Are We Nearing the End of the 30-Year Mortgage?

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

Freddie & Fannie Bailout Plan is Sure to Make Rates Rise

If you have or haven't heard, the Feds came out with a plan today to revise, change or eliminate Mortgage Giants Freddie Mac & Fannie Mae.  If you include all government mortgage entities, the US Government and US Taxpayers now do 97% of all home loans in America today.  They have effectively wiped out the private mortgage and securitization industry. Government can't do anything better that private industry can! We are currently losing Billions each quarter with these two losers.

It is estimated that the losses due to the relaxing of government lending standards in the 90's will cost the U.S. Taxpayer between $2 and $11 Trillion dollars when it's all said and done. This push into subprime lending by the outgoing Clinton Administration and Rep. Barney Frank D-NC, whose boyfriend worked high up at Fannie Mae by the way, will possibly double our National Debt! This exceeds all the bailouts of GM, Chrysler, AIG, Banks, TARP, and stimulus measures to date combined!

If you think it's hard to get a home loan now, just wait, Here are the few bullet points I gleaned from the press release this morning:

• Reduce the governments share of the mortgage industry from 90% down to 40%. (make a lot less loans)
• Raise Rates! (a lot less people can afford loans)
• Raise Credit Score Requirements (less people can qualify)
• Reject More Applications (less approvals)
• Charge Higher Closing Fees (more money to pay at closing)
• Implement a minimum of 10% Down (more skin in the game)

This will be catastrophic say the Realtor's, as less people will qualify to buy anything, and they like to sell houses! Supporters say that the private mortgage industry will come back into existence and fill the gap.  You decide. Either way, there are more bumps ahead in the road for housing and home finance.

D