Recently, philanthropist and entrepreneur
He would use the Federal Home Loan Bank system as the vehicle for implementing this product, as well as use federal subsidies to reduce the rate.
Nominally the 40-year mortgage would have a higher rate than the 30-year and it's not just because any iteration of the product that exists today falls under the non-qualified mortgage category. As with any mortgage, when the term increases, so does the rate.
The trade-off is that the extra 10 years of amortization spreads out the payments.
If anything, the market should even be considering a 50-year mortgage to account for affordability factors, especially if the country wants to maintain its middle class, said consumer finance expert and author Bill Westrom.
Bryant writes that
Getting a later start
However, what is happening is that people are
"[Having] 40-year mortgage loans as the standard is impractical from an age perspective," said Seamus Nally, the CEO of TurboTenant. "While a few decades ago, when people were more easily buying their first homes in their mid or even early 20s, that is not the case anymore."
He said the average age of a first-time home buyer is about 36 years old.
"Starting a 40-year mortgage at age 36 is impractical for the vast majority," Nally said.
The goal of owning a home is the ability to build equity, and the 40-year product, while albeit at a slower pace, does so in a way that improves affordability, said Melissa Cohn, regional vice president at William Raveis Mortgage.
It provides the opportunity for
"We know so much of your wealth comes from home ownership," Jindal said. The 40-year mortgage "brings more people into the market that can actually use that as a vehicle to build wealth."
In fact, the 30-year mortgage is
Canada
Like the aim of Bryant's expanded term here, the Canadian government's goal is to improve affordability.
Since the financial crisis in 2008, Canadians that needed government-provided mortgage insurance were limited to 25-year terms.
In the U.S., the average tenure as of June in a home is over 11 years, according to First American Data & Analytics.
Easier to qualify, no prepayment penalty
"The good news is that many loans don't have prepayment penalties, so you do have the ability to accelerate the payments," Cohn said. "But most people don't do that."
Indeed, many people who seek out the 40-year term would be those that were having a hard time qualifying for the amount they want to borrow, she said.
"One important thing to remember is that most homeowners don't stick with the same home or mortgage for the full term," said Matt Dunbar, the senior vice president for the southeast region at Churchill Mortgage, pointing to figures that show most people go 7-to-12 years before selling or refinancing.
"So, while a 40-year mortgage technically means paying more in the long run, most borrowers won't be making payments for all 40 years," Dunbar said. "Instead, they can take advantage of lower payments early on and refinance as their financial situation improves or interest rates change, giving them the flexibility to grow from there."
The fact that most people do not intend to keep their house or mortgage for 30 years, let alone 40 years, is actually a positive for that longer duration, said Matt Schwartz, the co-founder at VA Loan Network. "By rolling out a 40 year option it would allow access to homeownership to more individuals by lowering their debt-to-income ratio."
But even on a 30-year mortgage, consumers are paying at least twice the purchase price on a home when accounting for the interest, Schwartz said.
William Raveis Mortgage does not offer 40-year mortgages as a banking product but can through brokering with a non-QM lender.
Cohn most often uses the product as a loan with a 10-year interest only payment period and then amortizing over the remaining 30 years. She did not disclose the outlet but in September 2022, NewRez
Overall, "the fact is prices have increased so dramatically that there's much greater demand for anything that helps keep payments down," Cohn said.
In typical amortization of principal and interest, the latter is the larger component in the early stages of a mortgage and as time goes on, the balance shifts.
Spreading out the payments "can be advantageous in today's market, where higher than average prices make it difficult for new buyers to gain access to housing," Dunbar said. "While it can take longer to build equity and possibly result in paying more interest over time, the immediate relief of lower payments allows buyers to enter the market sooner and start building equity."
Do the rewards outweigh the risks?
Jindal notes that slower equity build can make it harder in the future for the borrower to prepay, either for a refinance or new purchase. This is because the reduction in the loan-to-value ratio is also at a slower pace if the home's value does not significantly increase.
While it is easier to qualify, it also might encourage "someone who was in the market for a $300,000 home [to be] thinking about $400,000," Jindal said.
Because it is nominally a longer term, it could also lead to additional default risk, he said, as the
"The other thing that you would just need to be conscious of is, what would this do to home prices?" Jindal said, noting it would likely increase demand in the low-end segment of the housing market, which has been hardest hit by the inventory shortage.
"You're only bringing more people into the market for the same set of homes," he said. "That will actually increase home prices even more."
Today's 40-year mortgage
A 40-year mortgage term is not a new product. Both Home Savings of America and Great Western Bank were among those in the late 1980s who introduced 40-year adjustable rate mortgages in an effort to address the affordability challenges of that period.
Both banks were eventually acquired by Washington Mutual, whose September 2008 failure was a result of the excesses and missteps in mortgage underwriting of exotic products in years prior.
At one point, the
However, when the qualified mortgage standards came out, Fannie Mae issued a Seller's Guide in August 2013 that announced the 40-year loan's removal from its automated underwriting system.
Freddie Mac, on the other hand, did not purchase these loans then or now and currently only allows for terms that long for modifications.
The
Today, however, besides the non-QM offering, 40-year mortgages are offered as a government-guaranteed loan modification program that
Loan modifications are what the 40-year term is highly suited for and has been working well at, Jindal said.
Right now, even with several programs available, consumer interest in a 40-year loan is at best "de minimis," said Brennan O'Connell, director of data solutions at Optimal Blue.
Out of 1.35 million locks Optimal Blue has in its system this year through mid-September, just 864 are for 40-year terms, or less than one-in-1,500, O'Connell said.
Optimal Blue's PPE has approximately 850 "locking lenders," that represent about one-third of U.S. residential mortgage activity, O'Connell said.
Speaking with a loan officer he was working with recently for his own loan, the originator commented that if affordability issues were to keep going in perpetuity, it could trigger a desire for a lender to offer products to alleviate those issues.
But right now, the lender O'Connell's loan officer works for does not have a 40-year product on its menu.
Because so little activity in the 40-year is happening, Optimal Blue does not have data for it on its website.
But using the difference between the conforming 30-year and 15-year FRM as a proxy, the spread on Sept. 24 was 91 basis points. That makes it likely an unsubsidized rate on the 40-year loan would be almost a full percentage point higher than for the 30-year FRM.
Bryant's rate subsidy is key to his program; the consumer would still benefit from lower payments, but higher interest would eat into that.
Demand will drive FHLBanks interest
If the Federal Home Loan Banks don't make the secondary market for these loans as Bryant envisions, rates could even be higher as investors would price in a risk premium.
Right now, several of the FHLBanks do accept 40-year mortgages from its members as collateral on advances,
It will be the demand from homebuyers that will drive whether lenders will end up offering this product, and ultimately any home loan bank's interest in being a part of the program, Donovan said.
The Council's "initial legal analysis suggests that we don't see any regulatory prohibition for it," Donovan said. "If a bank goes into that, they probably would have to update their risk models and evaluate the risk appetite for such collateral."
So it is likely statutorily possible, but additional guidance might be needed.
While providing advances secured by collateral is the primary book of business for the FHLBanks, several also participate in asset acquisition programs such as the Mortgage Partnership Finance program and the Mortgage Purchase Program.
Those programs have different risk parameters for the banks that have to be evaluated when it comes to the 40-year mortgage that would have to be figured out first.
"It's an interesting idea," Donovan said. "Right now, we haven't seen a lot of uptake on it, and so it's hard to know, with a lot of specificity, how the Home Loan Banks would respond."
