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The Buzz About 40-Year Mortgages Explained

With a press release in June, Ginnie Mae — a government-owned organization that backs FHA, VA, and USDA loans — set off a frenzy regarding 40-year mortgages.

First, there was the (misguided) knee-jerk reaction that government-backed lenders would be offering new loan products with 40 year terms. Then came a correction in the aptly titled “No, FHA Won’t Be Offering 40 Year Loans.”

Now, there seems to be some clarity on the issue. But unless you speak fluent mortgage-ese, it’s not easy to understand what’s actually happening.

Here’s the translation.

What’s going on with 40-year mortgages?

First off, 40-year mortgage products do exist. But they can be risky for both the borrower and lender, and therefore aren’t widely offered.

But the Ginnie Mae press release didn’t announce a new product for borrowers. Instead, it introduced a new pool of mortgage-backed securities (MBS) for investors to buy and sell.

After FHA and VA loans are issued, they are purchased by Ginnie Mae, which reduces risk for lenders and allows them to issue more loans. Ginnie Mae then packages loans into MBS and sells them on the secondary mortgage market.

In the past, Ginnie Mae was limited to buying and selling mortgages with 30-year loan terms or less. But beginning in October, Ginne Mae will introduce a new pool made up of modified loans with terms up to 40 years.

Why 40 years?

Pandemic-induced job loss caused many homeowners to fall behind on their mortgage payments. While an extended loan forbearance allowed struggling homeowners to defer payments and avoid foreclosure, this grace period ends for good on July 31 and some still aren’t able to make loan payments.

One avenue of relief is to modify the length of a 30-year loan and reduce the monthly payments. But lenders may be reluctant to do this since there is no secondary market for loans over 30 years.

The new pool from Ginnie May gives FHA and VA lenders an assurance that modified loans with between 361 and 480 months can be purchased on the secondary market. This, in turn, makes lenders more comfortable allowing borrowers to spread lower payments over a longer period of time.

This could prove helpful to homeowners as the original 18-month forbearance period ends in October and many borrowers — financially ready or not — must resume making payments.

Not everyone is a fan

While the new 40-year security pool seeks to give struggling borrowers another option to stay afloat, not everyone is on board.

Critics point out that underwriting and qualifications for 40-year loan modifications aren’t fully hashed out yet. How and when do the unpaid mortgage payments come into play? Do borrowers have to prove COVID-19 related stress to have a loan modified beyond 30 years?

There’s also a question of fairness to prospective homebuyers, who are fiercely competing over ultra-low inventory. As Jeff Lazerson points out in The Orange County Register: Why delay the foreclosure process for borrowers that aren’t able to make house payments when there are qualified buyers ready to take their place?

Long story short

Amidst all the buzz over 40-year mortgages and what they mean, the bottom line is pretty simple. Ginnie Mae is predicting an increase in mortgages modified beyond 30-years. It realized there wasn’t a secondary market for them, and made a change accordingly. Creating a 40-year pool allows them to support these modified mortgages, which may provide relief to certain borrowers.

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