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Maybe it’s because they got more than their share of liberal arts majors – maybe even more than the restaurant business. Whatever the reason, you have to hand it to the mortgage industry for being so innovative. In fact, the mortgage industry is so clever that if the whole industry could be condensed down to one person, that individual would be so freakishly smart that he could travel from State Fair to State Fair, attracting thousands of onlookers and astounding them all with answers to the world’s most difficult questions.
The performance might go something like this:
Carnival barker: Ladies and gentlemen! I have here in this chair America’s Mortgage Industry. It is an industry unlike any other. It is an industry that does not run after customers - its customers run after it. It is an industry beloved by the high and the low, the rich and the poor, the politically connected, the disaffected the unreflective and several vegetarians.
Now ladies and gentlemen, I’m going to ask the Mortgage Industry a series of questions. There has been no rehearsal. No discussion. No prompting. The Mortgage Industry will simply respond as best it can. I must warn you, the answers will astonish you. Please do not faint on your neighbor. Okay, Mortgage Industry, are you ready?
Mortgage Industry: I am ready.
Carnival Barker: Ok, here we go! Suppose that the homeownership rate is stuck in the 64-65% range. What could you do to get the rate to nearly 70%?
Mortgage Industry: Make it easier for borrowers to qualify for mortgages, of course.
Carnival Barker: Fair enough. But if housing prices go up, up, up and borrowers can’t come up with the down payment necessary to get a mortgage loan, even under the relaxed requirements, what could possibly be the solution?
Mortgage Industry: Lower the downpayment. Duh!
Carnvial Barker: Brilliant! And if prices keep going up?
Mortgage Industry: Eliminate the downpayment!
Carnival Barker: Even more brilliant!
Mortgage Industry: Better yet, loan the borrower more than enough to buy the house and let him spend the extra money finishing out his Star Wars action figure collection.
Carnival Barker: Ladies and gentlemen! Is there no limit to this creativity? Okay Mortgage Industry, try this on for size. What if 30-year mortgage rates start going up, even as housing prices continue to rise. Suddenly, fewer people will qualify for traditional mortgage loans, downpayment or no downpayment. What then?
Mortgage Industry: Traditional? Who says we have to do things traditionally? Did America’s revolutionaries don red vests and march in pretty formations? I think not. The answer is to provide adjustable rate mortgages, based on short term interest rates.
Carnival Barker: But what if home prices continue to rise and even short term interest rates move higher? What if they move so high that new borrowers have a hard time making even an ARM payment? What do you do?
Mortgage Industry: (yawning) You let the borrower choose how much principal to pay each month. He can catch up on the payments later.
Carnival Barker: Brilliant again! You let the borrower assume that “things will get better eventually.” Just like Congressional budget writers and slot machine players!
Now ladies and gentlemen, I have one more question for the Mortgage Industry. One more question that’s tougher than all of the others combined. And that question is – what if regulators don’t let lenders make so many of those fancy ARM loans? Or worse, what if borrowers decide that they are too risky?
Mortgage Industry: My, that is a long question.
Carnival Barker: So, you have no answer?
Mortgage Industry: I just said it was a long question. But it’s also an easy one. You simply offer forty and fifty-year mortgages.
Carnival Barker: Forty and fifty-year mortgages, ladies and gentlemen! Of course, the longer the term, the lower the payment. The Mortgage Industry really does have an answer for everything!
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While 40 and 50-year mortgages have been getting a lot of attention since the Treasury resumed issuing 30-year bonds in early February, Fannie Mae has had a 40-year program since the middle of last year. That’s a big deal because, according to the American Banker, 40-year loans have been around since the ‘80s, but banks have had no place to sell them. With Fannie committed to the product, particularly after losing market share by avoiding the exotic ARM market, 40-year mortgages could become a lot more common.
It sure looks like they’ll be popping up in California. The California Housing Finance Agency is also getting into the 40-year mortgage business. The housing agency wants to help residents who can’t otherwise afford California real estate by offering them the loan of a lifetime for most of a lifetime. Already the agency offers 35-year loans, so it has had some experience explaining the concept of eternity to borrowers. CalHFA is so keen on the 40-year product, that according to Andrew LePage of the Sacremento Bee, the agency thinks 40-year loans will account for 15-20% of its lending within the first year.
That’s pretty amazing considering these numbers:
a. Total interest paid on a 30-year mortgage loan of $300,000 at 6%. $347,515 b. Total interest paid on a 40-year mortgage loan of $300,000 at 6%. $492,308 c. Amount monthly payment is lowered by going the extra 10 years: $148
And then there are these numbers:
a. A borrower who turns 60 when his 30-year mortgage is paid off, will turn 70 by the time he pays off the 40-year version. b. Principal on the 30-year loan described above is reduced by $49,000 after 10 years. c. On the 40-year loan, 10 years of payments take the principal balance down by less than $25,000. And it takes almost 30 years to cut the principal balance in half.
Of course, as with most borrowers saddled with pay option ARMs, those who go for the 40-year loan probably anticipate moving into a conventional loan down the road. But at least with the fixed 40-year product, borrowers don’t run the risk of a spike in monthly payments like those who sign onto adjustable or interest only products.
In fact, ARM borrowers who find themselves in trouble may find the 40-year fixed alternative to be the perfect antidote to their financial stress. And the mortgage industry will be happy to relieve that stress by drawing up new loan documents for just a few basis points.
Now that’s innovation.
Written by: Rob Peebles
NEW YORK, March 22 (Reuters) - U.S. mortgage applications fell last week to their lowest level this year despite a marked drop in interest rates, an industry trade group said on Wednesday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended March 17 decreased 1.6 percent to 565.0 from the previous week’s 574.4, its lowest level so far this year.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.31 percent, down 0.11 percentage point from the previous week’s 6.42 percent level, a near four-year peak.
The 30-year fixed-rate mortgage, the industry benchmark, was also substantially above its 2005 low of 5.47 percent in late June of 2005 and was close to last year’s high of 6.33 percent in the week of Nov. 11.
The group’s seasonally adjusted index of refinancing applications decreased 0.6 percent to 1,574.5 compared to 1,583.6 the previous week. A year earlier the index stood at 1,894.4.
The MBA’s seasonally adjusted purchase mortgage index dropped 2.3 percent to 393.6 from the previous week’s 403.0. The index was only a few points above its two-year low of 391.7 reached during the week ended Feb. 10. The index was also below its year-ago level of 446.4.
The index, considered a timely gauge of U.S. home sales, was also below its year-ago level of 446.4.
Historically low mortgage rates have fueled a five-year housing boom, helping support the U.S. economy’s recovery from recession despite uncertain business investment.
Despite last week’s rate drop, most analysts say that mortgage rates are on the rise. While they may differ on whether or not there is a housing bubble, most agree that the market is now cooling off from its record run.
Fixed 15-year mortgage rates averaged 5.99 percent, down from 6.06 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) increased to 5.68 percent from 5.64 percent.
The MBA’s survey covers about 50 percent of all U.S. retail residential mortgage originations. Respondents include mortgage bankers, commercial banks and thrifts.
