The Fifty-Year Mortgage - Is it the Answer?

By Vincent A. Fiorillo, CEO of Park Slope Advisors

In the opinion of this almost 50-year mortgage participant, the answer in a word, NO!! 

But first, maybe the question needs to be: What are we trying to solve? The answer is simple, how do we expand and renew the American dream of home ownership when the costs are becoming prohibitive to the incoming generations. Furthermore, will they experience the positives of home ownership or will it become a dream not worth dreaming?

Yes, we have a housing problem, but a larger supply could cure most of that issue. The fifty-year mortgage addresses payments, not supply. So, what would a lower payment do to help the supply problem? Probably nothing. Increased capital, however, going into the single-family housing market or into the condo/coop market would certainly benefit and help cure that market. Does the fifty-year mortgage do that? No, it doesn’t. But since the dialogue is out there, let’s see exactly what the result of the fifty-year mortgage would be.

We’ll just make a quick comparison of the 30-year vs. 50-year mortgage on a typical starter home. Compare a 400K loan on a 500K house. Let’s assume a 5% loan on both and let’s compare the payments. 30-year = $2147, 50-year = $1817 - a difference of $330 a month. Not so inconsequential for the average new home buyer. But, taking a long-term view, how much more interest is one paying for the 20-year extension? How about an additional 317K. Is that worth it? Not in my opinion. And how much better served is the borrower putting the additional $330 towards building equity. The 30 to 50 year swap is not linear and at higher rates the monthly difference for monthly payment is actually smaller.

The balances on a 400K loan after 12 years with a 30-year loan would be 292K. While on a 50-year loan it would be 374K. That doesn’t look like it’s worth it, and, more importantly, what problem does the 50-year loan solve? Certainly not equity accumulation. And if you’re a lender, look at the increased risk of extending the amortization. With 30 years, you are building over 100K in equity vs 26K with the 50-year in twelve years. Not a solution, just an increase in risk without much reward.

What about all the new buyers that are coming into the market? Without substantial downpayment, the housing market seems out of reach for the average new homebuyer. However, with nearly thirty-one trillion dollars in home equity present in the current market, the pertinent question is how this capital can be accessed, particularly by members of the millennial generation and Generation Z.  And they need access to that capital without putting their parents, or themselves, into a larger debt position. Additionally, tax consequences might cloud the issue for both parents and children with the standard option of loan or gift to child from parent.

Is there a solution, a product, or a new idea to solve this issue? What about the HEI product? For those who don’t know, The HEI product is not a loan but an equity investment, where access to that equity is based upon the value or the home, not the credit worthiness of the current owner. Why is that important? It opens the possibility of total access to all the trillions without concerns about credit quality of borrowers or homeowners. More importantly payments are postponed (similar to reverse mortgages) while the cash is used for another purchase.

Imagine, a 30-something year old now has a new bank account (mom and dad’s home), without creating a burden of debt on the parents. How does one do that? And since this isn’t a new product, why are we discussing it now? Especially by someone who has had major questions and problems with the HEI market.

The need is great in the housing market, and thirty-one trillion could go a very long way to solving the issue. Yet HEI on its own is not the solution, but a combination of HEI with other mortgage options might be.

Let’s imagine a situation where a young married couple is expecting their first child and although they have a slightly higher than average income, they simply haven’t had the time to save that downpayment. What they need is a chance to save it while building other assets and their family. And who better to help but mom and dad!

In this scenario, the family home is worth 900K, with no mortgage. An HEI position on that house of 600K for five years would automatically put the growing new family in a position to look for a home in the 600K range. Probably a “starter” home in some neighborhoods. 

What does that accomplish? It brings a new buyer into the market with the means to acquire a home. It creates no additional burden on the parents, no debt on the new homeowner, and the period of five years allows the new couple to save for their own downpayment for the refinance of the home to pay off the HEI equity. Since they will not be making payments for a mortgage, they could save 20K-30K a year and, at the end of five years, use those savings as a down payment for their home refinance, pay back the original HEI loan and achieve their independence. The HEI lender can also assist in the acquisition of a new loan for the new home. To reduce the risk of the HEI investment, there could be a lien on the new property at the origination of the HEI, thereby allowing a lower rate overall for the HEI, due to the overcollateralization of the investment.

This is just one example, and I will provide additional examples.  However, in this simplistic scenario a new homeowner is established with no new rules, regulations, or programs needed. In fact, there is no additional debt, thereby not leveraging either party.

Let’s look at another scenario. The new couple has a portion of a down payment, but with the increase in housing prices, it doesn’t seem to be enough. By accessing a portion of the parent’s equity that could be used to place the new homeowner in a position to buy, parents don’t increase their debt, the new couple can save additional monies to repay the HEI, and the new couple is now a couple of new homeowners. 

But what about all the HEI negative press and actual lawsuits? By bringing the HEI product to a more mainstream audience and using the funds to help the new homeowner  community, the disinfecting light of daylight, more press, and more exposure could actually go a long way in developing this second option to increase homeownership. The increase in demand should motivate the HEI community to a more standardized product without eliminating creativity in lending.

Currently there is a trade organization started by some of the larger participants called The Coalition for Home Equity Partnerships. Their aim is to set a framework for future growth. What in my opinion might be a better alternative is standardization. Standards in underwriting, disclosures and terminology. And a trade organization would help police the bad actors. And in a marketplace where there is 31 trillion dollars available, there will be bad actors. However, the more mainstream and codified the product, the better for all participants.

I believe this approach to curing the housing market is only one step, a tool in the tool bag, if you will. I’m sure with good intelligent dialogue, we will find solid alternative solutions. Demand always cultivates creativity (think FHA, GNMA, and MBS securities). That market is one of the largest debt markets in the world. 

It is incumbent on the industry to create the necessary guard rails for the HEI industry, so that it can grow and help solve the housing problem as well as increase home ownership.