For almost half a decade following the housing crash in 2008, interest rates seemed to be playing the world’s longest running game of limbo, with every week bringing a new mark in the “how low could you go?” stakes.

Since last summer, however, flickers of life in the U.S. economy – and rumblings of change in the Federal Reserve Bank’s policies – have sent rates spiking upward, surging more than 1 percent over the past six months. The shift has already sent refinance applications tumbling, but does it have the power to resurrect a nearly extinct species of real estate deal?

The rare bird under examination is the assumption of mortgage, a deal wherein the purchaser of a property elects to keep paying off the existing mortgage rather than seek a new one. The buyer must have a large enough down payment to make up the difference between the home’s market value and what’s left on the mortgage to make the deal work; current interest rates have to be considerably higher than the rate on the existing mortgage to make the deal desirable.

Such deals were not uncommon in the stable rate environment of the 1970s and 1980s, when community banks and savings and loans dominated the home mortgage market. Two things acted to eliminate them in the years since: A succession of housing booms which made it rare that a buyer would have the cash to cover the equity the seller had built up in the home, and the rise of mortgage securitization. Loans which are headed for the secondary market, such as those handled by Fannie Mae and Freddie Mac, include “due-on-sale” clauses which require the mortgage to be paid off when the home is sold, in order to reduce the legal complexities of securitizing them.   

“I’ve been doing this since 1990, and I don’t know if I’ve [offered] a loan with an assumability clause in my lifetime,” said Amy Tierce, regional vice president at Fairway Independent Mortgage Corporation in Needham.

But there remain two sources where it’s still possible to assume a loan, the Veterans Administration and the Federal Housing Administration. The two federal agencies, which service and insure their own portfolios, have never eliminated the assumability language from their lending documents. And while the Veteran’s Administration issues only a tiny fraction of America’s mortgages, the FHA is a different story.

Nationwide, nearly 40 percent of all mortgages issued in 2010 were FHA loans, and 27 percent of all mortgages in 2011, according to a report from the National Council of State Housing Agencies. In high-cost states such as Massachusetts, those numbers were even higher, since the increased loan limits Congress authorized for FHA loans during the housing crash made them an attractive option for many buyers.  

Savvy sellers may already be picking up on the implications. Marybeth Mils Muldowney, broker/owner of Tradewinds Realty Group in Norwell, is currently handling a listing where the seller raised this issue. “He was asking me if I felt there was value to that, and if there was, [how it would affect] the listing price,” she said. “He was at 3 percent, and now with all the premiums FHA is probably about 5.5 percent. That two-and-a-half percent on a $200,000 mortgage would be a considerable savings.”

Barriers Remain

But even for sellers with assumable mortgages, practical hurdles still remain. The buyer must still go through a credit verification process, the same as if they were taking out a brand-new mortgage, and be approved by the lender. And the question of liability on an assumed loan if the buyer should default can be tricky.

“We would almost never recommend to our clients, even if it is an assumable loan, to go that route,” said Michelle Simons, 2014 president of the Real Estate Bar Association, and a partner in Newton-based Brecher, Wyner, Simons, Fox & Bolan LLP. “At times the seller can still be on the hook,” because their name is on the original note.  

Email: csullivan@thewarrengroup.com