So, what IS an “assumable mortgage”?

An “assumable mortgage” is exactly what it sounds like; it is when a buyer agrees to take over the payments from the seller on the seller’s existing mortgage.

Sounds simple enough, right? And, it is.

Many people don’t know this, but, mortgage assumptions were quite common during the 40± years from the end of WWII right up through the 1980′s. In fact, the federally insured (FHA) and guaranteed (VA) mortgages were legally required to allow for assumption, and many conventional bank loans were also assumable.

During the many mortgage droughts in the 1970′s, as well as during periods of hyper interest rates of nearly 20% in 1980-81, mortgage assumptions were the dominant form of financing residential and commercial real estate transactions. And, if not for the fact that so many mortgages were able to be assumed, there would have been economic chaos similar to our current situation.

Unfortunately, for reasons that are unclear even to me (having underwritten and reviewed literally thousands of residential and commercial loans), lenders have removed assumption clauses on virtually all residential loans. One can only assume, that as interest rates were rising, lenders were unwilling to maintain low interest rate loans when they could earn higher rates on new loans.

Anyway. Here we are in 2010. There are literally hundreds of thousands, if not millions, of actual and potential foreclosures taking place. And, every time a property is foreclosed, that single foreclosed property has a substantial negative impact on the value of the homes in the immediate neighborhood which, in turn, has a negative impact on their surroundings, and so on, and so on. This isn’t to mention, that the lender who forecloses is required to set aside a reserve which takes money away from the amount they can use to make a new loan.

In short, foreclosure has a far more devastating negative economic impact than on just the homeowner who loses their home.

Over the past 2 years, the federal government has come up with gimmick after gimmick to try to create buying activity. They started with the First Time Buyer $8,000 Tax Credit, which had very limited success; then, they extended the 1st Time Buyer Tax Credit and added the Any Buyer $6,500 Tax Credit, which has been even less successful. Now, they’re forcing lenders to negotiate short sales, BUT, only CERTAIN lenders are REQUIRED to comply. Consequently, this, too, will have virtually no beneficial impact on the housing market.

However, there is one thing the federal government may have been able to do that would likely have had substantial success; Require residential mortgage lenders to make their loans assumable. While it’s too late to require lenders to allow assumptions of existing mortgages (because they are an existing legal contract between a lender and a borrower that needs the approval of BOTH parties to change), it can be done for new mortgages as a requirement of obtaining FDIC insurance, and by making it a Securities and Exchange Commission regulatory condition for selling mortgage backed securities in the bond market.

As for existing mortgage loans, the federal government could provide lenders of these mortgages a certain level of assurance, perhaps up to 10% of the outstanding loan balance, for a period of say, 3 years after the loan is assumed, in exchange for the lender making their existing mortgage loans assumable.

Naturally, as an historical condition of assuming a loan, the buyer would have to submit to a credit analysis, and provide the normal proofs of employment, income, and so on. However, there would be no requirement for an appraisal, since the value of the property is not at issue, as there is no new loan to be created. This would shorten the processing time and the time between contract and closing, thereby minimizing the probability of delinquent payments by the existing borrower.

And, if the loan to be assumed is delinquent, a condition of the assumption could be, that all delinquencies are brought current, OR the amount delinquent is rolled into the loan being assumed. In that circumstance, the lender has the opportunity to minimize current losses.

Yet, another feature that could also be incorporated into the federal mortgage loan assurance to provide incentive to lenders of existing mortgage loans to allow them to be assumed, is to hold the original borrower on the note for the (example 3 year) period during which the federal government provides that lender insurance. This was commonly done in the past, and certainly would be worth the trade-off to both the seller/borrower (in saving their credit and financial future) and the lender to avoid foreclosure and all of the substantial associated costs.

If the federal government really has the desire to stimulate the residential real estate market and implement this type of program, and if lenders use good business sense and go along with this type of federal loan guarantee and allow existing mortgage loans to be assumed, this would open up a whole new world of financing that’s already in-place, AND provide buying and selling opportunities that would, in my opinion, substantially increase sales of residential property throughout the US.

I’d like to hear your thoughts on this topic.

This entry was posted on Sunday, March 21st, 2010 at 11:11 AM and is filed under Mortgage Related, The Economy, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.