The 50-Year Mortgage – Pros & Cons

The 50-Year Mortgage – Pros & Cons

QUESTION 

I am the underwriting manager for a mid-sized regional lender. Recently, an investor asked us if we would be interested in originating 50-year mortgages. This mortgage loan has been in the news a lot recently because the president has been pushing it. 

Yesterday, our loan committee met and decided to look into the pros and cons of 50-year mortgages. Next week, we have to present a report to senior management, and they will decide if it should be brought to the board for discussion. 

I do not want to parrot the mortgage news. Some of this news media seems more interested in driving sales than in what might be good for borrowers or the risks to lenders. I am asking you to share your perspective with us. I know you do not mix words. 

What are the pros and cons of 50-year mortgages for borrowers and lenders?  

COMPLIANCE SOLUTION 

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RESPONSE 

The promoting of this loan product, such as it is, has been stirred up recently by the president's remarks and massive news coverage. In my opinion, the president is recommending a flawed loan that is detrimental to a consumer's long-term financial interests, and the news media, as usual, is chasing a shiny object that supposedly highlights sales over substance. 

A 50-year residential mortgage is a home loan with a repayment period of 50 years (600 months!), significantly longer than the standard 30-year term. Its primary benefit is lower monthly payments, which can make homeownership more accessible. Fair enough! However, this comes at the cost of paying substantially more in total interest over the life of the loan, and it results in much slower equity accumulation. 

I suppose that stretching the loan over a longer period reduces the monthly principal and interest payments. To that extent, it could help some first-time buyers qualify for a mortgage or afford a more expensive home. The term "affordability" has become quite a hobby horse these days, given that monthly payments could open up homeownership to more people, especially in expensive housing markets. Ultimately, it will not beneficially resolve the affordability issues that consumers face today. 

But a 50-year mortgage seems like a form of indentured servitude. Over 50 years, the total amount of interest paid on the loan can be hundreds of thousands of dollars more compared to a 30-year mortgage. A central pillar of building equity in our society, home ownership, is seriously derailed because of slower equity growth. A much larger portion of early payments goes toward interest, meaning you accumulate equity much more slowly. It could take 30 years or more to build up significant equity, compared to about 12-13 years for a 30-year mortgage (excluding appreciation and down payment). 

Plus, the interest rates are higher. Lenders will charge a higher interest rate on a 50-year mortgage to compensate for the increased risk of lending for a longer period. Thus, mortgage originations would tread into uncharted territory. This is a new product, and lenders may be uncertain about the long-term risks, which could impact its availability and cost. 

Let's discuss these primary factors involved in 50-year mortgages: 

·       Feasibility

·       Alternatives

·       Legislative and Regulatory Changes

·       Impact on the Housing Market

·       Impact on the Economy

·       Inflationary Risk 

FEASIBILITY 

The 50-year mortgage is currently an idea under consideration, not an approved policy. But ideas often have a way of working themselves somehow into politics and policies. I am skeptical that certain key issues can be disposed of through politically palatable, economically viable, and financially responsible policies, even by way of legal and regulatory compliance. I'll mention but a few that come to mind.

Inflation, Tariffs, and Mortgage Lending

QUESTION 

I am the CFO of a mid-sized mortgage lender. We originate mortgages in 36 states. I am concerned about the impact that inflation has on mortgage banking. The tariffs are gradually driving up inflation, and economists predict a significant rise over time. 

I am concerned about being prepared for inflation's effects on mortgage lending. I'm sure we can prepare for inflation. But my question is about the impact and the signs to look for. Thank you for considering this question. 

What is the impact of inflation and tariffs on mortgage rates? 

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ANSWER TO YOUR QUESTION

You ask a good question. Often, mortgage originators focus on interest rates, and with good reason. Inflation indirectly increases mortgage rates by prompting central banks to raise interest rates to slow the economy, which in turn leads to higher monthly payments for new and adjustable-rate mortgages (ARMs). 

When rates rise, homebuyer affordability declines, and while fixed-rate borrowers are protected from future hikes, their new loans will have higher initial costs. For existing homeowners, high inflation can impact their decision to refinance, while low inflation may encourage them to lock in lower rates. 

I think you are correct to tie tariffs to interest rates. Tariffs can negatively affect mortgage lending by raising interest rates and increasing monthly payments, thereby reducing housing affordability. This is because tariffs can increase inflation, prompting central banks to raise interest rates, and can also cause market instability and reduce demand for U.S. debt, further pushing Treasury yields and mortgage rates upward. Additionally, tariffs on construction materials raise home prices and can lead to more volatile application volumes and tighter underwriting standards for lenders. 

CREDIT MARKETS 

While many people monitor equity indices, I keep an eye on credit markets. In my view, the credit indices tell me what is really happening in the economy. Credit is a crucial component of the financial system, influencing everything from individual finances to broader economic trends and serving as an indicator of economic health. So, while others look at stocks and other equity instruments, I look at the primary, secondary, public, and private credit markets. 

Prevailing interest rates are a key indicator of the health of the credit market. The level of investor demand also signals market conditions. And, the difference in interest rates between different types of bonds, like government bonds versus corporate bonds, can indicate economic risk. A widening spread can signal that investors are viewing corporate bonds as riskier, possibly foreshadowing a recession. 

So, let's dig deeper into the impact of inflation on mortgage banking. 

INFLATION 

When inflation is high, the Federal Reserve may increase its benchmark interest rate to cool the economy. This directly leads to higher interest rates on new mortgages and can increase the monthly payments on existing ARMs. Higher interest rates and home prices make mortgages more expensive, reducing a borrower's purchasing power and forcing them to buy smaller or less expensive homes. High inflation might prompt some borrowers to take out an ARM with the expectation that rates will fall, enabling them to refinance later. 

A fixed-rate mortgage offers some protection. Once a fixed-rate mortgage is secured, the interest rate will not change, even if inflation continues to rise. In a high-inflation environment, a fixed-rate mortgage taken out at a lower rate becomes more valuable compared to new mortgages with higher rates. 

Thus, refinancing becomes prevalent. If inflation is high and rates are rising, homeowners with existing fixed-rate mortgages may be hesitant to refinance, as new loans will have higher rates.

And when inflation is low and interest rates are lower, more homeowners may look to refinance their existing mortgages to lock in a better rate.

What to Expect from a Fannie MORA audit?

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QUESTION 

Last month, you answered a question about doing an internal audit in advance of Fannie’s MORA audit. We did not pay much attention to it because (A) we never had a MORA audit, and (B) we did not expect a MORA audit anytime soon. Then, all hell broke loose! 

Yesterday, we got a letter from Fannie Mae telling us that they will be scheduling a date for an on-site audit. They are requesting policies, procedures, and many other documents. There are due dates. This review makes a state banking exam look like child’s play. But I’m a QC manager, so I don’t have the whole picture of our risks. However, I do know one thing: we are not ready for this MORA audit. 

The CEO called a team meeting in the conference room. Our compliance manager is in charge, and everyone reports to her. I got your name at the meeting because she said we are going to use you to do a MORA Tune-up®. I just wish they would have done this sooner. 

What I need – and I think they need it too – is some idea of what we can expect from the MORA exam. I hope you don’t wait to reply. The compliance manager and others in management read your articles. They pass them around to us all the time. Please tell us what to expect about the MORA process. 

What is the audit process of a Fannie MORA audit? 

SOLUTION 

MORA Tune-up® 

RESPONSE 

If you want a copy of this article, please contact us here. 

We realize your question is urgent. Accordingly, we are prioritizing a response. You only have a few weeks to get ready for the MORA audit, the purpose of which is for Fannie Mae to evaluate your company’s compliance with Fannie guidelines as well as assess the operational risks. 

For those who don’t know, Mortgage Origination Risk Assessment (MORA) is a Fannie Mae review of a Fannie Seller/Servicer. It is intended to be a collaborative engagement led by the review team with the active participation of your organization.[i]

Getting our MORA Tune-up® engaged is one of several readiness activities you must undertake as soon as possible. Ours is the pioneer of the Compliance Tune-up, a unique review that provides a risk assessment and self-evaluation to satisfy the Second Line of Defense. I am grateful that your compliance manager chose Lenders Compliance Group. Nevertheless, to all our subscribers, please know that a few compliance and law firms offer to prepare you for the MORA review. Pick one you trust and get it done! 

There are seven phases in the MORA review process, and I will outline them for you. My outline will give you a high-level view. You should not delay! 

Here are the seven phases of a MORA review: 

Phase 1: Selecting the Organization 

Phase 2: Confirmation and Engagement 

Phase 3: Document Request and Receipt 

Phase 4: Process Evaluation 

Phase 5: Interviews 

Phase 6: Final Assessment 

Phase 7: Remediation 

I am going to provide a brief overview of each phase. However, numerous contingencies can affect the process and outcome. Take this review as a deep dive, one that will make your company stronger and its relationship with Fannie more durable. It is not too late to get started immediately. 

PHASE 1: SELECTING THE ORGANIZATION 

Fannie Mae selects organizations for a review using risk-based inclusion criteria and provides advance notice to the organization prior to scheduling the review. A member of the review team begins the process by compiling the organization’s pertinent contact information to start the review before moving to Phase 2. 

We are often asked if there is a way to predict whether and when the selection takes place. The short answer is No. The best answer is Soon. In other words, always be prepared.

PHASE 2: Confirmation and Engagement 

There are obviously two parts to this phase: the first part involves confirmation, and the second part involves scheduling. These two parts are interfaced. What happens is your point person – in your case, the compliance manager – will discuss Fannie’s BAMS team, that is, its Business Account Management Solutions team, to discuss some basics. The MORA team is independent of the BAMS team. This is a sort of Question and Answer format where the BAMS team gathers the following information: