The future of the 30-year mortgage is in question. Debate centers around the fact that 30 years is too long for a home loan. Systemic risk to the financial system grows with longer time durations. Banks that make loans for this length of time subject themselves to this risk. Equity in the home is built at a snails pace, allowing borrowers to walk away with little loss to themselves if they fall behind.
Community banks cannot loan money for this long safely in-house, so they originate and sell those loans to government agencies like the FHA, VA, Freddie Mac or Fannie Mae. We have no way of knowing what life will look like 30 years from now, nor what could possibly go right or wrong in the world. It's between 1/3 and 1/2 of a generation!
Most home loans never get paid off. The average life of a home mortgage lasts only about 7 years. They payoff due to sale of the home, a fire, refinance, or a host of other events that come along. So, is it wise to loan money for 30 years when you will statistically only have it for 7? We don't do it for our cars, so why do it for our homes? Simple, to make the mortgage payment affordable, and people can buy more house. We take out these loans and most us of know at signing that we will never see the day when they are paid off. That in itself is a risk.
If we make home loans shorter in duration, say 8, 15, 20 or a max of 25 years, we reduce risk to the system. Less risk is good. This will cause much, much higher monthly payments. Larger payments build equity in a home faster. This reduces risk of the borrower walking away because they won't want to lose all that equity. But, bigger homes will become unaffordable for most people, unless they have a larger cash down payment, say 20-40%. Otherwise the payments will simply be too high, and they can't qualify for the loan which is based on their income. This will add downward pressure to larger homes, and thereby extend the pain in our economic recovery in the housing industry.
Either way, change will come.
D
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