A Policy Solution to Unlock Housing Market Growth
By John Sauro, President, North Atlantic Mortgage Corp.
February 24, 2025
The U.S. housing market is stuck in a cycle of stagnation. Millions of homeowners are unwilling to sell because they currently hold mortgages with historically low interest rates, often half of today’s rates. This reluctance to move limits housing inventory, drives up prices, and prevents a healthy buy-sell ratio.
The Scope of the Problem
Today, 33.9% of homeowners have mortgages with interest rates between 3% and 4%, totaling around $4.05 trillion. Even if just 5% of them decide to move, that could represent over $200 billion worth of potential home sales—shifting inventory and reshaping the housing market.
Even as interest rates decline, they will not return to the artificially low levels of the past.
A Market-Based Solution: Collateral Substitution
A policy allowing collateral substitution would enable homeowners to keep their existing mortgage rates while moving to a new home. Here’s how it would work:
- Upon selling their current home, the homeowner’s mortgage is held in escrow.
- When they purchase a new home, the escrowed funds are applied, and the original mortgage is transferred to the new property.
- The new home serves as the collateral for the existing mortgage (provided that the new home is of equal or greater value)
- If additional funds are needed, a second mortgage can be obtained at the prevailing rates.
This policy would require cooperation from Fannie Mae, Freddie Mac, banks, and mortgage servicing companies. However, it does not require taxpayer-funded subsidies, making it a fiscally responsible solution.
Action Needed from Policymakers
The Trump Administration has the authority to direct federal housing agencies and banking regulators to implement collateral substitution. By doing so, policymakers can:
- Free up housing inventory and create market fluidity.
- Stimulate economic growth through increased home sales.
- Provide a path for homeowners to move without taking on unsustainable mortgage costs.
This is a market-driven, common-sense solution that balances economic stimulation with fiscal responsibility. The housing market needs movement—and collateral substitution is the key to unlocking it.