The subprime mortgage malaise is quite multi-faceted.  The borrowers are at fault for overextending themselves.  The lenders are at fault for making loans that are a stretch.  Realtors exacerbate the problem by artificially boosting prices.  And the builders will keep building as long as they have access to construction loans. 

Just when it seems that the mortgage madness is trying to work itself out, there was a surprise in the piles of mail this weekend: a 40-year mortgage offering from Countrywide Financial Corp. (NYSE:CFC).  It seems that the lenders are still willing to play financial games to keep loaning money.  Unfortunately this isn’t really new at all.  But it shows that at least this lender is willing to keep the games alive in overextending credit.

Back in 2006, Bankrate.com was reporting on the proposed 50-year mortgages.  Japan had or has those 100-year mortgages available so that children (and maybe Grandchildren) can buy and own property that would otherwise be unavailable.

The current 30-year and even 15-year mortgages are sort of a hoax when you consider the fact that the amortization table is almost entirely interest upfront.  On a 30-year mortgage with a 6% interest rate with a $1,798.65 monthly payment, a borrower at month 60 still owes $279,163.07 in principal.  The same 6% rate mortgage for 40-years has a $1,650.64 payment, but at month 60 the remaining principal is $289,489.78.  The 15-year mortgage with a 6% rate is much more expensive with a $2,531.57 payment but is at least a bit more skewed with the principal remaining at month 60 as $228,027.30.

The value of dirt usually appreciates through time.  But many of these newer structures built don’t seem to be built as sound as prior generations of homes.  The thought of some of these three-story toothpick structures having a 30-year life seems like a stretch.  There is no doubt that these ‘more creative mortgages’ make what would have been out of reach into something more attainable.  But that is still part of the problem. 

Maybe this is a harsh assessment here, but it really just seems that many U.S. borrowers still need to be renters rather than temporary owners.

Jon C. Ogg
October 15, 2007

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