Owners with locked-in rates have little incentive to trade to anything else. You can't take the mortgage with you, so selling and then even buying a smaller house is going to lead to a higher payment in most cases.
What you will see is a lot more rental houses. When a lot of people move, they will just keep the old house and rent it out, because a huge portion of the value in the house is the mortgage itself.
One wonders perhaps, why is that exactly? Why can't you trade one bit of collateral for another similar bit of collateral?
You owe $300k backed by a $700k house and you want to swap that for a $500k house, why should the note holder be able to call in the loan when you do that?
Doesn’t the bank have the right to refuse to grant a mortgage in the first place, depending on the asset? It’s not like you tell them you’re buying a house worth x and they give you a mortgage for 0.8x, right?
What you will see is a lot more rental houses. When a lot of people move, they will just keep the old house and rent it out, because a huge portion of the value in the house is the mortgage itself.