Jonathan Arad

Engineer's logic with a racer's sense of urgency.
Mortgages || Finance || Technology

[Jonathan Arad @JonathanArad]

@AdvisorJohn wouldn't lower rates result in inflation?

[Jonathan Arad @JonathanArad]

That's exactly right. The trust is the key - the lender never stops receiving P&I, so there's no loss to book and no balance sheet disruption.

The borrower gets out. The lender stays whole. No legislation, no GSE involvement.
@grok, given the scale of lock-in, what could this mean at scale, and why do you think this hasn't been tried before?

[Jonathan Arad @JonathanArad]

@BTCglobal_io @WallStreetMav Actually, there is a way to access that equity.
Denmark has been doing it for decades, and now some banks and credit unions started as well.
https://t.co/Yu0xIZw0Yg

[Jonathan Arad @JonathanArad]

@BoringMath1276 @jonbrooks 100%
The US mortgage market is missing the flexible exit for borrowers in a rising-rate environment (the equivalent to ReFi in declining rates).
Other countries already have implemented solutions which is why the US is the only one to have this problem.

[Jonathan Arad @JonathanArad]

@BoringMath1276 @jonbrooks Right. And that's not counting the lost opportunity cost if the house hasn't kept pace with the rate gap. Moving costs $800-1,200/mo more before you touch anything else.

[Jonathan Arad @JonathanArad]

@pdoherty972 @grok @Av8r07 @jonbrooks With the risk of being self-promotional, I'm leading an effort to do exactly that at Takara and the DREAM Program (https://t.co/Qwg6iTvJht).
@grok, what do you think?
https://t.co/evxPXwYog0

[Jonathan Arad @JonathanArad]

@erick_elson @Av8r07 @jonbrooks I beg to differ, there are solutions out there.

[Jonathan Arad @JonathanArad]

Look beyond...
Other mortgage markets have already solved it. In fact, the US is the only country in the world to have this problem.
Denmark has the 30-yr fixed, but not the lock-in, because they embedded a flexible exit mechanism - borrowers can payoff by buying the bond that covers their loan, when rates spiked in 2022, bond prices crashed and 100k Danes paid off with 20% discount.
It works!

[Jonathan Arad @JonathanArad]

@erichhartmann @jonbrooks The US system has a pressure valve for declining rates (ReFi), but not the other way around.

[Jonathan Arad @JonathanArad]

@WokenByAMoan @matrixband @jonbrooks There is a way - https://t.co/evxPXwYog0

[Jonathan Arad @JonathanArad]

Portability is one solution - impossible to implement. There is a way - Denmark has done this for decades. The mechanism exists. It just hasn't been applied to the U.S. yet.
In Denmark, borrowers can payoff their 30-yr fixed-rate mortgages by buying the bond that covers their loan. When rates spiked in 2022, 100k Danes paid off their debt with 20% discount as bond prices crashed.
It works!

[Jonathan Arad @JonathanArad]

100%
In fact, Denmark has the mechanism working already with the same 30-yr fixed-rate mortgage. Borrowers there can payoff their loan by buying the bond that covers the loan. When rates spiked in 2022 - bond prices crashed, and 100k Danes paid off with 15-20% discounts.
It works!

[Jonathan Arad @JonathanArad]

@MichaelOliphant @nickgerli1 38% is the headline but the mechanism underneath it matters. Lock-in keeps tens of millions of low-rate sellers off the market, which holds prices up, which keeps affordability crushed even if rates ease. It's a structural freeze, not just a cyclical one.

[Jonathan Arad @JonathanArad]

@wealthmoose The U.S. version of this is actually worse. Canada at least has mortgage portability. American homeowners with 3% rates can't take that rate with them. So they don't move. 30M households essentially frozen because selling means losing the best financial asset they own.

[Jonathan Arad @JonathanArad]

Great read!
Lock-in homeowners aren't just frozen, they're acting as artificial price floors for the whole market. 30M+ borrowers holding sub-4% rates means sellers won't sell, inventory stays thin, and prices stay elevated. The research probably understates how structural this gets when you model it at the portfolio level.

[Jonathan Arad @JonathanArad]

@MikeFellman @everettstamm1 Agreed, portability is not feasible, definitely not at scale. But there are other options. Worth looking at the Danish buy-back model that allows borrowers to buy back their loans at market prices.

[Jonathan Arad @JonathanArad]

The loan was underwritten against a specific property - LTV, appraisal, lien position, all tied to that address. A new property means new collateral the lender hasn't assessed. They can't carry the rate over without re-underwriting from scratch, and at that point it's just a new loan at whatever rate that new loan prices at. For GSE loans, Fannie/Freddie's guarantee is on the original collateral too. Porting would require a new guarantee. That's also just a new loan.
Also, many lenders are not national, what will they do if the property is outside their jurisdiction?

[Jonathan Arad @JonathanArad]

The 30-year fixed is structurally incompatible with portability. The prepayment option is priced into the rate, so lenders can't easily transfer it to a new property. Denmark solved it differently. Callable bonds let borrowers buy back at market discount when rates rise. That's the mechanism the U.S. is missing.

[Jonathan Arad @JonathanArad]

@jonbrooks The locked-in owner piece is the underappreciated variable. 30M+ borrowers are sitting on sub-4% mortgages. At current rates, selling costs them $600-900/month forever. For most of them the math just doesn't pencil.