News of the Federal Reserve's impending interest rate cuts has energized the real estate sector, with both homeowners and investors anticipating potential rate drops. However, for those hoping for a return to 3% or 4% mortgage rates, the outlook is less optimistic. Experts, including The New York Times, suggest that rates will likely stabilize around 5.5% to 6%. This, combined with the persistent shortage of affordable housing, suggests that homeownership will remain a challenge for many.
One potential remedy? The 40-year mortgage.
John Hope Bryant’s Proposal
John Hope Bryant, an investor and former advisor to both the Bush and Obama administrations, is currently the chairman and CEO of Bryant Group Ventures and The Promise Homes Company, the largest minority-owned single-family rental home provider in the U.S. Bryant strongly advocates for the 40-year mortgage as a tool to alleviate housing unaffordability. Although these mortgages have been suggested before, they have not gained widespread adoption due to concerns about higher long-term interest payments and associated risks like adjustable rates and balloon payments.
In an interview with Fortune, Bryant proposed modifications to the existing 40-year mortgage model that could make homeownership more accessible. His recommendations include:
Offering interest rate subsidies between 3.5% and 4.5% for first-time homebuyers who complete financial literacy training.
Capping the subsidy at $350,000 for rural areas and $1 million for urban areas.
Removing age restrictions, with Bryant arguing that older borrowers should have the same opportunities as younger ones.
A Temporary Solution
Bryant views the 40-year mortgage as a short-term fix, noting, "The 40-year mortgage is merely a Band-Aid. The real solution is increasing long-term housing inventory."
Acknowledging that some may be wary of taking on a four-decade debt, Bryant posed the question: "Does the market have a better approach to addressing affordability while still aligning with free enterprise and capitalism? We're not talking about radical ideologies here. If someone has a better idea, I’m open to it."
40-Year Mortgages in Loan Modifications
Though not a novel concept, 40-year mortgages gained more traction in May 2023 when the Federal Housing Administration (FHA) approved them as part of loan modification packages aimed at reducing monthly mortgage payments by at least 25%. However, even the Department of Housing and Urban Development (HUD) recognized that such modifications would only be effective if paired with a substantial interest rate reduction.
HUD’s final ruling emphasizes that while rising interest rates may limit the potential for payment reductions, the 40-year mortgage modification remains critical when 30-year modifications fall short of providing the necessary relief.
Potential Benefits for Investors
For real estate investors, 40-year mortgages could offer significant advantages:
Improved Cash Flow for Small Multifamily Units: New investors purchasing small multifamily properties with FHA loans could benefit by using tenant rent payments to cover their mortgage, with the extended term enhancing cash flow.
Tax Deductions: A longer mortgage period might result in greater mortgage interest deductions, potentially lowering annual taxable income for investors.
Flexible Loan Structures: The 40-year mortgage can offer flexibility depending on an investor's goals. Options like adjustable-rate mortgages (ARMs) could provide lower initial rates, making payments more manageable in the early years of ownership.
How to Access 40-Year Mortgages
Currently, most lenders do not offer 40-year mortgages as “qualified mortgages,” meaning they do not adhere to the Consumer Financial Protection Bureau’s (CFPB) rules governing 30-year loans. Additionally, these mortgages are considered non-conforming loans, meaning they don’t meet Fannie Mae and Freddie Mac guidelines. However, they are available through loan modification options for borrowers in financial distress.
There are two main routes to securing a 40-year mortgage modification:
FHA’s 40-year loan modification for existing FHA borrowers.
Fannie Mae and Freddie Mac’s Flex Modification, which can extend a conventional mortgage to 40 years and reduce payments by 20%.
Banks Offering 40-Year Mortgages
A few banks currently provide 40-year mortgages for new homebuyers:
Carrington Mortgage: Offers both fixed and adjustable rates, along with jumbo loans and refinances.
Needham Bank: Provides adjustable-rate mortgages.
Newrez: Offers interest-only payments for the first 10 years.
OneUnited: This Black-owned bank offers 40-year multifamily mortgages, aimed at increasing affordable housing in urban areas.
Final Thoughts
As John Hope Bryant aptly pointed out, while 40-year mortgages won't bring borrowers back to the ultra-low rates of the COVID-19 era, they could provide a solution for new investors purchasing owner-occupied small multifamily properties.
For investors looking to scale, mortgage products longer than 30 years may offer a competitive edge, even if they involve balloon payments or adjustable rates. These extended terms could offer much-needed financial flexibility during the early, challenging years of property ownership when stabilization and repairs are underway. Over time, this could make the 40-year mortgage an appealing tool for both homeownership and investment growth.
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