Yesterday I posted about the straightforward part of 50-year mortgages and what they can and cannot do. President Trump started promoting 50-year mortgages as a way to help younger people buy homes. On the surface, it sounds like promoting a trade-off between higher total interest and longer terms with smaller monthly payments.
30-Year Versus 50-Year Mortgages
For most people, it would essentially become the equivalent of lifelong renting, except for very slow building of equity in a property.
Kevin Leibowitz, founder of Grayton Mortgage, explains how moving from a 30-year to 50-year fixed mortgage can save some money monthly. For a $400,000 mortgage at a 6.25% fixed rate, assuming zero down payment, the monthly payment of principal and interest would be $2,462.86. Total interest would be $486,632.77, using an amortization calculator.
Move to the 50-year mortgage and the monthly payment is $2,179.80. It’s a savings of $283.06. For millions of people, not an inconsequential sum, even if it doesn’t make or break people.
“So, the payment on the 30-year fixed is 13% higher than the 50-year,” Leibowitz says. “The premise is that more people will qualify and afford a home with a lower payment. However, a reasonable argument is that investor demand for 50 year mortgages would be worse, and that would translate into a higher rate. At 6.75%, the 50 year payment would become $2,330.50 — only a 5.7% improvement.”
But the total interest expense would now be $907,934.58. The amount of time before the borrower would gain significant equity would be much longer.
The presumption has been that under a 30-year mortgage, the typical seller is in a house for 15 years. The selling penalty with a 50-year mortgage is much higher, and the seller would need to consider staying put for many more years.
Other Reasons For Long-Term Debt
There is no proof that there might be reasons for a 50-year mortgage other than making monthly payments easier. However, there are other potential interests in long-term borrowing.
“I think more strategically, it does something else entirely, it extends duration,” says David Kakish, a branch manager at C2 Financial Corporation. “Extended duration would mean longer servicing cash flows, slower amortization, and more predictable income streams for lenders and the [government-sponsored enterprises Fannie Mae and Freddie Mac].” And more profit for the lenders.
“Looking solely through the lens of Fannie and Freddie’s balance sheets, the suggestion of a 50-year term is extremely convenient timing. Both are still in conservatorship, yet are quietly rebuilding capital to eventually relist via [an initial public offering]. Longer duration loans make their projected cash flow more stable, which in turn makes them look stronger, more predictable, and more profitable.” Taking the two institutions out of conservatorship is something President Trump has said he wants to do.
Perhaps this is a radical opinion, but by introducing a 50-year loan term, I believe that President Trump is essentially pivoting away from his efforts to force interest rates lower,” says Shmuel Shayowitz, president of mortgage lender Approved Funding. “For months, we have seen his aggressive tone towards Fed Chair Powell, where he kept saying that mortgage payments are unaffordable and that something needs to be done to lower rates. I think this might be the administration’s effort to address that affordability without going through the uncertain and difficult route of using federal monetary policy to lower payments for the average consumer.” And given the lack of economic information because of the federal shutdown, the chance that the Fed will offer another rate cut has come down to about a 50-50 probability.
Pushing A 50-Year Bond
Another potential reason is to establish a viable 40-year or 50-year Treasury instrument, which might allow better funding of the national debt.
“A 50-year mortgage wouldn’t necessitate a 50-year Treasury bond,” explains Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors. “As it is, 30-year mortgages figuratively price off the 10-year Treasury since traditionally people only stayed in their homes for an average of 7 years, although now that has moved up to 11 years. Its effect on U.S. debt pricing would probably be minimal. However, if a tsunami of mortgage debt hit the market, it would probably compete to drive Treasury prices down and yields up.”
But others think the pressure for matching 50-year-dated Treasury instruments would be strong. “From a market standpoint, creating a 50-year mortgage market would require matching long-dated instruments to hedge duration risk,” says Chris Hodge, economist at Natixis CIB Americas. “That could, in theory, spur the Treasury to issue 50-year bonds — something periodically discussed but never implemented. But I’m skeptical the market could absorb that kind of duration risk. There’s limited natural demand for ultra-long assets in the U.S., and without deep, consistent investor appetite — think insurers, pensions, or foreign reserve managers — yields would need to rise sharply to attract buyers.”
“When 50-year mortgages become the norm for ultra-long borrowing expectations and acceptability, the Treasury can more easily issue 40-year or 50-year bonds,” agreed Charles Urquhart, founder of Fixed Income Resources. “If investors are accustomed to this tenor, Washington has a better chance of kicking the can down the road on its maturity profile.” A 40- or 50-year bond would become necessary for hedging activities by lenders.
“Thus, despite 50-year mortgages sounding like an idea to help stabilize home loans, it also makes sense from a government funding perspective,” Urquhart added. “It encourages private and investor sentiment to look out for half a century, and it extends America’s duration tolerance to feel a little more comfortable with [a $38 trillion national debt].”