Long bond may bring 50-year mortgages
30-year Treasuries are guide for rates
Associated Press
Published February 18, 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.
Although the connection between the two--the U.S. government borrowing money through the sale of debt and a home buyer looking for a loan to buy a house--might 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 will 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, have a better idea of what to charge home buyers for a 40-year mortgage. There is also 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 had been the Treasury 10-year note.
"A 30-year 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 last two decades, according to Gumbinger, who recalled that their use last jumped in the 1980s when home prices were high and interest rates were in double digits.
Rising home prices are bringing them back, he said, but noted that these loans likely will not 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 buyers can lower monthly borrowing costs and qualify more readily for a loan.
LaDue said bankers also could create a 50-year mortgage because of the Treasury's 30-year bond sale.
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