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30-year mortgage policy should be tossed



October 12, 2009 – Comments (0)

Paper Economy questions the own your own home policy and one of the things brought up is what is the  true legitimacy and soundness of the 30 year loan?

From what I can tell it was brought in to ease payment pressure around the depression.  Going from 15 to 30 years on a repayment plan can make a significant reduction to the payment amount.  I worked these numbers out somewhere, I think in my "Six Degrees of Leverage".   Actually, I couldn't find it there, but my memory is that it can reduce your payments by about 25% whereas trying to take a mortgage to 40 or 50 years would only save you 5%, which isn't going to help most distressed home owners.

Contrast the implementation of longer lending periods as a solution to people not being able to make their payments to today's forgiving part of a loan or loan payment.  What's happening today does not seem to be helping people that are in trouble, and these policies are causing loan principal to be written off,not delayed in when it is repaid.  How happy are you about that if you are holding mortgage bonds?

Additionally, that shorter time frame for borrowing was highly protective in reducing housing bubbles.  No question they had one in the late 20s, but it was bubbled for affordability over much lower lower lending term.  Graphs that compare relative debt today to the depression show that today's debt levels dwarf that of the depression.

I have stated a few times that lending laws need to be based on a fixed standard rate, as in the housing bubble.

If you have reasonable lending laws and require those standards in securitization of mortgage debt then you do not have to worry about idiots bring down the financial system, which came awfully close to happening and I am not so sure it is over yet.  You also have the capacity to respond to tough economic times.  Right now everything about the way things have been run is on the edge and in the need of perfect execution or it falls apart and there is nothing left in the arsenal of financial tools to help.  Tools that should limited to use in  hard times have become a social standard and now we are seeing part of the consequences of allowing such foolish policy and being complacent about it.

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