A 3% Mortgage Rate in a 7% World? This Startup Does It
wsj.com
wsj.com
subtitle: "Loan assumptions, which let a home buyer essentially take over a seller’s mortgage, are hard to find and hard to pull off"
'There are millions of outstanding mortgages with a 3% interest rate. A new startup says it can help today’s home buyers get their hands on them.
Mortgage rates are now above 7%, leaps and bounds above the 3% they grazed two years ago. Buyers and sellers alike are giving up, sucking demand and supply out of the housing market. And things are expected to stay that way, with the Federal Reserve signaling plans to keep rates high for the foreseeable future.
Roam, a real-estate company set to launch Wednesday, is betting that it can popularize an obscure workaround. “Assumable loans” allow sellers to transfer their own mortgage loans to the buyer alongside the house.
n theory, the idea sounds great, at least for discouraged house hunters who can inherit a lower-rate loan. Sellers, in turn, might fetch higher prices for their houses.
But Roam’s vision faces an uphill battle. Loan assumptions haven’t gained much traction recently, even though rates are up. Many lenders are cool to the idea because for them it would mean more work for less money.'
And the mean before the 2001/2008 recessions being much higher for the 30 years before.
To compare it to bonds, imagining I can sell my own bonds: To raise the same amount of money issuing a bond with a 3% coupon now vs. issuing one with a 7% coupon now, I'd have to issue more of the 3% coupon bond.
This seems an obscure bet on perceptions of house prices, house purchase heuristics and mentality, and a lot of imagination. I can imagine why lenders are 'cool to the idea'.
Please correct me if the above understanding's incorrect.
So now you essentially have this $10 surplus by not trading in your loan worth 90%. How the buyer and seller split that is up to them. For instance the buyer could say I want an extra $10 on top of what you would have paid without the transfer or the reverse. But realistically the buyer would pay a little more for a net lower payment. Win-win.
It's very clever. The big downside is having to get a second lien to cover the remaining amount which would likely be higher rate because it'll be a second lien. And the hassle of having two mortgages.
The release of the MiiX R.O.C. and ROAM products only magnify the urgent and desperate need for reform in the mortgage, housing, insurance and personal finance markets. Hat's-Off to these two co's for stepping forward!
Additionally, let's say an individual chooses to use Roam to sell their home and transfer the mortgage. In a normal market, the interest rate is unique to the buyer, but in the Roam market, the interest rate is now on sale as part of the house deal. This will increase demand for the house, and the seller can ask for more money. Presumably, the amount more that they'll ask for will erase some of the savings that the buyer will realize from the lower interest rate. The mortgage payment for a 500k house at 7% is comparable to a 750k house at 3%, but the required down payment for the latter is much higher.
https://lawandsteinllp.com/2023/04/garn-st-germain-act/ (Garn–St Germain Act)
Indeed, you can incur wrath (as this is fraud) if you apply to originate a mortgage stating it's your primary residence and then you turn around and rent it out as an investment property (you must move into the property within 60 days of closing, and after a year you can convert from owner occupied to investment property, on a primary residence note), but there is no mortgage clause to my knowledge that requires you to remain in the home yourself as long as the note exists.
Pass the crow?
As part of the process, we had to demonstrate that the new house would be my primary residence, that we would be selling the old house when my wife’s old contract end, and that my wife actually intended to move to the new house full time.
This process required an internal exception review and risk mitigation above the banks normal process (the old house was with them so we knew their mortgage process). It took a lot of time with them to convince them that we were not trying to purchase a second, vacation home - we simply bought early. If we did not sell the old house, they were going to force us to refinance as a second home or investment home.
My understanding is the situation changed the federal government’s opinion of our risk and, in turn, our mortgage’a qualification for federal mortgage programs (which our bank uses to back the mortgages). If an audit occurred, the bank had to demonstrate they did not provide me with two primary residence mortgages.
Yes, you'd have two loans.
It's an interesting idea, and one we floated by our mortgage lender. Our mortgage lender did not seem to like it, because I don't think they make as much. This makes one think, are there better ways for mortgages available that are not considered because the mortgage company does not make as much?
BML VIDEO: https://www.youtube.com/watch?v=Lib7HZZfAQw
Both have the same 3.5% - 30 Year - Fixed Home Finance product where you can amortize regular monthly expenses like utilities, health and car insurance, etc. into the 30 year home financing.
A US veteran that purchased in the low-interest rate environment has a significant advantage as a seller in today's market.