Blogging Business News, Real Estate Division (061605)
While BizzyBlog has been tending to electoral matters, the debate about the existence of lack of a housing bubble rages on. Latest interesting bits of info on housing:
(click “more” to see the info)
40-year Mortgages
The WSJ’s Real Estate Journal (link revised from earlier WSJ address to a Real Estate Journal address that appears to be free) reports that 30-year loans with longer interest-only periods (as long as 10 or 15 years), and 40-year mortgages are gaining traction:
The newest crop of products is largely aimed at borrowers who are looking for lower payments but are also concerned about interest-rate risk. In recent months, mortgage experts have been surprised by the continued strong interest in adjustable-rate mortgages at a time when borrowers can still lock in a fixed-rate loan at rates well below 6%. With rising short-term interest rates reducing the relative attractiveness of adjustable loans, lenders are seeing greater interest in loans that protect borrowers from rising interest rates — and are introducing products for that market.
Last month, Wells Fargo & Co. rolled out a 30-year fixed-rate mortgage that is interest-only for the first 10 or 15 years.
Why is this happening? Because Uncle Sam’s designated hitter is expanding its purchases of these loans:
Forty-year mortgages — which keep monthly payments down but cost more over the long term — also are attracting more notice in the wake of Fannie Mae’s recent decision to expand its purchases of these loans. First offered in the 1980s, 40-year loans account for less than 1% of mortgage originations, according to the Mortgage Bankers Association. More banks may be willing to offer them now that they know they can be sold to Fannie Mae, which has been purchasing 40-year mortgages since September 2003 under a pilot program with 22 credit unions. Fannie will purchase both fixed- and adjustable-rate 40-year mortgages.
Is anyone else besides me wondering if Fannie Mae (and Freddie Mac) are taking on an enormous amount of risk with taxpayers as the implicit backstop?
40-year mortgages are not a cost-free bet for borrowers, though:
Forty-year mortgages can be costly over the long haul. Rates on these loans tend to be about 0.25 to 0.375 percentage point higher than the rate on a comparable 30-year mortgage. Borrowers also pay more interest over time because the loan is stretched over an additional 10 years. With a $200,000 mortgage with a 5.75% fixed rate, a borrower with a 40-year mortgage will pay roughly $312,000 in interest over the life of the loan, according to HSH Associates, versus about $220,000 in interest if the same loan has a 30-year term, assuming both loans carry the same interest rate. If the rate on the 40-year mortgage is 6%, the total interest payments jump to about $328,000.
I don’t see the justification for the stretch from 30 to 40 years raising the interest rate by as much as it does, and I would expect competition to perhaps narrow that difference. After all, the difference between a 15- and 30-year fixed-rate loan is typically only a quarter point for doubling the term. If you lengthen the term by another third (40 vs. 30), where’s the additional risk that justifies an even bigger rate increase than the 15-30 jump?
A Delayed Bubble Burst?
In “The Trillion-Dollar Bet,” (link requires free registration), The New York Times notes some semi-comforting information, in that the problems with the potentially negative impact of higher rates on adjustable mortgages are 18 months away (I said semi-comforting; I’m a half-full type person):
American homeowners have made a trillion-dollar bet that mortgage rates will remain near record lows for at least a few more years. But with some interest rates already rising, economists worry that the bet could turn bad.
The problem is that new types of mortgages that hold down monthly payments for families - helping many buy homes that they would not otherwise be able to afford - also require potentially far higher payments in future years.
The bill will soon start to come due in a serious way, as the initial period of fixed payments, typically set at artificially low rates, expires for millions of homeowners with adjustable-rate mortgages.
This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted.
But in 2007, the portion will soar, with $1 trillion of the nation’s mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis.
The 2007 adjustments will almost certainly be the largest such turnover that has ever occurred.
For a 79 year-old, Alan Greenspan is going to have to be some kind of tightrope artist.
A Global Housing Bubble?
The WS Journal (sorry, link still requires subscription, just like it did two items ago) notes that worldwide 3-year housing inflation is staggering, and in some cases makes ours look like a model of stability. Here’s the Journal’s table:
Nice to see some global context every once in a while.
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UPDATE: Oweboat’s last three posts (link is to the latest), though slightly dated, give you an idea of where the residential mortgage market is going, and why. Basically, borrowers are willing to take on more risk and lenders are “creatively” figuring out a way to accommodate them. Perhaps lenders and borrowers are happily walking over a cliff; we’ll see.
