Imagine buying a house on a three year home mortgage where you had to visit the bank every three years to renegotiate a new rate. If you couldn’t afford to refinance your home, either because you were out of work or the home value dropped, you would be forced to pay the balance in full or lose your home.
This is how the banking system worked prior to 1933 when the Home Owner’s Loan Corporation (HOLC) was formed as part of the reforms of the Great Depression. HOLC’s job was to swap bank’s bad home loans with bonds issued by the U.S. government. Sound familiar? Working with homeowners all over the United States, HOLC re-issued home mortgages as fixed payment, fixed interest rate, 15-year term mortgages. For almost 50 years the commercial real estate banking industry played along, and almost all home loans were issued in 15, 20 and 30 year fixed payment terms.
As Congress debates the $500 billion dollar bailout for the home loan banking industry this next week, let us hope that the innovation will not stop with allowing the banks to exchange toxic, high risk debt with cold, hard cash. Now is the time to once again reset the banking industry standards so that home owners have clarity in their home ownership aspirations. For instance, if the government took a page from HOLC history and extended loan lengths, there is the potential to re-negotiate distressed mortgages into longer lengths of perhaps 40 and 50 years. Such products already exist on the private market but have not been readily used because they are vilified as mortgage products that build equity very slowly. In an age where 1 out of 10 homeowners is in distress of paying the monthly bills and is in risk of losing their home, the loss of quick equity seems like a fair trade off.
Longer term loans would allow the lender to bring down the monthly payments to allow home owners to rebalance the affordability of their property. For instance, a $400,000 loan paid over 30 years at a fixed interest rate of 6% would result in a monthly payment of $2,528.00. If that exact same loan were to be re-issued as a 40-year fixed payment, the monthly bill would drop to $2,341.00. For the homeowner, that’s a savings of almost $200/month, a predictable payment schedule, and time to slowly rebuild the equity in their home.
What do you think? Might longer term mortgages offer a potential option for struggling homeowners? If you were in a mortgage bind, would you be willing to renegotiate your home loan to 40 or 50 years to reduce your payments?