Is portability the cure to the mortgage market’s woes?

Bloomberg News

With mortgage lending ground to a halt in the face of rising interest rates, many in and around the banking and real estate industries are looking for ways to unlock the market. Some say the answer lies to the north — in Canada.

These market participants say many of the sector’s woes could be resolved if U.S. lenders and regulators emulated their peers in Canada and some other advanced economies by allowing homeowners to carry mortgages with them from one property to another. 

Mortgage portability is a feature available to borrowers in Canada as well as Australia, the United Kingdom and other countries. It allows them to retain the deal, the interest rate or — in some cases — the entire loan after selling one home and buying another. 

If brought to the U.S. today, Andy Heart, CEO of North Carolina-based Delegate Advisors and a former banker, said this option would remove the “golden handcuffs” from homeowners who — despite continued property value appreciation — are unwilling or unable to foot the bill for new mortgages should they move. 

“That low-cost mortgage becomes low-cost housing for the remaining term of that mortgage,” Heart said. “It’s like all of a sudden you’ve turned your biggest liability into your biggest asset.”

Yet, while the adoption of portability would benefit existing homeowners and potentially boost the broader for-sale housing industry, some policy experts say the shift would create more problems than it would solve.

Mark Calabria, the former head of the Federal Housing Finance Agency, said incentivizing borrowers to hold their loans longer would amplify risks for any entity with mortgages or mortgage-backed securities on their balance sheets.

“It’s a fair amount of interest rate risk you’re taking on,” Calabria said. “Pre-record low rates, pre-pandemic, the typical 30-year mortgage only really was around for about seven years before people refinanced or prepaid. Portable means, from the lender’s perspective, that 30-year [mortgage] may actually turn into 30 years.”

Proponents of portability argue that duration risk is baked into the origination or purchase of a 30-year mortgage. Anyone engaged in the space, they say, when interest rates were at record lows during and following the COVID-19 pandemic should have hedged against the risk of slower repayment times. 

“Whether it’s a five-year mortgage or whether it’s a 30-year mortgage, you’re still doing the same job from an interest rate risk management perspective. Duration of the instrument doesn’t matter to me, you should be understanding that the price volatility and sensitivity of your earnings to a change in interest rates is higher when the duration is…