50-year mortgage pitch reminds me of another time
Homeowners on the edge are at increasing risk of foreclosure as standards loosen. Credit: Getty Images/Feverpitched
For generations, federal officials have celebrated any efforts to expand the American dream of homebuying.
“The dream of homeownership should be attainable for every hardworking American,” said President George W. Bush in 2003. Now, it’s President Donald Trump who, according to White House spokesman Davis Ingle, “is committed to making it easier and more affordable to achieve the American Dream of homeownership by eliminating unnecessary red tape, increasing supply, and lowering costs.”
But if we’ve learned anything from our not-so-distant economic past, it’s that easier isn’t necessarily better and such dreams can be dashed if we’re not careful. Recent moves indicate we’ve forgotten that lesson.
Trump’s latest proposal spotlights the idea of 50-year mortgages, a concept that could lower monthly mortgage payments, while increasing interest costs and slowing equity accumulation.
Here, the numbers tell the story. Imagine a homebuyer purchases a $500,000 home, with a 20%, or $100,000, down payment. Longer terms mean higher rates, so a borrower that pays 6.2% for a 30-year mortgage could pay 6.7% on a 50-year mortgage. According to an analysis by Redfin, the real estate brokerage, that translates into a $2,450 monthly payment for the 30-year, or $2,315 on the 50-year.
So far, so good. But that same homeowner would pay $481,993 in interest on the 30-year, compared with $989,195 on the 50-year. After just 15 years, the homeowner with the 30-year mortgage would have built $212,400 in equity, including the $100,000 down payment. For the 50-year mortgage, that’d be just $125,099.
After 15 years of paying $2,315 a month, plus taxes and insurance, they’ll have gained just $25,099 in additional equity.
Many homeowners don’t stay in the same mortgage for long; they often refinance or move. For some more savvy homebuyers, a 50-year mortgage might make sense, especially as a possible initial way into the housing market.
And it’s an important conversation-starter, a recognition of the extraordinary need for more housing and for new strategies to make such housing attainable and affordable to qualified, financially capable borrowers.
But for many others, especially those already on the edge, a 50-year mortgage comes with little upside and some dangerous risks — including default, foreclosure or losing the house altogether.
Combine that with the latest news that Fannie Mae, a government-sponsored enterprise that purchases loans from private lenders, has removed its minimum credit score of 620 from its automated underwriting, supposedly giving lenders more flexibility in approving loans.
Recent rollbacks of key financial industry regulations and the weakening of the Consumer Financial Protection Bureau, meanwhile, open the door for looser lending standards and risky products.
As a former business reporter who covered the lead-up to the 2008 financial crisis and the crisis itself, this sounds awfully familiar. In the years prior, increased lending flexibility led to more homebuying. A 2007 analysis by Newsday found that in 2006, nearly a third of the Island’s 107,000 mortgages were subprime, or high-cost, loans, often given to borrowers with less-than-perfect credit. In some communities, it was more than half.
Such loans were more likely to go into foreclosure. And go into foreclosure they did. Between 2006 and 2008, initial foreclosure filings on Long Island doubled and the dollar volume of home sales dropped, our analyses found. The economic collapse reverberated for years.
Circumstances now are different, as the lack of supply has caused an extraordinarily tight real estate market.
Even so, that collapse easily can happen again.
So, yes, add housing and make it more affordable. But before you celebrate making the “dream” of homeownership “easier” for all, don’t forget the nightmare that can follow.
Columnist Randi F. Marshall’s opinions are her own.
Randi Marshall is a member of the Newsday editorial board.
