Published with Paul H. Kupiec in the Financial Times.
Robert Armstrong (“My mortgage is a problem for the Fed, and for America”, Opinion, FT Weekend, October 3) describes his personal experience with the “lock-in” problem bedevilling the American housing market, thanks to the Federal Reserve’s past “quantitative easing” actions.
His bargain basement 30-year, 2.75 per cent mortgage makes it virtually impossible for him to move. “I’m locked into the place,” he says. “Downsize when the kids leave? Move for a great job offer in another city? Nope.”
There is an alternative that may allow Armstrong to sell his home to a happy new buyer and downsize, or take a new job, and still benefit from the economic value of his cheap mortgage. It’s a classic financial concept, but a new idea when applied to mortgage loans: defeasance.
With US Treasuries yielding 5 per cent, Armstrong could create a trust of Treasury securities to pay all the remaining payments on his old mortgage for about 79 per cent of the unpaid balance on his loan.
The remaining 21 per cent, a sizeable number we imagine, he could share in an agreed-upon fashion with his current lender.
Defeasance is a real option if his current mortgage is held by a portfolio lender – like a credit union, bank or savings association – which has the power to agree to the defeasance. Unfortunately, legal issues preclude defeasance if his mortgage has been sold in a mortgage-backed security.
We explain how defeasance transactions are already occurring in the US in a recent article, “Unlocking the Value of Low-Rate Home Mortgages.”
Paul H Kupiec
Arthur F Burns Fellow,
American Enterprise Institute,
Washington DC, US
Alex J Pollock
Senior Fellow, Mises Institute,
Lake Forest, IL, US