A proposal floated by the Trump administration to create a 50-year mortgage product to improve housing affordability could offer significant immediate savings to homebuyers, but at the steep cost of a doubled interest payment burden over the life of the loan, according to a recent analysis by John Lovallo of UBS Securities.
Caveating that many basic questions remain unanswered, a back-of-the-envelope calculation shows a clear trade-off between immediate monthly affordability and long-term debt accumulation. Based on Lovallo’s estimates, the extended loan term could lower the monthly payment on a median-priced home by roughly $119.
While the short-term financial relief is meaningful for consumers struggling with current housing costs, the long-term fiscal penalty is severe. According to the UBS analysis, extending the loan duration from three decades to five decades could double the dollar amount of interest paid by the homebuyer on that median-priced home over the life of the loan. Furthermore, this significantly extended repayment schedule would substantially slow the rate of equity accumulation for the homeowner.
This is a problem since the extraordinary length of this proposal poses another demographic complication. UBS points out the average first-time buyer just hit 40 years old. This age profile means many initial borrowers could die before their mortgage matures.
“It’s typically not a goal of policymakers to pass on mortgage debt to a borrowers’ children,” Mike Konczal, senior director of policy and research at the Economic Security Project, told the Associated Press. The AP came to a similar calculation as Lovallo, finding the average borrower would pay an additional $389,000 in interest over the life of a 50-year mortgage compared to a 30-year.
How the math breaks down
UBS analysts on Lovallo’s team, including Spencer Kaufman and Matthew Johnson, based this calculation on a median-priced home of about $420,000, assuming a 12% down payment of $50,400, leaving a loan amount of $369,600. For comparison, the analysis posits a standard 30-year mortgage would carry a 6.33% interest rate, resulting in a monthly payment of $2,295.
However, the 50-year product is estimated to carry a rate 50 basis points higher, at 6.83%. Despite this higher rate, extending the term to 600 months (50 years) would reduce the monthly payment to $2,176. This calculation suggests an increase to the average consumer’s buying power of almost $23,000, allowing them to afford a home priced up to $442,995 while keeping the monthly payment at the 30-year benchmark of $2,295.
The viability and structure of the 50-year mortgage face several complicating factors. With Fannie Mae and Freddie Mac currently under conservatorship, they could potentially purchase these longer-term mortgages from lenders and then package them into securities to be sold to investors, assuming sufficient demand exists. The UBS analysts speculated amending the Dodd-Frank Act to allow 50-year mortgages to be classified as qualifying loans may be difficult, which would result in the longer-maturity loans carrying higher interest rates than the 30-year version.
Infrastructure Investment?
In concluding its initial thoughts on the proposal, UBS reiterated its finding from the end of a three-year study in early October: The housing market is so inefficient and frozen the one clear solution is direct government investment in housing infrastructure. The answer lies in, of all things, manufactured wall panels.
In October, Lovallo’s team noted several damning facts: Housing affordability is close to the worst it’s been since the mid-1980s, per the NAR Affordability Index, while Federal Reserve research indicates construction is the “only major industry to have registered negative average productivity growth since 1987.” Finally, Lovallo’s team estimated a structural shortage of homes in the U.S. housing market of 7 million units.
UBS suggested boosting the penetration of manufactured wall panels would be a meaningful strategy, generating up to a 30% reduction in framing days alongside a 20% reduction in waste. Construction costs would increase by $783 per unit, the UBS study found, suggesting reluctance on the private sector’s part.
These calculations may be a moot point, as President Donald Trump seemed to downplay the idea, if not back away from it, in a Tuesday interview with Fox News. He said it was “not a big deal” and it “might help a little bit,” as interviewer Laura Ingraham pressed him on an uproar among his base of voters about the proposal. ResiClub editor Lance Lambert noted the seeming unpopularity of the idea among his 11 takeaways in an analysis of the proposal.