Why aren't there more "assumable" mortgages?

Question

I know this probably will be a dumb question for anyone in the real estate/mortgage business, but I'll admit that this is one area that I'm not too knowledgable on. I know that there are some assumable mortgages out there, but they are rare and hard to find - I'm just wondering why that is.... Say Joe Blow doesn't want to or can't make his mortgage payments - he doesn't want to default on his mortgage or just walk away from it, but here's Sally Doaks who's willing to take over the payments for him and basically assume the mortgage. If she has to put down a little "earnest money" she can.

The only reason I can see that this option isn't offered more is that maybe there isn't enough money in it for anyone in the mortgage business.

I'm probably missing something here - like I said, I'm not too knowledgeable about the mortgage business, maybe someone can explain this one to me. Thanx!

All good answers so far - it's going to be hard to pick a "best answer". Everyone's added a little something different - too bad I can't combine a few together for a combo best answer :-)

I didn't realize that in a lot of these cases the original holder of the mortgage was still held liable if the second person defaults. I guess I just took it for granted that in an assumable mortgage, the second person that assumed the mortgage also legally assumed the liability for defaulting on it. If that's not the case, then I can see why most people would not want to do it, I certainly wouldn't if I were the original holder of the mortgage. But that still leaves the question - why aren't there more assumable mortgages where the liability for default is also assumed? One answerer mentioned that with all of the costs and work involved in this for lenders, they would be just as well off originating a new mortgage, and that makes sense too....

Anyway, thanks for all of your answers so far

Answer 1

The main reason mortgage loans are not assumable is that banks earn fees upon mortgage origination. A secondary concern is that at the time a property is sold (which is when you would want the mortgage to be assumed) the lender would have to reevaluate the condition of the property and the creditworthiness of the new borrower. If they are going to go through that work they might as well collect the origination fees that go along with it.

Answer 2

FHA loans and some adjustable rate mortgages are still assumable but they are assumable only by qualified assumption which means that the new borrower must meet investor guidelines for assuming the loan and pay an assumption fee to cover the cost of the transaction to the lender.

Blind assumptions, where the new borrower simply started making payments and the original borrower was not released from liability became extinct due to the high rate of mortgage defaults during the last major recession in the late 70's and 80's. Default rates soared, assuming borrowers had no legal liability and the foreclosures were being reported in the original borrower's name resulting in major credit dings to those who had no control. Think about it, how would you like it if you let Saly Doaks take over your payments, bought a new home yourself, and then 5 years later got a notice of foreclosure because Sally lost her job and couldn't make the payments any more. By that time you'd have deeded your interest to Sally and you'd have had no interest in the property just the liability of the debt. Not a good deal.

A previous responder indicated that assumptions were no longer available because lenders want to collect the origination fees on new loans. Not true. The investors, Fannie Mae, Freddie MAc, etc., set the guidelines for loans, not the lenders. After the financial losses, and foreclosures are almost always a loss to the lender and the investor, they incurred in that last major recession, they changed the guidelines to protect borrowers and themselves.

Answer 3

It's too high of a risk for a bank to take the chance on someone assuming a mortgage without qualification.

Although, it isn't that mortgages aren't assumable anymore, it's the banks have a "Due on Sale" clause in their mortgage contracts.

It is possible to assume a mortgage in a land trust, giving the original owner a small percentage of ownership of the house, so that the bank cannot call the loan due.

Answer 4

One thing you are missing is that the person with the original mortgage is still held liable if the second person who assumes the mortgage defaults or is late. That is the main reason they became obsolete years ago.

Answer 5

It's a huge risk for the bank.

You've got good credit, get a mortgage, move after a year, and have me, with bad credit, assume the mortgage. I make 3 payments and stop.

Why would a bank want that?

Answer 6

Generally, people who cant make payments will need to sell. If they just let someone assume the mortgage, they get no money for their investment. Selling would be the smarter thing to do.