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Welcome to the Deerwood Realty Show. I'm John Schink, founder and managing broker of Deerwood Realty in St. Louis, Missouri. Every once in a while, I like to step outside my bubble and look at the world as a wonderful place filled with a marketplace of ideas. We're always trying to move forward with humanity and make things better for everyone, which sometimes revolves around money. I recently came across an idea I've been procrastinating on putting into a video: the lower-rate-only adjustable mortgage or ratchet mortgage.

Interestingly, when I tried to make a thumbnail for this video using OpenAI, I found out you can't use the word "ratchet." If my video gets blocked on YouTube, that's probably why. But I asked my youngest stepdaughter if "ratchet" was a bad word, and she said it could be, but it's not in this context. Let's dive into it.

I got this idea from John Wake on Twitter, who I follow because he puts out interesting content. The lower-rate-only adjustable mortgage is an adjustable rate mortgage where the interest rate can only adjust down, not up. This idea could stabilize homeownership during economic distress. It means that when interest rates fall, your mortgage payment automatically falls, but when rates rise, your payment doesn’t increase. It's like automatic free refinancing without the risk of higher payments.

These lower-rate-only adjustable mortgages would charge a higher interest rate than fixed-rate mortgages but would increase financial stability for homeowners and the US economy. Some benefits include no negative equity trap when house prices and interest rates fall, fewer foreclosures, and a quicker and larger impact on the economy when the FED lowers interest rates.

I’m against traditional adjustable rate mortgages because of what happened in 2007, but this lower-rate-only adjustable mortgage seems different. It could offer automatic macroeconomic stability, lower household debt, and reduce the number of foreclosures.

The idea isn't new; it dates back to at least 2014 when it was discussed at the FED. Automatic refinancing would eliminate the costs and hassle of refinancing, which can add up in conventional mortgages. However, the mortgage industry might be hesitant because refinancing is a profitable part of the business.

For homeowners, the benefits are clear: automatic savings when rates decline, no refinancing costs, and no need for a credit check. For lenders, there are longer and more predictable profit streams and lower origination volatility.

While this idea might seem challenging to implement, it offers a lot of potential benefits. It could make economic downturns less painful and provide stability for homeowners.

However, there are challenges, such as promoting these mortgages among homeowners and lenders and ensuring that they align with long-term financial planning. Traditional fixed-rate mortgages offer predictable payments, while adjustable-rate mortgages can be risky if rates rise unexpectedly. Lower-rate-only adjustable mortgages would start with a higher rate, which might not be appealing in the current market.

In summary, while this idea is interesting and offers many potential benefits, there are hurdles to overcome. But if more people advocate for it, it could become a viable option.

Thank you for watching and listening. I'll catch you on the next one.