At some time, the US mortgage market must change. I believe this article describes only part of the adjustments to come.
Are we facing the end of the 30-year fixed-rate mortgage?I do believe that Fanny Mae and Freddie Mack have "distorted" the free market, because they have not been able to adjust their terms for the many different situations. One size fits all doesn't work for mortgages.
Mortgage rates should be adjusted depending upon the risk involved in the loan. Yes FICO score and appraisals are a big part of the formula. Loan to value ratios, payment to income ratios and rent cash flow do have a big effect on the risk.
Lenders do have a table of rates that take many of those factors into effect. The length of the loan generally affects the rate -- the longer the term (30 yrs) the higher the risk to the lender, so the interest rate is higher.
However, the dreaded "prepayment penalty" has been "under priced" -- in other words if a borrower opts to accept a prepayment penalty the rate reduction has never been properly priced. If the prepayment penalty option came with a big enough discount, borrowers would opt for it. That would make the marketability of the mortgages much better.
Likewise lenders do not offer a discount for a "recourse loan" vs non-recourse. Most American loans are "non recourse" so that borrowers can walk away from their home and the lender has to recourse to attach the rest of the borrowers assets. I think this increases the risk the lender takes. Why don't they offer a half percentage point discount for "recourse loans" -- of course that would probably mean that all "non-recourse" loan rates would be higher.
Likewise, it appears that people buying a second home get a big break. I believe anyone buying a second home and obtaining a mortgage should be required to get a "recourse" loan that puts all of their assets at risk if they default on the loan.
