Home Equity Lending News

1st Mtg Assumption Obstacles, 2nd Mtg Opportunities

While interest in assumable first mortgages is growing amid the current high interest rate environment, there are plenty of roadblocks to achieving an assumption. Recent innovations, however, in lender compensation, first mortgage technology and second mortgage financing are helping to lower the hurdles.

Dark Matter Technologies LLC last week announced that its Empower loan origination system has been enhanced with a loan assumption feature. The upgrade is intended to make it easier for lenders and servicers to transfer assumable mortgages to new homebuyers.

“The Empower LOS supports the process whether initiated by the seller’s mortgage servicer or the buyer’s mortgage originator and can even work with financial institutions that use a different LOS provider for first-lien origination,” the news release stated.

Its LOS is the first such mortgage system “to announce native support for loan assumptions,” the statement said.

Rich Gagliano

“After successfully piloting our loan assumption capability with a select group of early adopters, we’re incredibly pleased with the progress, success and the general availability of this important feature that consumers and real estate agents are increasingly asking for by name,” Dark Matter Chief Executive Officer Rich Gagliano said in the press statement. “By partnering with Dark Matter, mortgage originators and servicers can transfer assumable mortgages for home buyers and sellers in a manner that is compliant and efficient.”

Dark Matter, which was spun off by Black Knight in September 2023 as a condition of its acquisition by ICE, acknowledged in the media release that conventional loans are rarely assumable but highlighted how assumptions are possible on mortgages insured by the Federal Housing Administration or guaranteed by the Department of Agriculture or Department of Veterans Affairs.

One obstacle with assumptions is the amount of down payment needed to cover the difference between the loan balance and the home’s sale price.

Sean Dugan

Sean Dugan, chief revenue officer of the Jacksonville, Florida-based technology company, said in a written statement to HELN, “For these funds, we’ve seen buyers pay out-of-pocket, perhaps from their savings or proceeds from selling their home, or take out a second lien.”

An announcement last month indicated that Spring EQ is working with Roam to provide second mortgages to home shoppers who are assuming the first mortgages on properties they are purchasing.

Another roadblock for assumptions is that in the current market, sellers are getting multiple offers from shoppers who are already qualified for a new loan or are buying the property with cash.

But Dugan noted that sellers with assumable mortgages can attract more potential buyers at higher asking prices.

“While there certainly are cash buyers in some markets, there are also many buyers looking for an affordable way to buy a home,” Dugan wrote. “With mortgage interest rates currently hovering around 7%, government-backed mortgages (FHA, VA, USDA) that are assumable and have low interest rates of 2-3.5% have become attractive to buyers and are growing in popularity.”

Dugan explained that there were approximately 6,400 assumable loan transactions handled by the FHA and VA in 2023 based on published reports, up 139% from 2022. So far this year, he said there have been 3,896 assumptions completed.

One hinderance, inadequate assumption processing fees, has been mitigated. Dark Matter’s press statement indicated FHA recently disclosed that assumption processing fees to mortgagees are being increased on August 19 to $1,800 from $900. The change was reportedly made to support increased consumer demand by compensating mortgagees at contemporary rates.

Dugan said the company expects homebuyers to explore strategies like loan assumptions in order to make real estate acquisition more affordable while interest rates remain high.