How to End Mortgage Lock-In and Get Americans Moving Again
Old low-rate loans and capital gains on inflated values are stopping homeowners from selling.
Published with Paul H. Kupiec in The Wall Street Journal.
Many Americans are stuck in place. Since 2022, annual sales of existing homes in the U.S. have fallen to about 4.1 million—the smallest number since the mid-1990s, when the U.S. population was 22% smaller. This market is depressed despite robust economic growth. Why? Lock-in effects caused by existing low-rate mortgages and capital-gains taxes on home sales at inflated prices.
Cheap interest on mortgages from before mid-2022 are keeping homeowners from trading up to accommodate a growing family, relocating for a new job, or downsizing for retirement. Consider a home financed in December 2020 with a 30-year mortgage of $400,000 at 2.9% interest, then the national average. Under standard amortization, the homeowner’s monthly payment is $1,665.
Should the homeowner sell in December 2025, the remaining balance, due on sale, is $354,974. But today’s higher interest rates make the older mortgage a bargain. Given the national average mortgage rate of 6.27%, the remaining payments on the existing mortgage would support a loan of only $251,915. The difference, $103,059, is the capitalized value of keeping the current low-rate mortgage.
Most mortgages in the U.S. require the remaining balance to be paid off when the property is sold. Not all, though. Mortgages financed through Federal Housing Authority or Department of Veterans Affairs are “assumable,” meaning they can be taken over by qualified buyers. But the qualification process is cumbersome, and loan assumptions completed by FHA and the VA are rare, totaling fewer than 6,500, or less than 0.2% of mortgage transactions, in 2023, the last year for which data is available.
A simple risk-free financial transaction, however, could motivate owners to sell by allowing them to realize the value in their below-market mortgages. This is a standard practice in the Danish mortgage system; it could be done in the U.S. by creating a “defeasance” account at settlement to pay the remaining monthly payments on the existing mortgage on time and in full. Existing due-on-sale mortgage contracts prohibit this, but legislation could remove that unnecessary legal impediment and make it possible through the following process:
The federal government appoints a financial agent—the Treasury or the Department of Housing and Urban Development—to manage mortgage defeasance accounts. The defeasance manager provides the seller or settlement agent with a fair-market valuation of the remaining payments on a home’s outstanding mortgage, determined using the current market prices of a portfolio of Treasury securities. The defeasance account manager collects this market value at settlement, and invests the proceeds in the appropriate U.S. Treasury securities, generating the cash flow needed to pay off the remaining monthly payments on the existing mortgage.
The underlying real-estate collateral is replaced by the Treasury securities. The defeasance agent’s guarantee to remit the remaining mortgage payments to the mortgage servicer on time and in full substitutes for the home seller’s liability. The lender has no remaining credit risk except the U.S. government.
The defeasance transaction involves no “uncompensated taking” and doesn’t generate a financial loss for a mortgage lender. The borrower is merely exercising the option to make contractual mortgage payments until the mortgage matures, an undoubted right. The federal guarantee of full and timely mortgage payments is more than adequate to replace the original mortgage collateral—a house that could fall in value.
Inflated capital-gains tax liabilities are also depressing existing-home sales. Many longtime owners face taxes on home-price gains that exceed the exclusion limits set in 1997, $250,000 for a single filer and $500,000 for a married couple filing jointly. In the Northeast, the average sale price of a home increased from $231,400 in 1997 to $1.17 million in the second quarter of 2025, a nominal gain of $939,400 on an average-priced home. Since 1997, consumer prices and the nationwide median sales price of a home have doubled. Doubling the tax exclusions would simply adjust the exclusion values for inflation.
Homeowners locked in by ultralow mortgage rates or inflated capital-gains liability tend to belong to different generations. Younger homeowners are likely to have financial gains from home-mortgage loans originated before 2022, while taxable capital gains are likelier to keep long-tenured baby boomers from selling. Either reform by itself might lack the political support to make its implementation feasible, but together the reforms benefit several generations directly—and they have what it takes to revive the real estate market.