Portable Mortgages

If you have been listening to the news recently, you may have heard talk of portable mortgages. Portable mortgages, a feature of the Canadian housing market, allows borrowers to "port" their mortgage from one property to another, as long as they sell the first property within a certain time frame.

Here is an example, Betty Borrower has a 2.5% interest rate on her current mortgage with $300,000 in principal remaining. Betty wants to move but she can't afford to at today's interest rates and prices. Fortunately for Betty, she lives in this blog and she can port her mortgage. So, she goes out and contracts to buy a $360,000 home with $60,000 down. Betty's credit union will lend the $300,000 at 2.5% to purchase the new home. However, Betty is required to sell her home within a set time frame and pay off the original mortgage.

Should Betty wish to take out more than $300,000, the credit union could create a blended rate. For example, what if Betty needed $400,000 to purchase the second property. Under this scenario, she would get $300,000 at 2.5%, the original rate, and $100,000 at 6.5%, the market rate. The credit union would combine these amounts into a new $400,000 mortgage at 3.5%.

As we can see, being able to port her mortgage is a huge benefit for Betty. She will save thousands of dollars and maintain a lower monthly payment. Recently, portable mortgages have been brought up as a way to entice borrowers with low mortgage rates to move. In theory, this would help to free up the housing market and, with more homes for sale, lower home prices.

So, are portable mortgages the silver bullet that is going to fix the housing market? Very unlikely. However, while they may not be the best thing since sliced bread, they aren't as useless as a portable Walkman (If you can even remember what a Walkman is).

Where Can You Find Portable Mortgages Today?

Canada. As noted above, portable mortgages are a common feature in the Canadian housing market. Credit unions should note that, while Canada is our neighbor and a fellow former British colony, there are key differences between the Canadian home lending system and the system in the United States.

The first and biggest difference is that the 30-year fixed-rate mortgage is not common in Canada. Most Canadian loans are fixed for only a short amount of time. For example, a common Canadian home loan is a five-year fixed-rate loan that is amortized over 25 years. The idea being that at the end of the five years, a borrower would negotiate with their lender on a new mortgage/interest rate.

Thus, if Betty lived in the Great White North, her 2.5% interest rate would last less than five years rather than the potential decades it would last if she lived in the United States. This shorter time frame makes mortgage porting a significantly less risky and expensive proposition for lenders.

Further, Canada has different laws than the United States and portable mortgages are built into their system. We don't have that benefit in the States. However, that doesn't mean we can't have portable mortgages. Here are some key considerations for portable mortgages in the United States.

Closed-end Contracts Aren't Made to Be Changed

Most mortgages are closed-end contracts. Generally speaking, it is very difficult to change a closed-end contract in the United States. While modifications can be made to closed-end contracts, a modification to permit mortgage porting is a far greater modification than most modifications made today. Regulation Z would further complicate any such modification, as the disbursal of new money to purchase a second property would likely trigger disclosure requirements.

Credit unions who sell their loans on the secondary market should also note that investors are not likely to agree to any such modification. However, this may be changing. In November of this year, Federal Housing Finance Agency Direct Bill Pulte stated that the agency is "actively evaluating portable mortgages." Any FHFA support for portable mortgages would greatly help credit unions implement a portable mortgage program.

A Second Contract with a Variable Feature

While credit unions may not be able to add porting to existing contracts, credit unions can add a porting feature to new contracts. Specifically, credit unions can structure a loan to have a preferred rate (the ported/blended rate) that is lost if the borrower does not pay back their first loan within a certain period of time. For example, Betty takes out the second loan with a 2.5% interest rate that increases to 6.5% if she fails to pay off her first loan within 12 months.

Credit unions should keep in mind that this would likely cause the mortgage to be considered a variable rate transaction under Regulation Z, Comment 19(b)-5.i.b.

Interest Rate Risk

Beyond structuring the transaction, one major issue with porting mortgages in the United States is the 30-year mortgage. If a credit union were to port a mortgage, it would be lending at below market rates. Credit unions considering mortgage porting should ask whether it wants to or can afford to lend at lower than market rates.

Further, there is no required path a credit union must take. Credit unions can be creative. They can set a minimum interest rate, they can charge high fees, and/or they can require a minimum share account balance be maintained.

The difference in principal and interest payments between a $300,000 2.5% and 6.5% loan is $711 per month over 30 years. That is a significant financial benefit for the borrower. Credit unions can and should charge the borrower for that benefit, as it is a luxury many other members would not have.

Forget About the 30-Year

While the 30-year mortgage is the most popular type of mortgage in the United States, nothing says credit unions have to go with the flow. Credit unions could limit the types of loans a borrower can port into. For example, only allowing a borrower to port into 5/1 and 7/1 adjustable-rate mortgages (ARMs). This would more closely mimic the Canadian market and limit the risk the credit union was taking on.

While ARMs got a bad rap after contributing to the 2008 housing crisis, the rules are different today. There are far stricter standards and more borrower protections in place today than in the 2000s. While ARMs are still more risky than a 30-year mortgage, they aren't as risky as they once were.

State Laws

Credit unions should also review state laws to see if there are any roadblocks there.

Regulations

Credit unions would also need to be careful that they satisfy all regulatory requirements, such as the ability to repay requirement under Regulation Z, section 1026.43. Current U.S. laws and regulations were not made with mortgage porting in mind.