October 17, 2004 in Business

Fannie Mae testing 40-year mortgages

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CHICAGO — Mortgage giant Fannie Mae is in the midst of a pilot program to test consumer reaction to a relatively rare mortgage animal: the 40-year, fixed-rate loan.

It’s an experiment of 22 credit unions nationwide in partnership with Fannie Mae, which will decide next year whether to roll out the loans on a broad scale. In Washington, Boeing Employees’ Credit Union, of Seattle, and Vancouver-based Columbia Credit Union are taking part. No Idaho credit unions are involved in the pilot program.

While a few banks offer the occasional 40-year fixed-rate mortgage on a customer-by-customer basis, a stamp of approval from Fannie Mae could standardize such loans. The company finances one in every five home loans in America.

Officials at Fannie see the 40-year loans as a way to turn more Americans into homeowners.

But critics view the loans as adding even more nightmares for people who already are saddled with debt.

“I thought the point of buying a home was to own it,” complained Amelia Tyagi, co-author of “The Two-Income Trap,” an examination of American household debt. “With this thing, you pay until you die.” She regards the concept as “almost criminal.”

“Sending the message that it’s acceptable not to get that thing paid off for 40 years, that’s a dangerous message,” she said. “What happens if your roof springs a leak? What if you get laid off?”

Robert Manning, a professor of finance at the Rochester Institute of Technology who teaches financial literacy, says Fannie Mae’s efforts to expand homeownership actually can end up having the opposite effect. Putting more cash into the hands of first-time buyers, he says, enables them to drive up prices.

“You’re bringing more people into the market who shouldn’t be there,” Manning said. “It makes it more unaffordable for those who want to do the right thing and save for a down payment and get a mortgage that’s a realistic length.”

A generation ago, the 20-year mortgage was the only game in town. Now there are dozens of ways to borrow, and homeownership is at an all-time high.

The 40-year loans are somewhat easier to qualify for than 30-years, and borrowers can get bigger loans than with the 30-year products.

“For first-time borrowers, it lowers a monthly payment and makes a home more affordable,” said Fannie Mae spokeswoman Sandy Cutts. “It also could be helpful in general for borrowers who are challenged by affordability issues, those who live in high-cost areas,” because the longer term means they can borrow more.

But even lenders agree that the longer term can be a minus. The 40-years’ interest rates are one-quarter to one-half point higher than those of 30-year loans. And then there’s the cost.

In a simplistic comparison, a borrower of $200,000 at 6 percent for 30 years would pay $231,677 in interest. The same amount, borrowed at 6.3 percent, would cost $348,420 in interest.

Material from the Associated Press was used in this report.

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