Are 40-Year Mortgages The New ARM? Or Our Way Out of This Mess?
Well…yes.
When I first saw this option, I brightened up. In coastal New England, we have an economy that continues to defy national averages, and a rental market buoed by the number of foreclosures. Paradoxes. Housing here still isn’t what you’d call cheap — I just posted a 500 sq. ft. condo that is selling for the same price as a 5-bedroom in great condition a friend of mine just sold in Pittsburgh. Will 40 year loans be the ticket out of the Adjustable Rate Mortgage and Interest-Only loan mess that seems so anomalous when we look at the relative economic health of greater Boston?
A 40-year ARM alternative sounds really good. But as a recent Bankrate/MSN Money article points out, the interest rates on these loans could save you a couple of hundred bucks a month and cause you to pay tens of thousands more for the loans. Moreover, if the interest rate is high enough, a 40 year loan might not even give you much of a break. And that’s a real sore spot, because the Banking industry has the power to put the market back on the rails if they play fair with people caught in the clinch by bad policymaking and under-regulation.
The same article talks about 40-year mortgages getting “Fannie Mae approval.” I wonder if Fannie Mae has a new loan program for buying swampland in Florida, or a great rate on a 30-year note on the Kernwood Bridge.
Dan Green has a much different take on this, however, and his position is worth listening to if you’re faced with foreclosure or ridiculous New England rents (interest on a 40 year mortgage is a big tax deduction; rent, not so much). And he’s even talking about 50-year loans as ironically a “short-term borrowing strategy.”
I’d like to see less inventory in the market, so I’m willing to listen. I have one friend who is going to pay $1300 a month for an apartment (she’s tired of roommate drama) when she could afford a 40 year mortgage easily; but she gets a $10,000 gift from her elderly father each year at tax time, and could make large payments against principle every year and effectively cut the loan down to 30 years anyway. She can’t get a 30-year note on anything she likes because the bank won’t count her dad’s distribution as income.
She is not the norm.
What might make even more sense for all parties concerned is if banks wrote 40 year notes at interest rates that, frankly, ignore the recent past of near-foreclosure homeowners. If they took these ultra-long-term loans and were happy with the great profit to be had long-term even at reduced rates, and considered the very tangible benefits of an appreciating market to the banking industry.
Yes, homeowners effed up. Yes, there should be consequences for your actions, young man. Maybe new lower-interest longer-term notes could stipulate Hail Marys or trips to bed with no supper — whatever. We need a real solution from Fannie Mae, not more snake oil. In their current incarnations 40-Year home loans look like a mostly bad idea for everyone but the folks who are pushing them.
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max said:
We don’t need more creative lending. Look where it got us. What we need is to get back the affordable mortgate. Which, historically, means 80% LTV, and 28% LTI. You can stipulate whatever you want in your loan terms, including yearly distributions from relatives and diet consisting of $.20 per serving Ramen noodles… But the reality is that if you lend at more then 28% LTI — lots people are going to default. And if you lend at more then 80% LTV, you are going to have significant losses when those people default. It’s quite simple, actually. If you don’t want defaults — lend reasonably. If that suddenly means that nobody can afford anything — well, duh… We tried to step over these limits, and look where we ended up.
August 15, 2008 10:27 PM
mike.martin said:
Max, I definitely hear you — but those limits go out the window when people are ALREADY defaulting. Creative lending that really seeks to give people better options than default might be in order.
August 15, 2008 11:02 PM
max said:
The fundamental problem here is that the people who are defaulting simply don’t have the money. The only thing that can be done is to give them some. Reduce their mortgages, give them cash, whatever. They either default, or you bail them out. If you bail THEM out, it tends to happen at MY expence. And I DON’T LIKE THAT. Unfortunately, there’s not enough of me to influence policy…
August 16, 2008 12:03 AM
mike.martin said:
Again, I can’t disagree. The bailout of Fannie Mae and Freddie Mac kind of makes Enron look insignificant, though it’s a less sensational mess in a lot of ways. I just have a fundamental problem with private corporations getting bailed out when individual homeowners are getting clobbered. Bailing out the big boys won’t do anything about reducing inventory and righting the market; I think bailing out the consumers (or forcing the banks to do something constructive to resolve this — maybe the radical steps you mentioned) will go farther towards righting the ship.
I’m guessing we’re both fairly disgusted by the bailout we’ve already paid for.
Thanks for commenting.
August 16, 2008 12:34 PM