Transferable Mortgages: Free the Rates! Unlock the American Dream!
In this week’s email: an idea I have been researching, thinking about, and talking about: and one whose time has come.
Today’s housing market is defined by a peculiar standoff: millions of Americans hold ultra-low interest mortgages they don’t want to give up, while first time homebuyers face the highest borrowing costs in a generation.
How can we solve this? Why not allow new homebuyers to assume existing mortgages, from sellers, at their original interest rates?
If I were a candidate running for Governor of a state with a housing crisis, or a federal officer in Treasury, I’d make Transferable Mortgages my top issue.
Adopting widespread assumable mortgages could unfreeze housing supply, boost economic mobility, and make homeownership more affordable. We have the tools to make this happen, and the benefits of action far outweigh the objections.
The “Golden Handcuffs” Creating a Housing Crisis
American homeowners refinanced and bought homes at record-low interest rates during 2020-21. Now those same owners are reluctant to sell, knowing any new mortgage would carry a 6%–8% interest rate instead of the 3% they enjoy. The result is a sharp drop in homes for sale. In 2023, the inventory of existing homes on the market fell to about 1.1 million, 40% below pre-pandemic norms.
Last year, existing-home sales plunged to just over 4 million, the lowest in nearly 30 years. The Federal Housing Finance Agency (FHFA) estimates this mortgage rate lock-in effect prevented 1.72 million home sales from mid-2022 to mid-2024. Homeowners are effectively “locked-in” by their cheap mortgages, a phenomenon lenders themselves anticipated.
Why is this the case? “Due-on-Sale” clauses.
Nearly every mortgage has a “due on sale” clause, which require sellers to pay off their loan upon transfer. These used to not be widespread, 1980s precisely to prevent buyers from assuming loans. As inflation and interest rate spiked in the late 1970s, we saw a similar “freeze-out” for homebuying, and a low-rate mortgage became an attractive selling point, and lenders were not able to reissue loans at higher rates. The Garn-St. Germain Depository Institutions Act of 1982 began to address the “due on sale” clauses. As interest rates soared in the late 1970s, lenders pushed for due-on-sale clauses to protect profits and manage risk.
Homeowners who want to move – whether to pursue a new job, downsize, or relocate closer to family – could do so without forfeiting their once-in-a-lifetime rate. Boomers with no kids don’t want to downsize today because their rates are so good. And their kids, therefore, don’t have inventory because the parents won’t leave their golden home. Allowing Boomers’ kids’ generation to inherit their 2.75% interest rate, I believe, woulc unlock housing mobility and inventory at a time when both are desperately needed.
How is this possible? Federal and state governments could both lead.
Transforming assumable mortgages from niche exception to widespread reality could require action at multiple levels of government. Here’s how federal and state authorities could implement this change:
· Congress: Congress could amend the Garn-St. Germain Act of 1982, which currently grants lenders broad rights to enforce due-on-sale clauses. That law made assumable mortgages rare by allowing banks to demand full repayment when a home is sold. It’s time to update it. A straightforward fix would be a federal law stating that for new mortgages, lenders must permit assumption by a qualified buyer at the original contract rate (perhaps with a modest fee), instead of forcing refinancing at a new rate. Notably, federal law already “encourages” lenders to permit assumptions, but basically no one does this (why would you if you can charge a higher rate?)
· Executive Branch (FHFA & Agencies): Federal housing regulators can move quickly within their existing authority. The FHFA, which oversees Fannie Mae and Freddie Mac, could direct these mortgage giants to accept and support assumable loans in their guidelines. That means new conforming loans sold to Fannie/Freddie would include clauses allowing a future buyer to assume the loan (with the buyer subject to standard credit and income qualification). The Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) already back assumable loans – FHA, VA, and USDA mortgages can be assumed by new owner-occupant buyers under current rules In addition, the FHA could insure supplemental second mortgages used by buyers to bridge the gap between the assumed loan balance and the home’s price.
· Executive Orders: The current administration is testing the bounds of executive orders beyond past action. I could imagine a simpler fix: Treasury could simply say that in order for a bank to have a charter in good standing with the U.S., they need to require assumable mortgages.
State-Level Initiatives: While broad changes to mortgage law require federal action, states could take the lead. State agencies could require mortgage assumability in order to operate in that state. Imagine if a housing-starved state like Colorado or my home state of Virginia required assumability. Can you imagine the flood of young families that may enter the state, looking for the chance to own a home? It could be an economic and demographic boom. Some states have already done this, creating laws to require assumability in certain situations (e.g. one spouse can assume the mortgage in a divorce buyout)
Absent license-to-operate action, state housing finance agencies can pioneer programs offering assumable mortgages for first-time buyers, using their bonding authority and partnerships with lenders to backstop risks.
What might the economic impact be?
Making most mortgages freely assumable would reverberate through the economy
Home Sales Boom: By removing the “golden handcuffs” of low-rate loans, assumable mortgages would likely trigger a double-digit percentage increase in home sales. How many more sales? Consider that in just a two-year span, 1.72 million home transactions were **forgone due to the rate lock-in effect (FHFA). That’s roughly a 20% reduction in sales volume. If even a large fraction of those sidelined sellers and buyers re-enter the market thanks to assumable financing, home sales could easily rise 15% or more relative to today’s levels.
Boost to GDP and Jobs: Housing is a major engine of the economy, accounting for roughly 15–18% of U.S. GDP when you include construction, remodeling, real estate services and housing-related consumption. Each home sale doesn’t just shuffle ownership; it triggers spending on movers, brokers, renovations, furniture and more. The National Association of Realtors (NAR) estimates each home sale generates about $113,000 in economic impact.
Labor Mobility and Efficiency: One often-overlooked benefit of freeing up housing transactions is improved labor mobility. When people feel locked into their current home by a low mortgage rate, they may pass up job opportunities in other regions or delay moves that would better match them to jobs. A Federal Reserve study found that roughly 44% of the decline in moves by mortgage holders from 2021 to 2022 was attributable to rising interest rates creating disincentives to move.
Improved Home Affordability: Perhaps the most immediate and tangible impact would be on affordability for homebuyers. High mortgage rates have been brutal for affordability – the difference between a 3% and 7% mortgage rate on a median-priced home adds roughly $1,000 to the monthly payment, pricing out millions of middle-class buyers. In fact, the National Association of Home Builders found that the jump from ~3% to ~7% mortgage rates priced out an additional 18 million U.S. households from affording the median home.
Addressing Objections to Assumable Mortgages
As with any major change, I’ve spoken with skeptics who have raised objections to making mortgages widely assumable. Here are a few I’ve heard that deserve to be addressed:
Lender Resistance and Market Risk: Banks and mortgage investors may balk at being stuck with lower-yield loans for longer. A due-on-sale clause lets a lender force a high-interest refi or payoff, which “protects” their profit when rates rise. If buyers can assume a 3% loan in a 7% market, the lender forgoes the chance to issue a new loan at higher interest. There’s also the concern of credit risk: the new buyer might be less vetted or creditworthy. My counterargument: These issues can be managed. First, any assumption policy would still require the buyer to qualify under the lender’s credit standards (just as FHA and VA assumptions do), so lenders aren’t taking on unknown risk.. Second, while lenders lose an opportunity to charge higher interest, they also avoid the cost of originating a new loan and keep a performing asset on the books. They can be allowed a one-time fee (such as 1% of the loan balance) to compensate for processing and the extended loan term. This already happens in commercial real estate, my day job, all the time.
Market Distortions and Allocation of Benefit: Critics worry that allowing low-rate loans to be passed along will create a two-tier housing market. Homes with an assumable “golden handcuffs” mortgage attached might sell at a premium and could concentrate demand, distorting prices. Early sellers could capture a windfall by effectively “selling” their low interest rate along with the house. There’s also a concern about what happens when that second buyer eventually sells – do they keep passing on the 3% loan indefinitely, potentially creating an ever-appreciating asset tied to an old loan? Counterargument: Some price effects are likely, but they are a feature, not a bug. Yes, a home with a 3% assumable mortgage will be more valuable to buyers than an identical home without one – because the financing is part of the package. This is simply a transparent pricing of financing advantage, similar to how homes with solar panels or energy-efficient upgrades fetch higher prices due to lower operating costs. In other words, the assumable mortgage feature helps ensure the house goes to a family rather than a Wall Street landlord – hardly a bad outcome.
Fairness and Moral Hazard: Some argue that assumable mortgages might be “unfair” to those who don’t have access to one. For example, a first-time buyer purchasing new construction won’t have an existing low-rate loan to assume, whereas a buyer of a decade-old home might. There’s also a question of whether it’s fair to effectively guarantee some homeowners a higher resale price because they locked in a low rate. Additionally, might borrowers be less inclined to refinance (even when it would make sense) just to preserve an assumable loan for later sale, potentially making markets less responsive? Counterargument: The current situation is already grossly unfair – in favor of incumbents. Today, the only people benefiting from those ultra-low pandemic mortgage rates are the ones who happened to buy or refinance in that window, while newcomers are shut out. Assumable mortgages would spread the opportunity to benefit from low rates to a wider group, including younger and first-time buyers who missed the window. It’s a way of leveling generational inequities in housing.
Free the Rates! Unlock the American Dream!
America’s housing market needs a jolt of liquidity and fairness. Enabling assumable mortgages on a wide scale would provide just that, injecting flexibility into housing transactions and easing the logjam caused by recent interest rate swings. In the coming years, this single policy change could help millions of Americans move into housing that better fits their lives – whether it’s a new job opportunity, a larger home for a growing family, or a more affordable path to first-time ownership. It would boost economic growth, improve housing affordability, and even temper the wild price cycles by keeping supply flowing.
Policymakers should not let outdated clauses in fine print (or the banking lobby’s inertia) stand in the way of such broad benefits.