In a world full of scams and rackets, the Trump administration has floated the idea of 50-year mortgages, which Wolf Richter wrote would be, “...the ripoff of the century.”
Richter goes on to explain, just as in the case of 30-year mortgages versus the 15-year variety, investors demand a higher rate of interest for longer-running mortgages. The average difference for the past 5 years has been 74 basis points. In his example, the difference between the 30-year payment and the 50-year is less than $100. But, for that small difference in payment, a borrower would pay $350,000 more interest. Let’s say the mortgage is paid off in 15 years.
With a 15-year mortgage, the borrower would have saved $270,886 in interest expense over a 50-year mortgage that gets paid off in 15 years.
With a 30-year mortgage paid off in 15 years, the borrower would have saved $95,273 over a 50-year mortgage that gets paid off in 15 years.
Richter poses the more likely situation of a payoff in 5 years: “over just the first 5 years, the 50-year mortgage costs $21,269 more than a 30-year mortgage, and $50,348 more than a 15-year mortgage.”
The mortgage industry makes out with 50-year paper, the consumer, not so much.
I point out in Walk Away, “In an America that was arguably much freer and much more libertarian there was no such thing as a 30-year mortgage.” Builders and subdividers provided seller financing at high rates and short maturities. Buyers had to put 50 percent down. That all changed with Herbert Hoover: “Hoover offered a vigorous, new approach to the housing problem through the application of federal, voluntary, and business cooperative activity,” Janet Hutchinson writes in “Building for Babbitt: The State and the Suburban Home Ideal.” She continues,
So while it may seem that Americans by their nature have genes that make them aspire to home ownership, this notion is nonsense. Homeownership was sold to Americans with “carefully calculated governmental policies that proselytized Americans about the virtues of suburban home ownership while opposing outright market intervention,”...
Hoover would eventually make it to the White House, where he pushed the idea that “mass homeownership depended on large-scale, well-planned private development,” but that second, these private residential developments “could only succeed with the aid of large-scale public land development, coordination, and regulation,” writes Weiss.
FDR created the Federal National Mortgage Association (Fannie Mae) in 1938, which created the secondary market in mortgages. Fannie Mae was given the mandate to help make homeownership more available throughout the United States. The modern mortgage market was born.
Robert Fishman explained in Bourgeois Utopias: The Rise and Fall of Suburbia that suburbia had its origins in Hoover’s housing agenda of the 1920’s along with the government housing apparatus erected the following decade. “Financially, organizationally, and technologically, the roots of the boom were in the 1930’s, for it was then that the building industry streamlined itself,” Fishman wrote, “both the Federal Housing Administration mortgage and the mass produced tract house date from that era.”
Almost Daily Grant’s (ADG) in a piece called “Fannie The Flames” provided a more notable housing finance item than the 50-year talk:
Out with the old, again: Last week, Fannie Mae announced that, beginning Nov. 15, it will no longer require would-be borrowers to carry a FICO score of 620 or above to be eligible for underwriting by the government sponsored agency. That move follows a July directive from Federal Housing Finance Agency director William Pulte permitting Fannie and peer Freddie Mac to utilize VantageScore model – which is marketed as a more “inclusive” model than the FICO gauge – in lieu of its incumbent peer to assess borrower creditworthiness.
For the uninitiated, 620 is not a good credit score.
ADG concludes, “Might those ostensibly buyer-friendly machinations help spur a renewed round of monetary mischief?” In finance, memories are short.
