A 3% Mortgage Rate in a 7% World? This Startup Says It Can Do That
Loan assumptions, which let a home buyer essentially take over a seller’s mortgage, are hard to find and hard to pull off.
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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.
In 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 face 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.
Some 22% of active mortgages are part of the government programs that have assumption features, according to the mortgage-data and technology company Black Knight. That includes loans extended through the Department of Veterans Affairs and the Federal Housing Administration programs.
Few consumers know about the option, and fewer still follow through with it. The FHA has processed 3,349 assumptions in the fiscal year that ends Sept. 30, up from 2,566 in the year prior.
Raunaq Singh, Roam’s founder and chief executive officer, says his new company will find and advertise home listings attached to attractive assumable mortgages. It is initially launching in Georgia, Arizona, Colorado, Texas and Florida.
The company aims to help with the paperwork and other bureaucratic hoops. That means working with the seller’s mortgage company on behalf of the buyer and seller.
“Have you ever called someone every day until you get what you wanted?" says Singh, who earlier in his career worked at the online real-estate company Opendoor. “That’s the kind of service we do on your behalf."
A loan assumption is different from a standard sale, in which a buyer takes out a mortgage at the going rate to pay the seller. In that case, a seller uses the money to pay off his or her own mortgage and pockets the rest.
An assumable transaction doesn’t replace an old mortgage with a new one, but instead transfers the old mortgage to the new owner. The seller is relieved of the remaining mortgage liability, so the balance is subtracted from the purchase amount owed. The buyer must come up with cash to cover the rest of the purchase price.
Take a $500,000 house that is tied to an assumable mortgage with a $300,000 balance. Even after the buyer assumes the mortgage, the buyer still needs to come up with $200,000. Unless the buyer can pay that amount, he or she would need to take out a second loan at going rates.
Roam says it will recommend lenders to provide additional financing. It wouldn’t specify which lenders it will work with. Roam will collect a fee from the buyer that equals 1% of the purchase price.
Roam, with 10 employees, received $1.25 million in a seed funding round led by the venture capital firm Founders Fund and Eric Wu, who co-founded Opendoor. Tim Mayopoulos, the former Fannie Mae CEO who briefly ran Silicon Valley Bank after it failed, is an adviser.
The startup could run up against the Luddite world of mortgage banking, where assumption documents are still often transmitted by fax machine. Lenders sometimes drag their feet in processing assumptions because they earn only a few hundred dollars for processing them, far less than for originating a new mortgage, according to Ted Tozer, nonresident fellow at the Urban Institute’s Housing Finance Policy Center.
For loan assumptions to become popular, lenders will need to be allowed to earn more on them, Tozer says. “There’s not much you can do with that if the lenders aren’t going to be efficiently processing assumptions," he says.
If assumptions did take off, mortgage investors could effectively demand higher rates on new loans to compensate for being stuck holding assumable mortgages for longer, according to John Kerschner, head of U.S. securitized products at Janus Henderson Investors.
Another challenge: Not every seller wants to part with a loan. If a seller with a VA loan bequeaths a mortgage to a civilian buyer, the seller might not be able to take out a new VA loan immediately.
Veterans United Home Loans, the largest VA lender, expects to process about 150 assumptions this year, up from roughly two dozen last year.
Jessica Pardinas and her family assumed a Veterans United loan with a rate of just over 3% when they bought a four-bedroom home in Bowie, Md., in August. She knew loan assumption was a possibility because it was mentioned in the listing. Because Pardinas is a veteran, the process was a little easier.
The seller hadn’t paid down much of the loan balance, so a second loan wasn’t needed. She estimates taking the lower rate will save about $10,000 a year.
“It was a very welcome surprise," she says. “We certainly will be able to put the money we are saving to good use."
Write to Ben Eisen at ben.eisen@wsj.com
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