Understanding Why Subsidies for Downsizing Baby Boomers Might Actually Be Effective
The Trump administration has put forth a concept that many might find quite logical: a portable mortgage. This notion allows homeowners to transfer their existing mortgage—along with its interest rate—when they sell one home and buy another. It feels intuitive, right? If you’re making those payments, why shouldn’t you take it with you when you move?
However, there’s a key reason why this idea isn’t in place in the U.S. A mortgage is tied to a specific property. When banks lend, they do so backed by that particular home as collateral. If a borrower defaults, the bank can seize that exact property. The whole mortgage system—especially the secondary market, where many mortgages are packaged and sold—relies on this principle of unique collateral for unique loans.
That said, FHFA Director Bill Pulte from Fannie Mae and Freddie Mac has mentioned they’re “actively considering” avenues for making this portable mortgage a reality. The reasoning is straightforward. Countless homeowners find themselves reluctant to sell their homes with low, pandemic-era 3% mortgages, not wanting to take on new 7% rates. A portable mortgage would let them move while keeping those lower rates intact, potentially unfreezing the stagnant housing market.
Who Covers the Cost of Portability?
So, let’s unpack what actually happens. Imagine you own a home worth $400,000 with a $200,000 mortgage at 3%, and you wish to move to another home of the same value.
Typically, when you sell for $400,000, the buyer’s mortgage pays off your old loan; you use that money to buy a new home, where new mortgages are set at 7%.
With portability, though, the buyer continues to pay the old mortgage, but you receive a new loan of $200,000 at 3% secured by the new house.
The catch? Your lender is now dealing with assets valued below market rates. If the current market rate is 7%, a $200,000 mortgage at 3% might be worth $75,000 to $100,000 less compared to a new loan at the market rate. Why would lenders agree to this deal?
They wouldn’t, unless there’s someone covering the difference. In this case, that would be the government, primarily because we’re talking about Fannie Mae and Freddie Mac, government-sponsored entities.
The Securitization Dilemma
There are some significant limitations here. This plan definitely won’t apply to existing mortgages. Most loans originated during the pandemic have already been sold to Fannie Mae or Freddie Mac and bundled into mortgage-backed securities (MBS), sold to investors. These bonds are tied to specific mortgages on specific properties. Simply extracting these from an MBS pool to secure them against another property is virtually impossible without unraveling the entire security. Even if it could be done, the legal and accounting hurdles would be immense.
Essentially, portable mortgages would be exclusive to new loans set up after the program is introduced. Those who secure a mortgage at 7% may wish to port it later, but folks with 3% loans from 2021 likely won’t have that option.
This limitation poses a significant barrier to solving the current lock-in situation. The intent here is to assist those with lower-rate mortgages in relocating to homes that fit their new needs, but ironically, those are precisely the loans that can’t be made portable retrospectively.
In the future, GSEs might package portable mortgages in a distinct way; they’ll need different pricing compared to standard loans. Portable mortgages would likely have slower prepayment speeds, allowing borrowers to transfer the loan instead of paying it off when moving, and only refinancing when rates drop below current levels. Investors must recognize that they are buying products with varied prepayment features and prices.
What’s the Price Tag?
No free lunches here—this free suitcase mortgage has to be funded. Likely, that burden falls to Fannie Mae and Freddie Mac, which eventually equates to the Treasury and taxpayers footing the bill.
To give some context, if 10 million mortgages were transferred with an average of 15 years remaining, and a 3% interest rate differential on a loan of $250,000, the present value cost could hit around $100-150 billion. That’s about $10-15 billion annually at peak periods. Even in government circles, that’s a substantial amount. Is it worth the expense?
And then there’s another consideration. New mortgages would need to factor in portability options. Lenders might charge more upfront, understanding that a borrower might be able to keep enjoying lower rates for years by transferring loans multiple times. So, future homebuyers might end up paying more for the chance to enable portability they may not even use.
Unfreezing the Housing Market
Should we completely disregard this idea? Not necessarily.
Portable mortgages may not resolve the current lock-in dilemma, but they can be impactful. They could prevent future lock-in situations.
There’s a recurring issue in the housing market that tends to surface every time interest rates rise, especially following extended periods of low rates. Retirees occupy larger homes while young families struggle to find suitable options. No one’s willing to move because of fixed mortgage rates. Ideally, empty nesters would downsize while helping families find the space they need, but the costs tied to maintaining favorable mortgage rates create barriers.
This is a classic unbargained problem. If the market functioned smoothly, empty nesters would transition into smaller units, allowing families to settle in larger homes. However, the transaction costs obstructing this reallocation—the lock-in effect, in this case—make it a challenge. Empty nesters hold onto valuable low-interest loans and won’t part with them lightly.
In a perfect world, families would offer to pay incentives for empty nesters to move. But the costs of identifying and negotiating with specific sellers are significant. Additionally, many younger households simply don’t have the upfront cash needed to motivate empty nesters to agree to potentially higher interest rates.
Thus, the government might need to step in to facilitate such negotiations. The Treasury could subsidize the interest rate gap, permitting homeowners to downsize without penalties—thereby making larger homes more accessible for families. If this results in a notable boost to housing supply, it could alleviate price hikes or at least slow them down. This subsidy is a way to overcome the transaction costs that are currently hindering efficient market reallocation.
Is this the only solution for the housing slowdown? Certainly not. An ideal alternative might be the ongoing push to build more houses, although this often clashes with both human concerns and physical limitations.
Anticipation for a new home can quickly fade when construction begins. Zoning boards may dig in their heels. Environmentalists may raise valid concerns about new developments impacting the climate. While builders advocate for new projects, endangered species seem to prefer to linger in vulnerable habitats. Even if local resistance subsides, major infrastructure issues remain. How many more riders can commuter trains accommodate? How much more congestion can our highways manage before they effectively fail?
Portable mortgages offer a politically feasible approach, even when better solutions are sidelined. Surveys indicate that the public supports allowing people to maintain low interest rates, even if that requires substantial government assistance.
Portable Mortgages: A Benefit for Future Generations
This is clearly a potentially lopsided development—it benefits existing homeowners with valuable properties. However, the broader social gain comes from increasing housing supply. In many areas, the main limitation is not building capacity or land availability but homeowners’ struggles to sell due to interest rate lock-in. By creating portability options, we could significantly boost the availability of family-sized homes, which benefits buyers and potentially enhances affordability.
The challenge is whether a cost of $10 billion to $15 billion annually is reasonable for achieving this transition. Is it an acceptable price for that flexibility? It might depend on how adaptable the approach is. If only 100,000 households benefit, the individual cost may be too high. But if the plan captures 2-3 million households over a decade, freeing up considerable inventory in a tight market, it could prove worthwhile.
That said, it’s crucial to acknowledge the limitations. This won’t assist anyone currently caught in a lock-in situation. The focus is on a future policy designed to prevent the next lock-in crisis.
Many homeowners with 3% mortgages from 2020 to 2022 are likely to remain stuck unless rates drop or they’re willing to reconsider their options. And countless baby boomers and older families hoping to purchase homes from Gen X will need to remain patient.
The reality of portable mortgages isn’t that they’re the ultimate economic solution or that they tackle today’s issues. Rather, they represent a politically viable way to facilitate future negotiations, potentially preventing housing supply freezes when interest rates rise. Sometimes, the best policy we can enact is just better than the ideal policy that remains out of reach.
Is it $10-15 billion each year? What’s the acceptable trade-off for this flexibility? This remains fundamentally a political matter. However, this method at least stands a chance of success, provided we’re willing to invest in mobility that’s currently missing. Sometimes, action is all it takes.
