What Happens when You Assume

Abstract

Mortgage assumption allows a borrower to transfer both the property and the outstanding balance of their mortgage to a new homebuyer. Assumption of a loan has value when the note rate is below prevailing market rates. However, assumptions also create risk for lenders and insurers. This paper uses survival analysis to estimate the likelihood of assumption and the effect of assumption on the likelihood of refinance and default. We find that every additional $1,000 in assumption value is associated with a 2 percent increase in the assumption hazard. Assumption is not associated with a statistically significant change in refinance or default hazard when loan performance is dated from the original closing date, but assumptors are less likely to refinance or default compared to other borrowers when loan performance is based on time since assumption. The growth of FHA-insured lending since the Great Recession has increased the stock of mortgages that are assumable. However, the economic significance of the assumption option depends on the future level of mortgage rates.

Keywords: FHA, mortgage, default, prepayment, assumption

JEL Classification: G22, G29, R21, R28