien to the qualifying buyer for an amount up to 80% of the determined property value.
When it’s a VA loan being assumed, if the assuming qualified buyer is a non-veteran, the seller’s VA entitlement will remain tied to the assumed property. It cannot be used by the veteran to purchase another property until the assumed loan is paid in full.
CMS also clarified that if the home’s current value is higher than the remaining principal balance, the buyer will have to cover the difference at closing. The borrower can pay with cash or cash and a second mortgage loan, which depends on the maximum combined loan-to-value ratio determined by the company.
A market effort
Mortgage servicers, lenders and other companies are working to make assumable mortgages more accessible. But it will take a concerted effort from the government to update some policies.
“One of the things that’s not going to be huge – but every incremental gain matters – are assumptions. They are going to become more important,” David Sheeler, president of residential servicing and executive vice president of correspondent lending at Freedom Mortgage, said during a mortgage conference last November in New York City.
According to Sheeler, “One of the keys to making assumptions become more impactful is building a market for second mortgages which will help both existing homeowners and new homeowners realize the benefits of the lower rates on current mortgages.”
Assumable mortgages are also an interesting solution to deal with runoffs. It happens when borrowers pay off their mortgages because they are either refinancing or getting a new loan with another lender.
Market experts say there are three leading causes of runoffs – people moving for tax purposes, job opportunities or retirement – which can reach 5% to 8% of lenders’ and servicers’ portfolios annually.
Richard Yonis, CEO at the mortgage solutions firm M.M.H, estimates that in an average portfolio of 100,000 loans, with a 5% runoff and a 35% share of FHA loans, assumable mortgages could help to retain some of the 1,750 loans lost per year.
M.M.H. developed a program to identify properties nationwide that are for sale, meet the criteria of the FHA for assumptions and have a mortgage rate lower than the current market rates.
“We can do one of two things: pass that lead back to the servicer, and they can decide what they want to do; or I have contracted with two companies to be a fulfillment center for them, where we can handle the loan on their behalf. We can handle the assumption and generate the new lead for the servicer,” Yonis said.
Before plunging into assumable mortgages, Yonis says mortgage lenders need to be aware of how long the window might be open.
“Everybody is saying, from all economic indicators, that rates will continue to rise at least for the next two quarters and they are not going to drop instantly,” the executive said. “It may take them 12 to 15 months from the time they start to move it to get the rate back down. I don’t think we’ll ever see rates back down on the 2s, but we’ll see solid rates back down somewhere in the 4s.”
As such, he concluded, “The window of opportunity for assumable mortgages only exists until rates come back to 4%.”
