The End of the Road for the 40 Year Mortgage?
The media keeps writing premature obituaries for the housing finance majors Freddie Mac and Fannie Mae with a certain amount of glee. Is that really called for though? If the federal government actually manages to shut these two down, would that be a good thing for homeowners in America? America has been raised on a steady diet of the 30-year and 40-year mortgages for about a half century now.
With these two housing finance companies out of the running, Americans might as well forget convenient mortgage options like these. Most borrowers, the ones who live in the cities and in the rural towns especially, could see very high interest rates become almost the rule (although suburban home buyers might be spared). And private lenders, knowing there is no calming influence from the government anymore may begin to charge you all kinds of fees for regular everyday loan features that you’ve always taken for granted. If for instance you were in talks with a lender for a loan, and you wanted to lock the interest rate in before you actually took the loan now, that could cost you.
Both Republicans and the Democrats dislike Freddie and Fannie. And they both would like to see these two walk away into the sunset, finally. But it’ll be a slow process. No one wants America to quit cold turkey. Why does everyone want to see the last of these two mortgage giants? It’s easy to understand.
While both were created to make it easy for the general public to take out mortgage loans, the two companies decided they didn’t want any part of the American public. They just wanted to make use of whatever means they had to make their shareholders rich – a strategy that has cost billions of dollars in taxpayer money.
Still, even when Freddie and Fannie are finally dissolved, everyone does want the government to do something to make the 30 year and 40 year mortgage an option that the regular person can take advantage of. The housing finance crisis of 2008 especially shows that you can’t have a housing market that completely depends on private lending.
The 40 year mortgage first came about by an act of Congress in the 50s. Ever since then, almost every long-term loan such as this has only been issued because the government was willing to guarantee it. No regular private lender has investors who aere willing to take on such a long-term bet. Any investor could only hope to be dead before seeing any loan be repaid. Anyone willing to make such a loan usually requires a much larger down payment and an impossibly high credit score. Actually, that might not be a very bad idea in a country where people buying homes that they can ill afford.
Experts believe that the 40 year mortgage is a major reason why the American housing finance system is in collapse. It usually makes borrowers pay the same rates of interest forever even when interest rates fall. Anyway, these kinds of loans are meant for subprime borrowers – those who are not able to pay a proper down payment. And as everyone knows, those who pay a low down payment are more likely to default. Perhaps it’s a good thing that long-term mortgages are coming to an end. Most countries don’t have them anyway