Over the past few years, the US housing market has faced an unusual obstacle: not a lack of buyers, but a lack of sellers who are willing – or able – to move.
Millions of homeowners remain “locked in,” holding mortgages that originated in 2020–2022 at interest rates between 2% and 4% (Federal Housing Finance Agency; Freddie Mac Primary Mortgage Market Survey). Although housing prices have risen, the financial penalty for selling and repurchasing at today’s 6%–7% rates is unsustainable, depressing property values and transaction volume across the country (National Consumer Association; HousingWire).
The result is a frozen market dynamic: the demand is there, but the supply is not responding.
What if the barrier isn’t need, affordability, or price — but the structure of the mortgage payment itself?
One concept, long established in real estate finance, offers a possible way forward: defeat.
Letting go with simple words
Defeasance is a financial option that allows a borrower to substitute a loan repayment method instead of paying off the loan at face value.
Instead of paying off the loan entirely, the borrower funds a portfolio of highly secured assets—usually US Treasury securities—that generate enough cash flow to make the remaining loan payments (Securities market practice; Securities Industry and Financial Markets Association).
Once that change is completed, the borrower is released from the continued obligation of the loan, while the lender or bondholder continues to receive scheduled payments.
The loan technically remains outstanding.
The borrower does not.
Defeasance is widely used in real estate to protect the value of subprime loans embedded in mortgage-backed securities (CMBS). The same structural logic, in theory, can be applied to certain categories of housing—especially those that are already certified.
Why rate locking is a structural problem
A 3% fixed rate loan that was established a few years ago is worth more than a new loan that started at 6% or more. Economically, that subprime mortgage behaves like a premium bond.
But when the homeowner sells, the loan must be paid off in full – regardless of its approval rate (Fannie Mae’s servicer guidelines).
That requirement destroys the embedded value.
If, instead, for a loan economic value-discount using current interest rates – replaced by a charge, the homeowner can unlock the equity tied up within the loan structure itself.
This is a humbling concept.
A simplified illustration
Current home
- Home value: $500,000
- Mortgage balance: $400,000
- Interest rate: 3%
- Monthly payment: ≈ $1,700
Current market
• New loan rates: ~6.3% (Freddie Mac PMMS)
By today’s standards, a 3% mortgage with years left is not economically worth its face value of $400,000. Its discounted value could be closer to $300,000–$320,000, depending on the time remaining and duration (bond discount principles; Treasury yield curve).
Traditional selling (No submission)
- Sale price: $500,000
- Mortgage payment: -$400,000
- Equity available: $100,000
- New loan needed: ~$600,000 at 6.3%
- Monthly payment: ≈ $3,700
The result: a significant payment shock and reduced affordability — often enough to prevent the move altogether.
Selling using the defeasance mentality
- Sale price: $500,000
- Treasury funding for decommissioning: -≈$310,000
- Equity available: ≈$190,000
- New loan needed: ~$510,000 at 6.3%
- Monthly payment: ≈ $3,150
The homeowner does not retain the 3% loan, but the travel finance penalty is materially reduced.
An important structural difference
• No guesswork for the buyer: The consumer establishes a new debt; A defaulted loan remains alone.
• There is no merit in defeat: Credit and income underwriting only applies to new purchase loans.
• No change in commissions or workflow: Agents, title, and escrow proceed normally.
• No rate manipulation: This is not a refinancing or a subsidy — it is a payment stream replacement.
Which debts are most compatible?
From a structural point of view, dissolution is naturally accompanied by:
- Matching with fixed rate loans
- Fannie Mae and Freddie Mac get mortgages
- The loan is already embedded in mortgage-backed securities (MBS)
Portfolio loans, large products, and credit union loans may each be possible, depending on the institution’s policy.
Federally insured programs (FHA, VA, USDA) are likely to require regulatory action and are not readily flexible (HUD; VA loan program rules).
Why this matters in 2026
Home repos are often structured around interest rates. But traffic – not prices alone – drives transaction volume (Harvard Joint Center for Housing Studies).
If even a small portion of a subprime mortgage can default:
- Merchants also get financial flexibility
- Inventory is growing without forced price adjustments
- Consumer demand meets actual supply
- Transaction speed increases
This will not be a return to quality.
It can be a recovery of mobility.
One last idea
Defeasance does not lower interest rates.
It does not skip writing.
It does not extend subprime loans to consumers.
What it does is remove the building penalty that currently discourages millions of homeowners from moving at all.
If housing is to be normalized in the next cycle, the solution may not come from monetary policy – but from rethinking how mortgages default.
2026 may depend less on the Fed – more on monetary policy.
Tim and Julie Harris are real estate coaches, best-selling authors, and podcasters.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: [email protected].
