When new cars cost $5,000 consumers took our two or three year car loans. Now
they are commonly a five to seven year commitment. Likewise mortgages, which,
four decades ago were amortized over 20 years, then 25 years, and now commonly
30 years, may soon have a new standard:
40 year home loans.
After test marketing a 40 year mortgage for some months, Fannie
Mae announced last week that it will begin purchasing them. The Corporation
acknowledged that changes in "housing market affordability and requests
from (our) lender partners" led to the decision to extend the maximum
loan term on certain loan products.
Fannie will now purchase
40 year fixed-rate mortgages and
40-year
hybrid adjustable rate mortgages (ARMS) with initial fixed periods of three,
five, seven, or ten years. Not included in the new purchase standards are biweekly
mortgage products, loans secured by manufactured housing, loan to value ratios
greater than 95%; and ARMS with initial fixed rate periods shorter than three
years (including the popular 1-year ARM) or with any subsequent adjustment period
greater or less than one year. Also on the no-fly list are negative amortization
loans.
Forty-year mortgage loans are not new, they have been tried,
even promoted in years past and some lenders have continued to write them in
special circumstances. When test marketing began a few months ago a number of
mortgage pundits soundly denounced them because of the greater interest costs
over the life of the loan. Conversely, however, the much lower monthly
payment may make the 40-year a good choice for homeowners who have a limited
time-frame in which they will own the home or keep the loan. Regardless, with
Fannie opening its part of the secondary market to them, look for mortgage companies,
banks, and brokers to start strongly marketing various 40-year loan products
to consumers.