Desperately Seeking Loans

I know my grandmother, Big Mama, is looking down from Heaven shaking her finger and rolling her eyes at the way the home loan market has evolved.

Big Mama would be especially shocked at the proliferation of interest-only loans on which people pay just the interest on their mortgage note -- in many cases as long as 10 years.

"Hush your mouth, child," Big Mama would say. "Have people lost their everlasting mind?"

No, Big Mama, they're just desperate. In major metropolitan markets, especially on the West and East coasts, the prospect of owning a home is fast slipping away for many people, including minorities, who already lag greatly in homeownership.

Harvard's Joint Center for Housing Studies points out in its "State of the Nation's Housing" report that until 2004, falling mortgage interest rates helped to keep homeownership affordable even as prices escalated. But with long-term rates flat year after year and short-term rates rising, people will find it more difficult to buy a home.

To combat the housing affordability problem, lenders have created alternative financing, everything from hybrid adjustable-rate mortgages to interest-only loans. This is, indeed, a new era in mortgage lending.

For example, expect to soon see the mass marketing of 40-year mortgages, thanks in part to a recent announcement by Fannie Mae that it will now buy such mortgages from lenders.

In 2003, Fannie Mae, the nation's largest source of financing for home mortgages, launched a pilot program to test whether stretching people's loan payments out an additional 10 years could help make homeownership more affordable for low- and moderate-income borrowers.

In making the announcement to lenders, Fannie Mae said that "recent changes in housing market affordability" and requests from some financial institutions led to the decision to buy 40-year loans.

"We don't expect the 40-year mortgages to ever eclipse the 30-year in popularity," said Sandy Cutts, spokeswoman for Fannie Mae. "However, for some borrowers, we do think it will be an attractive option."

Fixed-rate, 40-year mortgages are essentially the same as 30-year loans, but because the loan period is longer, borrowers can potentially qualify for larger mortgages with lower mortgage payments. Yet the extra 10 years means paying more interest over the life of the loan.

Since June 1, lenders have been able to sell Fannie Mae 40-year fixed mortgages as well as 40-year hybrid adjustable-rate mortgages, or hybrid ARMs. The 40-year ARMs must have initial fixed periods of three, five, seven or 10 years.