WASHINGTON – The combination of skyrocketing housing prices, lower wage growth and rising interest rates coupled with the growing necessity for lenders to be able to offer borrowers dealing with affordability challenges with more mortgage options have prompted Fannie Mae to expand its 40-year fixed-rate mortgage program nationwide out of its pilot phase. Starting June 1, Fannie Mae will begin purchasing 40-year mortgages from Fannie Mae-approved lenders. The housing Government Sponsored Enterprise planned to send a lender announcement on the expansion of its 40-year mortgage product to its lender partners at the end of last month. Twenty one credit unions have been part of a Fannie Mae pilot group for the 40-year, fixed rate product since 2003. Designed with the emergence of the purchase market in mind, Fannie Mae has positioned the low monthly payments to be the primary appeal of the product saying the longer term of the loan makes it more cost affordable for the first time homebuyer to buy their home and also makes it feasible for repeat homebuyers to afford more home while keeping their payments lowers than 30-year fixed-rate products would require. Fannie Mae has consistently stressed that the 40-year product is not right for everyone and is intended to just be another option for borrowers. "Escalating lender demand and the interest rate cycle greatly influenced our decision to make 40-year mortgages – with both fixed- and adjustable-rate options – eligible for delivery to Fannie Mae as a standard product," said Fannie Mae spokesperson Sandra Cutts. "We learned that the 40-year product is not going to eclipse the 30-year fixed-rate mortgage in terms of its popularity, however we learned that there is a place for it among those who are financially conservative but want another option to keep their payments lower than 30-year products would require," she said. Since the pilot was launched, Cutts said the mortgage market has become very focused on product originations – rising interest rates have caused a sharp decline in refinances and the purchase money business is not replacing what the volume the previous refi generated. Consequently, lenders are offering borrowers a wider array of mortgage products to choose from. For competitive reasons, Cutts says Fannie Mae "never provides volume figures on any of our products, including the 40-year." But CUs that participated in the pilot have had mixed results with the product. Some like Midwest Financial CU in Ann Arbor, Mich. have seen member interest, but no takers so far. President/CEO Larry Knoll said the $180 million CU is marketing the 40-year product to its approximately 16,000 members through its newsletter and statement stuffers stressing the product's lower monthly payments compared to shorter term mortgage products. The CU intends to continue to keep the product on its mortgage menu "so members will have another option." "Members we talked to about the 40-year mortgage wanted to know what their payments would be, but usually when we calculated their payments for a 40-year mortgage and compared it to a 30 year, they saw the monthly price difference wasn't that much and realized over a 40-year period they wind up paying more than over 30 years," said Knoll. The Midwest Financial president said the credit union puts all mortgage applicants through a counseling process "to make sure we put each of them with the product that's best for them. All products are not suitable for everyone, and the 40-year mortgage is no different. We counsel them so they'll know all the options available to them so they'll be able to make the best decision." DFCU Financial CU, Dearborn, Mich. also hasn't seen much activity with Fannie Mae's 40-year fixed-rate mortgage. Chief Lending Officer Mike Kruczek said members are more interested in the $1.7 billion CU's 40-year balloon and ARM product because of the payment differential. In the 18 months that DFCU has offered the fixed-rate product, Kruczek said it's only originated about $2 million in the loan. That compares to the $129 million in balloon and ARM loans the CU originated in 2004 of which 85% were for the 40-year term. Like Midwest Financial, Kruczek said DFCU will continue to offer the fixed-rate 40-year loan but will sell the loans to Fannie Mae and not retain them in its portfolio. -

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