Mortgage lending practices and market dynamics

Mortgage Lending

Mortgage Loans

The implosion of the housing market from 2007-2010 has left the current environment with at best a weak "recovery with housing sales slowly improving and inventories down from peak levels. However, housing supply still outpaces demand, sending prices in a constant state of fluctuation. Prices of homes were still falling at year end and may still be seeking a bottom" (Panchuk, K. March 7, 2011. P.1). In this current state lenders are understandably concerned about extending credit, yet their actions in lending in the years leading up to the crisis point to considerable lack of judgment and a laxity in lending standards. While the mortgage market is made up of a myriad of products including fixed and adjustable rate loans, the most common loan is the 30-year mortgage, a product which grew in popularity as a result of government support and backing.

The 30-year loan first became broadly available by an act of Congress in 1954

and, from then until now, the vast majority of such loans have been issued only with government support. Most investors are simply not willing to make such a long-term bet. They prefer loans with adjustable rates. (Appelbaum, B. March 4, 2011. P.1)

While lenders may prefer adjustable rate loans there are significant advantages for borrowers in utilizing the 30-year fixed rate option. Because the amount of the loan is amortized over 30 years the monthly payments are significantly smaller than for 10, 15, or 20-year options. Additional benefits include the stability of a fixed rate for the life of the loan as well as the consistency of payment. There are disadvantages as well including: the allure of lower adjustable rates particularly in higher interest rate environments, lower initial payments with an ARM which increase affordability, the longer time required to build equity because total interest paid over the life of the loan is higher. The 30-year provides simplicity and a sense of security for the buyer which an ARM with its potential for rate changes may not. For now the 30-year is here to stay as "Fannie, Freddie and other federal programs now support roughly 90% of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees" (Appelbaum, B. March 4, 2011. P.1). If the government does exit from its participation in the mortgage market the 30-year product may disappear altogether, and some say that would not be a bad idea. "One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage," he said, noting that such loans are not available in most countries. "For many people, it's not at all clear that that's the best product (Appelbaum, B. March 4, 2011.P.1).