Fast Mortgage - Mortgage News
Fannie Mae to expand purchases of 40-year mortgages
By MarketWatch
Last Update: 6:12 PM ET May 10, 2005
Fannie Mae (FNM) will be stepping up its purchases of these loans, providing lenders with an incentive to offer more of them. Thomas Lund, Fannie's acting executive vice president of single-family businesses, told executives at a mortgage banking conference last week that the company would be making the 40-year mortgage a standard product. A formal lender announcement will be issued at the end of the month.
Fannie Mae has been purchasing 40-year mortgages since late 2003 under a pilot program with 22 credit unions. While initial volumes haven't been huge, the company sees the product as a way to make homeownership more affordable as interest rates rise and house prices continue to appreciate.
By stretching mortgage payments out over a longer period of time, borrowers can lower their monthly payments, even though the interest rates on 40-year loans are higher than those for 30-year mortgages.
For example, for a $200,000 loan with an interest rate of 6% and a term of 30 years, the monthly payments would be $1,199.10; but a borrower could save $63.62 a month by taking out a 40-year mortgage. Even at a higher interest rate of 6.25%, the monthly payments would be just $1,135.48.
While the savings is relatively small, Fannie Mae spokeswoman Sandra Cutts said it could be enough to get people into homes they otherwise couldn't afford. "Over the life of a loan, that could add up," she said. "The amount saved per month could be spent paying other bills."
There's a downside, of course: borrowers end up paying significantly more interest over the life of the loan. And since payments made during the first few years in the life of a loan go toward interest, borrowers build up equity in their homes more slowly than they do with shorter-term loans. "They're not for everybody," Cutts said.
The spokeswoman said 40-year mortgages have been around since the 1980s, but few lenders have offered them.
There are a suite of other products designed to make homeownership more affordable, including adjustable-rate mortgages and interest-only mortgages, that have been much more popular. But 40-year fixed-rate loans could have more appeal to borrowers who plan to live in their homes for a number of years and don't want to run the risk that interest rates will rise significantly at the end of a five- or seven-year reset period.
"From a credit perspective, if you can afford it, you can continue to afford it," said David Montano, head of mortgage-backed securities research at J.P. Morgan.
Lenders may be much more willing to offer 40-year mortgages if they think they can sell them to Fannie, freeing them up to make more loans. And analysts say Fannie should have no trouble selling them on in the secondary market, assuming the yields are attractive enough.
Montano said 40-year mortgages would have to offer at least an additional 25 basis points of yield more than 30-year mortgages of comparable size to attract investors, but a yield pick-up of 50 basis points would probably make them unattractive to borrowers.
There's already talk that the securitization of 40-year mortgages may be underway, with the first pool of loans appearing in July.
Art Frank, director of mortgage-backed securities research at Nomura Securities International, said there is initially likely to be more demand for such a product in the form of collateralized mortgage obligations than as an actively traded pass-through vehicle.
