Are mortgage servicers holding back assumption volume?

Transfers of government-backed low-rate mortgages are up significantly this year in the face of higher interest rates, but some say even more of these transactions would take place if mortgage servicers picked up the slack.

Through the first three quarters of this year, the Federal Housing Administration and the Department of Veteran Affairs have both tracked record numbers of mortgage assumptions, in which homebuyers take on the mortgages held by the selling homeowner.

But, with this uptick in assumption activity has come a surge of another kind: complaints that servicers are dragging their feet on processing these transactions. 

So far this year, the Consumer Financial Protection Bureau has recorded more than 130 complaints related to mortgage assumptions, according to the agency’s searchable online database, up from fewer than 100 last year and roughly double the number notched in 2020 and 2021, respectively. 

Jerry Devlin, a former mortgage banker for National City, PNC and Academy Mortgage, described the current moment — in which interest rates have soared from below 3% to more than 7% in less than two years — as a “once in a generation marketplace” for mortgage assumptions. He notes that the recent uptick in interest rates bucked a 40-year trend of declining borrowing costs. 

Earlier this year, Devlin co-founded Assume Loan LLC, a Brookline, Mass.-based advisory that helps facilitate mortgage assumptions. He said the appetite for assumptions has been strong and the pool of potential assumptions — more than 20% of current mortgages — is deep. But, he added, the processes and procedures at mortgage servicing companies have prevented assumptions from reaching their full potential.

“What we’ve seen almost across the board is an immediate pushback from the lending community. They say it’s going to take a lot and admit they’re not devoting appropriate resources to assumptions,” Devlin said. “It creates a ripple effect within the marketplace and the opportunity, because then sellers won’t offer it, realtors won’t accept an offer with an assumption and it puts a stall in the marketplace.”

Complaints registered with the CFPB vary, with some issues relating more directly to the assumption process than others. But numerous complaints cite issues related to the length of time it takes to process an assumption request. 

One complaint, filed against Boca Raton-based Freedom Mortgage Company in November, states that the lender said it could take between 90 and 120 business days to process the assumption of a Veterans Affairs loan with an interest rate of 2.25%. The loan was being moved from one veteran borrower to another. 

The complainant noted that the sale documents included a 45-day close guarantee, after which the transaction could be voided. After the complainant threatened legal action, the company finished the process in roughly 30 days, the complaint notes. But the same consumer ran into problems with Freedom Mortgage again when trying to assume a mortgage for their new home. 

Freedom Mortgage did not immediately provide a comment about the complaints filed against it with the CFPB.

By law, all FHA and VA loans can be assumed by qualified purchasers. The feature is most often used in instances of death or divorce, in which a related party takes over the mortgage, but the changing interest rate environment has driven interest in assumability as a means for incentivizing sales in an otherwise stagnant housing market.

Through Sept. 30, the FHA tracked more than 3,800 mortgage assumptions this year, according to data from the Department of Housing and Urban Development, a small slice of the overall housing market, but a jump of 67% from 2022’s year-end total and more than double the amount seen in 2021. Similarly, VA assumptions through the first three quarters of this year totaled 1,037, up from 308 last year and 276 the year before that.

Devlin and others who have a stake in facilitating mortgage assumptions say the slow movement of mortgage servicers is standing between borrowers and a government-imbued right to transfer their home loans. 

“The lenders are taking the position that there’s not enough money in assumptions so they’re just not going to devote the resources, and I think that in itself needs attention,” Devlin said. “That is an unacceptable position for somebody to take that’s in the business of originating and servicing loans.”

Yet, some in the mortgage space say servicers are entitled to address assumption requests at the rate dictated by their business interests, which are hindered by a government imposed cap on fees that can be charged for assumptions. 

Matt Van Fossen, CEO of the Fairfield, N.J.-based independent mortgage bank Absolute Home Mortgage Corp., said the current fee cap of $900 ensures that servicers will lose money on processing transactions, because the cost of processing a mortgage far exceeds that total. Most would rather risk losing the loan to a prepayment as would be the case in a traditional sale, he said.

Van Fossen said many banks do not staff their servicing departments to process assumptions quickly or smoothly, adding that retooling to do so would be hard to justify given the loss-making proposition of a fee-capped mortgage assumption and the limited volume of overall activity in the space.

“There’s no motivation for them to create a pleasurable experience, other than maybe avoiding complaints,” he said. “There’s no money in it for them.”