The Risky Reality of the 50-Year Mortgage

I wrote about my disdain for the 50-year mortgage last month. Since then, I have seen multiple articles still attesting to its virtues. To paraphrase Elizabeth Barrett Browning, “How do I loathe thee? Let me count the ways.”

“An analysis from Realtor.com compared the cost of a typical 30-year mortgage to the estimated costs of a 50-year mortgage. Assume a $400,000 loan, with 10% down at a 6.25% interest rate … buyers could save around $250 on their monthly payments with a 50-year mortgage...”¹

All of the articles I have seen, including the one cited above, do point out that lifetime interest on a 50-year mortgage is essentially double that of a 30-year mortgage. However, borrowers interested in this product, by definition, will be most concerned with the monthly payment. The $250 savings mentioned above assume that the coupon charged on the 50-year mortgage would be the same as on the 30-year mortgage. It is doubtful that this is true:

• Investors in this 50-year asset understand the time value of money well. They will insist on a premium to lock in a fixed rate for that length of time.
• The credit risk inherent in a 50-year asset is substantially greater than that of a 30-year mortgage. The likelihood of a real estate cycle over a 50-year time horizon borders on certainty. Economics professor Dr. Fred Foldvary published a prediction in 2007 titled “The Depression of 2008,” which demonstrated an 18-year real estate cycle going back to the early 1800s. This real estate cycle risk is exacerbated by the lack of equity that would accrue on such a mortgage (see graph above). Additionally, since the target market for such a loan consists of borrowers concerned about debt-to-income ratios, credit risk may be heightened even further. The credit aspect of these loans would likely need to be guaranteed by the government (i.e., taxpayers).
• The duration of such a loan would be significantly higher than that of a 30-year mortgage. This would result in heightened sensitivity of value to swings in market interest rates. Accordingly, as volatility of return increases, so does required yield.
• Bank GAP analyses would likely preclude banks from holding either 50-year mortgages or their resultant securities. Potential investors would probably be limited to insurance companies. This relative illiquidity would also tend to push up yields.

Mortgages, especially those guaranteed by the GSEs, need to balance risks and returns for both the borrower and the ultimate investor. The optimal mortgage, taking into consideration payment affordability and equity build-up, is the 25-year mortgage.