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50-year mortgages may not be golden

/ Source: contributor

“It feels like a solution in search of a problem,” says Pete Bonnikson, vice president of mortgage operations for E-LOAN, describing the latest product to hit the home mortgage market: The 50-year mortgage.

Reportedly the problem this hyperextended loan addresses is affordability for homebuyers in high-cost areas. By stretching the repayment calculation over 50 years, so the argument goes, monthly payments fall by enough that borrowers unable to qualify for any of the other dozens of mortgage options can get a loan.

For certified financial planners like Nancy Flint-Budde in Salem, N.Y., it is a tossup as to whether helping people get around a standard option meant to keep them from overextending themselves is a good thing. “If they can not qualify for a standard or interest-only mortgage, this seems like a dangerous strategy,” she says.

“Nationally, we are seeing almost no activity in this product,” says Douglas Duncan, chief economist for the Mortgage Bankers Association in Washington, D.C. “Statistically it does not even register in our volume numbers. Most areas have not had the dramatic run-up in home prices necessary for this to be an answer to an affordability issue.”

So far the only area harboring any interest and some activity in 50-year mortgages is California, its birthplace.

“In California, buyers [many of them middle-income] cannot qualify for traditional 30-year mortgages because their debt-to-income ratio ends up being too high. This may be the only way they can get into a home,” explains John Marcell, president of the California Association of Mortgage Brokers and a mortgage broker in Upland, Calif.

Even in California there is little more than curiosity being expressed, according to Debbie Hoover, a mortgage loan agent with Legend Mortgage in West Hollywood, Calif. “The people who are purchasing now seem comfortable with the 30-year.”  On the refinancing front, she adds: “We have yet to see the market turn down to the extent people are in situations where their payment is hurting them. Nearly everyone locked in three years ago at lower rates.”

In fact, says Dena Bricker, a mortgage broker with American California Financial in Torrance, Calif., “right now the pricing on the product is silly.” The fixed-rate version is priced at such a premium to 30-year mortgages, it is not competitive to other alternatives. The adjustable version is only slightly better. This version, also priced at a premium, fixes the rate for between five, ten or 15 years and then becomes an adjustable-rate mortgage up until year 30. At that point a balloon payment for the remaining balance is due.

“That last 20 years is an illusion,” says Marcell.  “It is basically a 30-year loan amortized over fifty years.”

Another reason there is not much activity — and another reason to be wary — is few lenders offer the 50-year option.

“We are on the frontlines with 50-state coverage and we are not seeing anything like a groundswell of interest,” says Bonnikson explaining why E-LOAN does not offer 50-year products. “If demand rises, we will,” he adds, “but we think we have other products that get to the same end and are better for customers.”  Those products include interest-only mortgages. Since equity builds at such a glacial pace with a 50-year loan, borrowers might as well be in the more competitively priced interest-only product, which also produces low monthly payments.

Similarly, Bank of America does not offer a 50-year mortgage — it is not even on the drawing board, says Floyd Robinson, Bank of America’s consumer real estate president. But then, the bank, like many others, just rolled out its 40-year product to address the same affordability issues targeted by the 50-year.

The 40-year mortgage currently accounts for about 5 percent of the national mortgage market. Though in California, Marcell estimates it may represent roughly 25 percent of recent mortgages. The 40-year has only been in the spotlight for about a year and a half — roughly as long as Fannie Mae has been purchasing them from lenders. Fannie Mae offers no program for 50-year loans, which should keep them on most lenders’ backburners.

Fannie Mae got involved with the 40-year mortgage because “for some borrowers the 40-year can make a difference between owning a home and not,” says Sandy Cutts, a spokesperson for Fannie Mae. “But the reality of it is people are rarely in their same mortgage or home for 30 years, let alone 40.”

And that is the rationale behind respectable lenders and consultants recommending extended mortgages in the first place.

“The average homeowner stays in a home for five years in California (seven years nationally) and the average mortgage in California stays on the books two to three years,” says Marcell.   Neither the 40-year nor the 50-year mortgage is intended to be held for the duration.  He adds. “The interest paid over the life of the loan would be astronomical.”

Both products seem best suited for borrowers who want to qualify for a home today which they will be able to actually afford tomorrow — someone like a new doctor finishing up residency who knows a much larger salary is imminent. The key to taking on this extremely long term commitment rests with knowing it will be a short-lived one.

Otherwise, as certified financial planner Phillip Cook of Cook And Associates in Torrance, Calif., observes, “They are not thinking about ever owning their home free and clear.”

What everyone agrees is that the new 50-year mortgage is yet another mortgage tool — though more a novelty item at this point than a truly useful tool given its premium pricing. But if interest rates or home prices continue rising that may change. Marcell observes the 40–year mortgage first debuted in the 1980’s and is just now finding a market for those very reasons.

What is clear is that as financial tools mortgages have become finely calibrated to meet each borrower’s specific situation at specific points in their lives — a good thing for those in the mortgage consulting business, but a bad thing for borrowers who do not want to think that much about their mortgages.