Would you consider a 40 year mortgage? A Fed official thinks it’s a good idea. But others say it’s a risky proposition.

Should the federal government start supporting mortgages even if they are over 30 years old? Philadelphia Federal Reserve Chairman Patrick Harker believes it could be a solution to an emerging problem in the housing-finance ecosystem.

In a speech in which Harker called on the central bank to act more aggressively to fight inflation, he also focused on developments in the housing market.

“In general, the housing market is largely healthy. if nothing else, it does not meet demand “, said Harker Tuesday.

A potential problem on the horizon is the large number of Americans who are lagging behind in mortgage payments. And that is where the 40-year mortgage can come into play.

The Philly Fed has been monitoring the evolving state of mortgage lending. At the start of the pandemic, lawmakers demanded that borrowers whose mortgages were federally insured be allowed to suspend payments amid financial turmoil. Through CARES, lawmakers also introduced a moratorium on seizures. For loans not backed by the federal government, private lenders have largely adopted the same policies – although there have been some gaps.

The Department of Housing and Urban Planning proposed the 40-year mortgage facility, but this has not yet happened.

In all, more than 8.5 million borrowers entered into mortgage lending at some point during the pandemic, representing more than 15% of the country’s mortgage market. Today, that number has shrunk to just 680,000 home loans, a drop of about 90%.

“Nearly three-quarters of those who have resigned have repaid or are repaying, and many are using deferred payments or loan modifications,” Harker said.

Still, nearly 1 million home loans are delinquent – only half of which are in loss mitigation programs, Harker said. (Loss mitigation may include tolerance, loan modification and other options.) Many of the borrowers who did not use the loss mitigation options never tolerated and lagged behind in mortgage payments even before the COVID-19 pandemic. Black and Hispanic borrowers currently have higher rates of non-payment of mortgages, Harker said, either because they are tolerant or because they are delaying their loan.

While the housing market is by no means facing an exclusion crisis the size of what happened around the Great Depression, many homeowners are in a difficult position. “Interestingly, just as unemployment has returned to pre-pandemic levels, the number of arrears has also returned to pre-pandemic rates,” Harker said. Specifically, the national moratorium on exclusion expired at the end of 2021.

Lenders, Harker noted, could consider solutions that would reduce the cost of modifying loans while providing borrowers with payment relief. And he pointed to 40-year-old mortgages, specifically from the Federal Housing Administration, as one such solution.

The government is just granting loans for 40 years

Last June, Ginnie Mae, the state-owned mortgage lender through programs managed by the FHA, the Department of Veterans Affairs and the US Department of Agriculture, announced that it would begin supporting securitization of loans with conditions of up to 40 years . These would not be new loans. Instead, it would be existing mortgages that would be modified by the lender to 40-year loans to reduce the size of monthly payments to borrowers.

But the government was late in granting the loans. Ginnie Mae first released its 40-year loan for modified VA and USDA loans in December.

However, as Harker pointed out, while the Ministry of Housing and Urban Development proposed the facilitation of a 40-year mortgage, “it has not yet been implemented” for FHA loans. ONE draft of such a new policy was released last fall and on Friday HUD posted a suggested rule in the Federal Register that would allow the modification of existing FHA mortgages into 40-year loans.

Access to a 40-year loan can be crucial for many homeowners with FHA, USDA and VA loans.

By extending the duration of their loans, lenders and servers could make it easier for homeowners to manage their current payments as they recover from the financial difficulties associated with the pandemic.

Freddie Mac FMCC,
and Fannie Mae FNMA,
already support loan modifications for up to 40 years through “Flex Modification” programs.

Access to a 40-year loan can be crucial for many homeowners with FHA, USDA and VA loans. Throughout the pandemic, these mortgage borrowers were more likely to be tolerant of people with loans backed by Fannie Mae and Freddie Mac. FHA, VA and USDA loans are accompanied by less stringent credit scores and advances, making them more popular with less affluent homebuyers.

A 40-year mortgage could be a risky proposition

While Harker’s comments only pointed to 40-year mortgages as a useful tool to help homeowners struggling to get back on track, the 40-year mortgage modification program could serve as a testing ground for the product’s overall popularity.

“Whether this is sustainable or not will ultimately be summed up in investor demand – and that can change with the wind,” said Greg McBride, chief financial analyst for Bankrate.com.

A 40-year interest rate would be another challenge for consumers, as the amount of interest usually increases with the duration of the mortgage.

If investors were receptive to securities backed by loans that initially had lower terms but were later converted into 40-year mortgages, it could be seen as an indication that they would support such a product if lenders offered it to home buyers and refinancing people. fully. As investors lubricate the wheels of the mortgage market, their opinion carries a lot of weight.

But as McBride points out, a 40-year mortgage is far from foolish, especially given where we are in the current market cycle. Housing prices are very high in most parts of the country and many economists expect that the rate of increase in housing prices will slow down as mortgage rates rise.

On this front, a 40-year mortgage rate would be another challenge for consumers – and a potential benefit for banks – as interest rates typically increase over the life of the mortgage.

So far, the rapid rate of home price appreciation has benefited struggling homeowners. Families behind their mortgage could rely on the sale of their home and benefit from the increase in equity. But with a 40-year mortgage, homeowners would be able to raise money at a snail’s pace – it would be even slower in a market where house prices are slowing.

This not only affects borrowers “in terms of how much equity you build, but also whether or not you have enough equity to pay the transaction costs,” McBride said.

Related: See how much a 40-year mortgage would save you every month over a 30-year loan. And the absolute cost.

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