For the previous a number of years, the U.S. housing market has confronted an uncommon constraint: not an absence of patrons, however an absence of sellers prepared — or ready — to maneuver.
Tens of millions of householders stay “rate-locked,” holding mortgages originated in 2020–2022 at interest rates between 2% and 4% (Federal Housing Finance Company; Freddie Mac Main Mortgage Market Survey). Whereas dwelling values have risen, the monetary penalty of promoting and repurchasing at right this moment’s 6%–7% charges has discouraged mobility, suppressing stock and transaction quantity nationwide (Nationwide Affiliation of Realtors; HousingWire).
The result’s a frozen market dynamic: demand exists, however provide doesn’t reply.
What if the impediment isn’t demand, affordability, or pricing — however the construction of mortgage payoff itself?
One idea, lengthy established in business actual property finance, affords a possible path ahead: defeasance.
Defeasance in plain phrases
Defeasance is a monetary mechanism that permits a borrower to switch a mortgage’s fee stream somewhat than repay the mortgage at face worth.
As an alternative of retiring the mortgage totally, the borrower funds a portfolio of extremely safe belongings — usually U.S. Treasury securities—that generate enough money stream to make the remaining mortgage funds (Industrial Mortgage-Backed Securities market observe; Securities Business and Monetary Markets Affiliation).
As soon as that substitution is full, the borrower is launched from ongoing accountability for the mortgage, whereas the lender or bondholder continues to obtain scheduled funds.
The mortgage technically stays excellent.
The borrower doesn’t.
Defeasance is extensively utilized in business actual property to protect the worth of low-rate loans embedded in mortgage-backed securities (CMBS). The identical structural logic might, in concept, be utilized to sure classes of residential mortgages—notably these already securitized.
Why charge lock is a structural downside
A set-rate mortgage at 3% originated a number of years in the past is considerably extra precious than a new mortgage originated at 6% or increased. Economically, that low-rate mortgage behaves like a premium bond.
But when a house owner sells, the mortgage should usually be paid off at full face worth — no matter its favorable charge (Fannie Mae servicing pointers).
That requirement destroys embedded worth.
If, as a substitute, the mortgage’s financial worth—discounted utilizing present interest rates—have been substituted for the payoff, the house owner might unlock fairness at present trapped throughout the mortgage construction itself.
That is the logic behind defeasance.
A simplified illustration
Present dwelling
- House worth: $500,000
- Mortgage steadiness: $400,000
- Rate of interest: 3%
- Month-to-month fee: ≈ $1,700
Present market
• New mortgage charges: ~6.3% (Freddie Mac PMMS)
At right this moment’s charges, a 3% mortgage with years remaining will not be economically value its $400,000 face worth. Its discounted worth could also be nearer to $300,000–$320,000, relying on remaining time period and period (bond discounting ideas; Treasury yield curve).
Conventional sale (No defeasance)
- Sale proceeds: $500,000
- Mortgage payoff: –$400,000
- Fairness accessible: $100,000
- New mortgage required: ~$600,000 at 6.3%
- Month-to-month fee: ≈ $3,700
End result: vital fee shock and decreased affordability — typically sufficient to forestall the transfer totally.
Sale utilizing defeasance logic
- Sale proceeds: $500,000
- Treasury funding for defeasance: –≈$310,000
- Fairness accessible: ≈$190,000
- New mortgage required: ~$510,000 at 6.3%
- Month-to-month fee: ≈ $3,150
The house owner doesn’t retain the three% mortgage, however the monetary penalty of shifting is materially decreased.
Key structural distinctions
• No purchaser assumption: The customer originates a brand new mortgage; the defeased mortgage stays remoted.
• No requalification for defeasance: Credit score and earnings underwriting apply solely to the brand new buy mortgage.
• No change to commissions or transaction stream: Brokers, title, and escrow proceed usually.
• No charge manipulation: This isn’t refinancing or subsidy — it’s a payment-stream substitution.
Which loans are most suitable?
From a structural standpoint, defeasance aligns most naturally with:
- Conforming fixed-rate loans
- Fannie Mae and Freddie Mac securitized mortgages
- Loans already embedded in mortgage-backed securities (MBS)
Portfolio loans, jumbo merchandise, and credit-union loans could also be possible on a case-by-case foundation, relying on institutional coverage.
Authorities-insured applications (FHA, VA, USDA) would probably require regulatory motion and are much less instantly adaptable (HUD; VA mortgage program guidelines).
Why this issues for 2026
Housing recoveries are sometimes framed when it comes to rates of interest. However mobility — not charges alone — drives transaction quantity (Harvard Joint Heart for Housing Research).
If even a modest share of low-rate mortgages turns into defeasible:
- Sellers regain monetary flexibility
- Inventory expands with out pressured worth correction
- Purchaser demand meets actual provide
- Transaction velocity will increase
This is able to not be a charge restoration.
It might be a mobility restoration.
Last perspective
Defeasance doesn’t decrease interest rates.
It doesn’t bypass underwriting.
It doesn’t switch low-rate loans to patrons.
What it does is take away a structural penalty that at present discourages hundreds of thousands of householders from shifting in any respect.
If housing is to normalize within the subsequent cycle, the answer could not come from financial coverage — however from rethinking how legacy mortgages are unwound.
2026 could hinge much less on the Fed — and extra on monetary structure.
Tim and Julie Harris are actual property coaches, bestselling authors, and podcasters.
This column doesn’t essentially replicate the opinion of HousingWire’s editorial division and its house owners. To contact the editor liable for this piece: [email protected].
