Monday, October 18, 2004

Jonathan Neal, 24, bought a $400,000 condo in Northwest this past summer, while high housing prices have forced many of his friends to live with their parents.

“I have an awesome view of the [National] Cathedral,” the native Washingtonian said.

He also expects to have a great view of the Fourth of July fireworks.

He was able to purchase the large, one-bedroom condo by taking advantage of a unique loan product: the 40-year mortgage.

“The 40-year loan made it so I can make regular payments each month and not put me in dire straits,” he said.

The 40-year loan has been around for several decades but, unlike other nontraditional mortgages that have taken off during the real estate boom, it has not taken hold.

But this year mortgage lender Fannie Mae and 16 credit unions nationwide have been experimenting with the 40-year loan. The District company, the nation’s largest purchaser of mortgages on the secondary market, will decide next year whether to roll out the loan option on a broad scale.

If the experiment is successful, more first-time buyers like Mr. Neal would be able to purchase homes.

Fannie Mae calls the 40-year loan “the credit union affordable mortgage.” The pilot program, rolled out last January, offers loans 0.25 to 0.375 percent higher than a 30-year loan, spokeswoman Sandy Cutts said.

The major advantage of 40-year loans is reducing monthly payments because the amounts are spread out over a longer term than through a conventional 30-year loan.

The monthly payment on a 30-year, $100,000, 6 percent loan is $600, while the comparable payment on a 40-year, 6.25 percent loan is $568, according to Ms. Cutts.

The product allows a potential home buyer to qualify for a loan he may not qualify for otherwise, said David Reed, mortgage banker at SouthTrust Bank of Birmingham, Ala., and author of the book “Mortgages 101.”

Mr. Neal put down $100,000 and took out a $299,000 loan at 5.8 percent. He pays $1,700 per month with condo fees. He expects to pay the loan off early.

“The 40-year loan gives me a good start, so I’m not so pressed with my checkbook,” Mr. Neal.

Forty-year loans are a “no-brainer,” said John Quigley, professor at the University of California at Berkeley and the director of the Berkeley Program on Housing and Urban Policy.

“There is a potential that could be quite useful. Consumers will surely benefit. The increased risk to the lender is small and will be priced into the loan. Borrowers and lenders are better off.”

A 40-year loan is a good choice if the house is in an area where housing values are appreciating, said Peter Miller, author of the book “The Common Sense Mortgage.” The standards for obtaining 40-year loans are much more liberal than for conventional 30-year loans, available to those with less credit and less income, he said.

Despite being beneficial for the homeowner’s monthly budget, the 40-year loan hurts the homeowner long term because he pays more interest over the term of the loan.

The loans have the potential to be profitable to lenders. They create “such good return for us, we like to keep them,” said Gary McCann, executive vice president at Astoria Federal Savings, one of the few lenders nationwide that offer 40-year mortgages.

A 40-year, $100,000, 6 percent loan will result in interest payments of $164,000 vs. $116,000 for a similar 30-year loan. So, the 40-year borrower will pay 41 percent more in interest payment than a 30-year borrower, yet save only 9 percent on each monthly payment, Mr. Miller said.

Despite Fannie Mae’s interest in the product, sister lender Freddie Mac, the second-largest buyer of mortgage loans, doesn’t buy 40-year mortgages and is not planning to do so.

“It’s not a product that our customers are looking to us to find financing,” said Doug Robinson, spokesman for the McLean company.

“The demand for 40 years will not be very great. It just doesn’t do much for people,” said Jack Guttentag, professor emeritus of finance at the Wharton School of Business.

The effect of 40-year loans will be “pretty trivial — the intent is to get down the payment to make loans more affordable. But the impact is very small,” Mr. Guttentag said.

He points out that at a 6 percent interest rate, the monthly payments fall 36 percent as a loan is stretched from 10 to 20 years. Monthly payments fall another 16 percent as the 20-year loan is stretched to 30 years. But monthly payments fall only 8 percent more as the 30-year loan is stretched to 40 years. When the additional interest rate of 0.25 percent is added to the interest rate, the difference between the 30-year and 40-year loan payments is only 5 percent.

“I’ll be honest with you — we haven’t done any,” said Doyle Province, vice president of Mortgage Lending at Weokie Credit Union in Oklahoma City, one of the credit unions participating in Fannie Mae’s pilot program.

“Members don’t seem to think the savings in payment justifies the longer term. It’s a new thing. The first thing you think is ‘you’ve got to be kidding,’” he said.

No Washington-area lenders are participating in the pilot program.

CFCU Community Credit Union in Ithaca, N.Y., has not sold any through the experiment, said Skip Hewitt, vice president of residential loans.

“I did come up with a hybrid 40-year [loan] before Fannie came out with theirs and it’s not been very successful. I think we’ve only done two or three out of, I don’t know, 800 or so, so it’s not a very popular product,” he said.

Bethpage Federal Credit Union, another participating lender in Bethpage, N.Y., has closed on one 40-year mortgage, according to spokeswoman Joanne Habib.

Still, there are those who are excited about the loans. “We did a soft rollout, and slowly members are entertaining the idea.” said Tara Perry, spokeswoman for First Technology Credit Union in Beaverton, Ore.

“So far, we’ve closed about five to 10 loans and the requests and interest is growing steadily — that number is pretty good,” she said.

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