- The Washington Times - Monday, February 27, 2006

NEW YORK - 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.

While the connection may not be apparent, the two are inseparable. That’s because the interest rate the government pays for its debt usually determines the rate consumers and corporations pay for the loans they take out.

The reintroduction of the 30-year bond means lenders who had relied on the government’s 10-year note for mortgage-rate guidance now 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.

The longer-term mortgages would lower monthly payments.

“To the extent more consumers have more products available, it will be a help for affordability,” said Douglas Duncan, chief economist at the Mortgage Bankers Association.

Keith Gumbinger of HSH Associates, which tracks the mortgage industry, believes lenders will likely generate some borrower interest with the 40-year loans. “Expanding your menu [as a lender] to include as many loan choices means you get a better opportunity to scour borrowers out of niche markets,” he said.

After a five-year hiatus, the Treasury Department borrowed $14 billion through the sale of 30-year bonds on Feb. 9, and said it plans to continue regular sales of the bonds. The long bond’s revival was a big event on Wall Street and for mortgage bankers because the longest-dated government debt instrument had been the 10-year Treasury note.

“A 30-year [Treasury] security might give lenders a benchmark to track the pricing of longer-term mortgages,” said Steve LaDue, president of Affiliated Mortgage in Wauwatosa, Wis.

Forty-year mortgages have been offered by lenders over the past two decades, according to Mr. Gumbinger, who recalled that their popularity jumped in the 1980s when home prices were high and interest rates were in double digits. Rising home said, adding 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 for a bigger loan.

Mr. LaDue said bankers could also create a 50-year mortgage lenders could sell to first-time home buyers, or what Mr. LaDue calls “a gateway product.”

Mr. LaDue doesn’t expect borrowers to stick with these loans for the full term. He said these homeowners are likely to refinance into 15-year or 30-year loans to repay them faster.

Of course, like all longer-term loans, the 40-year mortgage carries a rate that is higher than shorter-term loans. 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 6.5 percent — which meant their monthly loan payments totaled $585, according to HSH’s Mr. Gumbinger.

A 30-year loan, meanwhile, had a 6.25 percent rate, and a home buyer with a $100,000 loan had a monthly payment of $616.

“Could there be some 50s? There could be some 50s,” said Mr. Gumbinger, referring to 50-year home loans.

But he doesn’t expect big demand for these mortgages.

The new loan products could help the housing market if they improve affordability at time when sales have slowed and inventories have ballooned.

Chris Low, chief economist at FTN Financial, a financial services firm, said longer-term 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.

“It is a kind of a way to play games with monthly payments,” said Dick Bove, banking analyst at Punk Ziegel. “Stretching out the mortgage maturity is simply a way to lower month payments and stimulate sales.”


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