Andy Taylor, Cofounder and CEO, RetroRate

Stop Waiting for the Fed: Push Rewind with Assumable Loans

If you're waiting for the fed to lower rates to stimulate business, you're wasting time. This keynote dives into how a new buyer can still get a 4%, 3% or even 2.5% loan, -right now-, with an assumable mortgage. We'll dive into the mechanics, policy, and give a report card on how the industry has handled an affordability crisis.

Introduction by Holly Sraeel, SVP, Strategy and Content, National Mortgage News Live Media

Transcription: 
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record. 

Andy Taylor (00:08):
All right. Now I will be the first to admit that when I signed up for this, I hadn't quite realized this was going to be literally the day before the Fed makes an announcement. So we don't really have that much time to wait for the Fed. I also didn't realize I was going to be the last slot, so I'm literally the last person before cocktail hour starts. We can go for 20 minutes, maybe we'll have some questions at the end, but we can keep this light. I've been in the mortgage and real estate tech industry for a couple of decades now. First as the head of product at Redfin; I worked there from 2009 to 2015. So if we have anyone from Rocket, you're welcome. Thank you. Afterwards, I started the mortgage point of sale company Approved back before Mortgage Point of Sales were called Mortgage Point of Sales, and sold that to Credit Karma.

(00:55):
For the past four years, I was running the mortgage rate table business, which I built for Credit Karma. Now I'm starting this Assumable loan company—a kind of crazy time—and I wanted to talk about getting more people into homes. So why are we here? Well, not metaphysically, but why are we here at this conference right now? We're all here to find the next big thing to spice things up at a time when loan volume has been slow, to say the least. Basically, everything that we're being pitched right now is AI, AI, AI, AI, followed by your favorite real estate buzzword. I'm here to tell you that the future is actually the past in this situation. The world of ZIRP—that's the zero interest rate environment that made us all a heck of a lot of money during the refi boom—was a strange history blip in the history of mortgage rates.

(01:49):
Literally everyone who could have refinanced or purchased a home did so. Between 2020 and mid-2022 when rates were just super low, the party was about to end. Everyone knew it was about to end, and so they all wanted to get their last call in before the lights went on and the cops were called. Today we have the highest rates in a generation; average 30-year fixed is a moving target—I think it's like 6.1% as of this morning, but it's hovering between 6% and 7%. Buyers have lost $150,000 in purchase power on the cost of an average home. Sellers are locked into a mortgage payment that's $1,500 a month less than what they would pay for the exact same home if they were to buy it on the market today.

(02:42):
Agents and other real estate professionals and people in this room are staring down the barrel of one of the worst years by transaction volume in the last 40 years. Everything's just literally locked up. We all have this mindset that business is going to improve when the Fed cuts rates. There's this myth that Jerome is this magic gatekeeper that's holding us all back, and I'm here to tell you to stop waiting for the Fed. This passivity has just done nothing to help people over the past few years when people could have really benefited from it the most. Jerome Powell has less of an effect on rates than you think. Heck, literally the last time he dropped the interbank lending rate, rates went up by about a half a percent. So we're probably going to get a cut tomorrow at the Fed meeting.

(03:27):
I think that's more or less a given at this point, probably about 25 bips rather than maybe 50. We could be surprised, but that's likely already priced into the cost of mortgages that you see right now. We really have to dispel this vicious rumor that someone else is going to come along and fix all our problems. We're just wasting time; we're being reactive. If you're waiting—and I mean, sure, there's plenty of AI-powered CRMs that you can go see out there right now—but we can do better. This is the MBA mortgage finance forecast from August of this year. I'll admit that it's an eye chart, but let me focus on the important details for those who have the cheap seats in the back. If you believe the experts, rates will only slowly approach about 5%. Tomorrow you're going to hear from Joel Kan; he's the deputy chief economist of the MBA and they said that we're only going to see 6.5% by the end of next year.

(04:15):
They might be wrong—again, we don't know—but roughly Fannie and Freddie have it pegged at about that same place as well. Nobody has a crystal ball, but there is something right now that can rewind those rates to 4%, 3%, or even 2.5%. That's the assumable loan. This is really ultimately the retro tech that we can use right now. Because of those really concentrated rates between 2020 and the beginning of 2022, we have this massive concentration of people really on the low end. Just to give you some perspective, a full 75% of homeowners that have a mortgage have a rate that's below 5%, 55% have a rate that's below 4%, and nearly 20% have a rate that's lower than 3%. 3%. That's literally half of what we're talking about that we're all getting excited about right now.

(05:14):
The assumable loan really is the key to unlocking those rates, not necessarily waiting for the Fed. Before we go too deep, I wanted to spend a moment just defining what an assumable loan is. If you're like me, I didn't even know what this was going into 2022, and I'd been in this for far longer than I'd like. An assumption is a way for a new buyer to take over a seller's loan. You take over their rate and their terms, wherever they are in the amortization cycle. The buyer is qualified just like any other loan, usually using a cash flow analysis type underwriting method. The seller is given a release of liability and essentially the buyer then re-records with the county.

(06:07):
There's something very interesting here in that VA loans don't have to be assumed by a veteran. They can be assumed by a non-veteran. As a matter of fact, veterans' loans can be assumed by an investor as well—great deal if you're looking for some sort of cash flow there. Non-first-time home buyers can also assume FHA loans as well. ¹ The original origination criteria don't necessarily apply in this situation. It's also worth noting this isn't some new financial instrument or some newfangled startup idea. This is something that has and always has been baked into the government loan products. It's actually a part of the mortgage contract itself, and there's a lot of them. Seriously, 22 to 25% of the homes on the market that have a mortgage right now have an assumable loan.

(06:59):
A couple of days ago I did this fun little exercise: on Zillow, you're seeing about 237 homes that are showing assumable loans on there when in reality there were about 1,360—roughly a 6x difference. These killer deals are out there; you just need to know where to look. By the way, this lack of coverage really bothered us. We quickly whipped up a browser extension. It overlays the amount that you would save, the mortgage rate, and a side-by-side loan comparison against the prime rate on all of your favorite sites: Zillow, Redfin, Realtor. Go get this right now because if you're a portal or a non-bank lender and you ultimately have the strategy to drive purchase in 2025 or 2026, good on you. But the data is just too important to hide it away. You can run, but you can't hide, especially with this browser extension.

(07:51):
I'm going to try to dispel some of the misconceptions that you probably heard about on assumable loans. If you were like me in 2022, probably when I said "assumable loans," a lot of your red light beacons were going off. The first rumor that I wanted to dispel is that these things are too rare. Hopefully, I've done a little bit of that so far, but basically, we're talking about 22 to 25% of the homes on the market. Listing agents love to say "rare assumable loan with a 2.75% VA rate," and that's a great marketing strategy—you absolutely should talk about this—but these aren't rare; they're commonplace. This is something that you can literally find right now. It's millions of loans every single year that could be assumed. And like all real estate, location matters.

(08:36):
Actually, there are some places like Killeen, Texas where a full 38% of all the homes on the market have an assumable loan. Does anyone know why Killeen has such a high concentration? Army base, yeah—Fort Hood, one of the biggest army bases in the country. ² Rumor number two: these things are too hard to transfer. I agree that the time component can be a real slog. We're working to improve that through process automation, and I'm going to go into some of the real structural reasons why this happens. I suggest finding an agent who's an expert at this or finding a service like ours that can help handle the assumptions to possibly make this just as easy as any other loan financing type. If you have a buyer who's qualified already for a 7% loan or maybe an all-cash buyer, you're halfway there.

(09:26):
This is the number one rule in assumable loans: stick with it and be patient. You want to be patient because rumor number three is that these things aren't worth the hassle. Assumable loans may not be what you're used to, but they're absolutely worth pursuing. On every $400,000 loan, every 1% delta in the rate equals about $250 a month in P&I savings, or $150,000 in additional purchase power. Homes that market the fact that they have an assumable loan sell for about 5% more than their comparables on average. If this is the difference between your buyer being able to afford the house to begin with or your seller's next down payment, you should absolutely pursue it.

(10:18):
It's 100% worth it. In a way, assumable loans are kind of like this long-lost language that nobody speaks anymore. Listing agents don't think to ask about them. Sellers wouldn't know if they had one if they weren't asked in the first place. And buyers would be absolutely furious with you if the home that they were interested in had one and you didn't say anything about it. Still, most of the listing agents that you see who have these assumable loans are just talking about stainless steel appliances and granite countertops instead of this amazing steal of a deal that comes with the house. Less than 1% of the assumable homes that are actually on the market today market that fact nationwide. It's just a huge missed opportunity. These things are effectively invisible on the MLS, which means they're invisible on the web portals and broker sites.

(11:14):
I wanted to do a fun little exercise and do a scorecard—a report card of the industry. How have we done to respond to assumable loans over the past few years when they could have been really useful? While servicers of a loan don't have a choice as to whether an individual loan is assumable—literally a fact written into the mortgage contract—they did 100% have the choice as to whether they wanted to originate that loan or whether they would accept an assumable loan into their portfolio. They have final say over whether a particular borrower is going to qualify because they ultimately make the credit decision. That's totally fair. A good rule of thumb is you want that borrower assuming the loan to be about as good or better than the current owner. Honestly, that seems fair.

(11:58):
But the servicing infrastructure was set up to handle things like a family member taking it over. They are absolutely not set up to handle true arm's-length third-party transactions. I've heard rumors that some of the biggest servicers in the country have about three to five people total in their whole assumptions department. The whole thing is gummed up. I get it—a 6.5% loan in your portfolio probably looks better than a 3.5% loan—but the best customer that you have is the customer that you already have. I know this because I ran the rate table business at Credit Karma and you realize how expensive those leads are.

(12:50):
Aside from inertia, shouldn't an assumption be easier than a normal loan anyway? Many servicers right now are warning their customers that it's going to take 120 days to get an assumption across the line, even though it's federally mandated to take no more than 45 days to get a credit decision made. This makes no sense. They know the LTV; no appraisal is needed for the home. There aren't necessarily surprises here. You could desktop underwrite this and qualify a new borrower super fast if you were motivated to do so. There's literally no excuse. We got into real estate to help people get into homes and I think that we can do better. So I'm sorry servicers, I'm going to put you on notice: I give you an F, but you can retake the grade.

(13:43):
We're in the San Diego County Unified School District; you can retake the grade. Next time, let's see if we can do a little bit better on this one. All right, brokers and agents, you're next. I can't blame you, honestly; I just told you that assumable loans are effectively invisible on the MLS and sellers don't even know if they have one or not. You're just trying to get the deal done, not spend all your time fighting with servicers. You want to get paid and get that commission at the end. I get it—as a buyer's agent, be the superhero in this story. Get your buyer more home for the money or maybe the same home for less money. You can send your clients more search results than they're going to find on Zillow, Realtor, or Redfin.

(14:27):
This is ultimately why we build our software for agents. We're very agent-first because if there's one thing I've learned at Credit Karma and Redfin, it is that most consumers do not understand how mortgages work, much less how an assumable mortgage works. Guide them through this process; show them the inventory they didn't even think that they could afford themselves. Listing agents, you should know and ask every single time you list a home whether it has an assumable loan because you're missing out on a line of a hundred people out the door every single time you forget to mention this fact. This is the way that you get eyeballs on your listings and stand out with picky buyers. Whether or not they end up assuming doesn't necessarily even matter. This is your way of generating traffic and interest.

(15:14):
Or if you're looking for business, you can dive into homes that aren't even on the market that have assumable loans as well. Compare this with the book of business from before 2022. Look at all the homes that you have actually sold, and I guarantee you that you're sitting on a gold mine of leads and you don't even know it yet. This is also a really great way of differentiating yourself from all the other listing presentations because you're probably going to be the only one that walks in and uses assumability as a marketing opportunity. By the way, this is the Dallas-Fort Worth area. You wouldn't know it because it's literally crawling with assumable listings. Brokers, if you're looking for a way to help juice your agents' transaction volume, give your team a leg up. Host a webinar on the benefits of assumable loans.

(16:16):
Provide the tools that let your agents actually find and transact on these loans and not leave them guessing. Help dispel those rumors and show them why an assumable loan could be a great tool in their arsenal. Certainly, just don't wait for the Fed. Brokers and agents, I love you; I have to give you a B plus. I know that an A is just around the corner. You just have to apply yourself. We could do another retake as well. And for a final report card, what's the US government doing to support homeownership amongst our armed forces? This is something that's actually very near and dear to my heart. I grew up in Coronado and spent the last 25 years in the Bay Area, and both my grandparents were naval aviators.

(17:02):
I basically grew up in this great military town. Right now, if a non-vet assumes the loan of a veteran, that veteran's entitlement is locked up into the home until the original loan is paid off. That entitlement is basically the money that the government gives to the veteran to allow them to put down near 0% on their down payment. ³ Not being able to use that on the next purchase for veterans is a major disincentive for them allowing a non-veteran to assume their loan. I think that veterans deserve more. It's rare to see these VA-to-VA assumptions because there's only 10% of them in the buying public to begin with. Three quarters of veterans don't actually put any of that money down because they've got the entitlement.

(17:50):
So this is not going to cover the equity gap that you're going to see in an assumption. There are some major policy changes that could make assumable loans more widespread. Easing entitlement reuse would allow sellers to accept any qualified borrowers' application while retaining those VA benefits for later use. That would fuel future buys and boost VA funding fees. It'd be good for the VA and that would promote home ownership. So let's not handcuff our servicemen and women; let's help fulfill the mission of getting more veterans into those homes. I give the government regulators a C because it's hard to give them any more than a C average for really anything these days. This is our industry's chance to prove that it can innovate without intervention from Washington or the Fed. This is our chance for bold industry leadership.

(18:42):
Every time a new loan is originated that could have been an assumable loan, I kind of cry on the inside. We're sitting around waiting for rates to drop and business to pick up, but there's literally hundreds of thousands of properties with loans right now that could take buyers back in time if we just knew where to look. Servicers, you should be streamlining the process instead of being bottlenecks. Agents, you can use this to drive transaction volume and help buyers and sellers when they need it most. The people in this room should be the ones making this happen. Just as vinyl and film cameras came back because they offered something timeless, assumable loans can make home ownership attainable again. I really love this community. I've been coming since 2015. As I walk the halls and meet the creative individuals building really great things, I'm just reminded that we don't have to settle for what we think of as just normal.

(19:49):
Oh wait, what's that you say? How would I grade myself on this presentation on assumptions? I think you know how I did. Thank you. I think we've got some time for questions as well. Yes, sir.

Audience Member One (20:10):
Wondering, what's the borrower profile for the people that are getting the assumable loans? Is it any specific category?

Andy Taylor (20:25):
The interesting thing is it's kind of all over the map. I mean, we've seen everything from all-cash buyers to people who would qualify for any normal loan. Especially if you're an all-cash buyer and you can get a 2.5% rate, then that's just pure rate arbitrage. Why wouldn't you do that? Go invest the rest. So the characteristics of people assuming loans is really the characteristics of anyone buying homes—it's just a great deal.

Julian (20:55):
Yeah, I'm going to build on the previous question. If people are coming in and they do not have the down payment that it might take to match the equity position of the existing home with the assumable loan on it, what happens?

Andy Taylor (21:14):
This is one of the major impediments to assumability, probably one of the bigger ones. There are certain areas, especially in high-appreciating areas like California, where this is more difficult because homes have appreciated and that equity gap owed to the original owner is quite high. Fortunately, there is a secondary market. There are companies out there that will provide a home equity loan—a piggyback loan—that will sit secondary at a higher rate. Effectively, what you get is a blended rate of that secondary loan on top of the original loan for a shorter duration at a higher rate. Usually, it's about a point to a point and a half higher than what you would see on the open market. Almost universally the blended rate is better than what you'd get on the open market. But obviously, as that spread increases, the benefit of an assumption diminishes.

Julian (22:11):
And then when you're looking at it as an entrepreneur and you're looking at your TAM, how are you calculating your TAM?

Andy Taylor (22:25):
Certainly, as an entrepreneur, we were thinking about launching the company. One of the things we looked at was a confluence of areas that had some of the lowest appreciation in the country, areas that had really great VA, FHA, and USDA volume, and areas that have good prices. Areas where we thought we could do right by the consumer—that was our market entry. Obviously, as we get better at what we're doing and as we're able to connect with other partners that provide these piggyback loans, that expands our pool of areas that we can go after.

Audience Member Two (23:09):
From a servicer's point of view, there is zero incentive for the servicer to perform quickly on these because they're not making any money, right? For the loan officer, there's zero motivation because they're not going to get paid. For the servicer, there's zero motivation because it will be 60 or 90 days. What are the benefits?

Andy Taylor (23:52):
First off, in this situation, there isn't necessarily another independent loan officer; you're working directly with the servicer and their internal staff. They also don't have a choice. That was effectively the deal they made when they said, "we're going to originate a loan that carries less risk on our books." You've got 45 days to effectively issue a credit decision. This is where technology can really come into play. As soon as you get that loan package from the new potential borrower on the books, you start the clock right away. This is where process automation and getting ahead of it to force that issue can really benefit you. I'll also add that I do think that servicers deserve to be compensated for it. It is legitimately work. There was a recent change that allowed them to charge $1,800 rather than $900, but that's still an incredibly low amount for what's effectively a new origination. I think this is another area where we can do better.

Audience Member Three (25:24):
Wouldn't the motivation be this: if I have someone fleeing my purchase book, potentially going to buy a new home, they are going to sell their house. If you approach them and you have their loan, maybe I can help by finding you someone who can assume your first. Now I end up with two loans in my book.

Andy Taylor (25:52):
That is one way that I look at it too. I mean, yes, you would probably rather have a 7% loan, but if you say no to the assumption, you're basically giving up that cash flow-producing asset for the chance that you could go back and actually originate a net new one at 7%. That's a difficult proposition these days. It's highly competitive; you don't necessarily know that you're going to get that. So assumptions in a way are almost a servicing retention strategy. We have time for one more.

Audience Member Four (26:33):
Why do you think the big portals are all hiding this? It's content that would be very helpful for consumers to see. Why do you think they're hiding this?

Andy Taylor (26:58):
I don't want to necessarily say they're trying to hide something or ascribe intention, but I would say that if you're owned by a big national or non-bank lender and your strategy is to drive purchase volume, that runs counter to this. I would also add that it's hard. I thought it would be a lot easier to go light up a few data sources and know this instantly. But as you know, in the real estate world, MLS information is touched by a thousand different agents. Hands-county recorded information is touched by a thousand different random county recorders, sometimes literally typing it up. There's a lot of cleanup involved in this. This isn't just an off-the-shelf data store.

Audience Member Five (28:09):
Not really a question, but a testimonial. I focused on VA loans and one of my clients had a sister in trouble. I assumed her VA loan in Delaware in 2016. It took me 90 plus days knowing the system, but it eventually took the servicer hearing me say, "what would the news think of you denying a veteran female disabled minority of this opportunity?" Suddenly I got the officer calling me back. I bought it as an investment property and I sold it two years ago for a $150,000 profit. So that's your target audience and that's where it's beautiful. The equity gap is exactly the problem.

Andy Taylor (29:16):
Most people don't have the cash. We've heard stories like this before. One of the first ones we worked on was a veteran who wanted to sell his home but didn't want to leave. He ended up selling to an investor who then rented it back. It was effectively like a sale-leaseback so he could stay in his home and cash out the equity instead of a reverse mortgage. We hear stories about this all the time. It doesn't necessarily have to be for a buyer getting a great deal; sometimes it could just be for someone to stay in their house. All right, thank you all. It's been fun.