50-year mortgages?

The Chronicle ran an AP article today on the possibility of a new 50-year mortgage. "The Treasury Department's resumption of 30-year bond sales could have an interesting impact on the home mortgage market, with lenders offering more 40-year loans and maybe even 50-year mortgages for the first time to help some consumers qualify for loans."

"The reintroduction of the 30-year bond means lenders — who had relied on the government's 10-year note for mortgage rate guidance — have a better idea of what to charge homebuyers for a 40-year mortgage. There is also some talk among lenders, who are always looking for new mortgage products, about creating a 50-year home loan."

"Forty-year mortgages have been offered by lenders over the last two decades, according to [a mortgage industry analyst], who recalled that their use last jumped in the 1980s when home prices were high and interest rates were in double digits. Rising home prices are bringing them back, he said, but noted that these loans likely won't account for more than a fraction of a percent of all loans processed by bankers. Last year, lenders underwrote $3.2 trillion worth of mortgages."

"By stretching out their mortgage payments over 40 years first-time home buyers can lower monthly borrowing costs and qualify more readily for a loan. [A mortgage broker] said bankers could also create a 50-year mortgage because of the Treasury's 30-year bond sale. This would be a product lenders could sell to first-time home buyers, or what he calls "a gateway product.""

"Of course, like all longer-term loans, the 40-year mortgage carries a rate that's higher than shorter-term loans, as lenders charge more for taking on the risk of a longer term loan. So although the payments are lower, a borrower ends up paying much more in interest."

"Last week, home buyers could get a 40-year $100,000 mortgage at a rate of 6.50 percent which meant their monthly loan payments were $585.00, according to HSH's Gumbinger. A 30-year loan, meanwhile, had a 6.25 percent rate and a home buyer with a $100,000 loan had a monthly loan payment of $616."

"Chris Low, chief economist at FTN Financial, a financial services firm, said longer-dated home loans could prevent a dramatic drop in the housing market because their lengthy payback periods would lower monthly payments at a time when interest rates for other mortgages have risen from historic lows."