Five U.S. Senators introduced a bill in September to create a new program to help lower-income, first-generation, first-time home buyers.
Instead of giving first-time home buyers a $15,000 tax credit like the Biden campaign proposed last year, this new proposal would make mortgages 10 years shorter. Home buyers in this program could borrow the same amount of money but they would pay off their mortgages in 20 years instead of 30 years – with roughly the same monthly payments. The program would not drive up house prices for all future home buyers like a $15,000 tax credit would.
The Democratic senators call it the Low-Income First Time Homebuyers Act, or LIFT Act, and their two-page summary of the bill stresses that 20-year mortgages build wealth twice as fast as 30-year mortgages. Separately, Ed Pinto of the conservative American Enterprise Institute has said 20-year mortgages have half the foreclosure rate of 30-year mortgages.
Up until 1954, the maximum length of government-backed mortgages for buyers of existing (not new) houses was 20 years. The U.S. home ownership rate skyrocketed from 44% in 1940 to 55% in 1950 back when 20 years was the maximum mortgage length for the vast majority of house buyers. Today, however, the U.S. home ownership rate is similar to the rate back in the 1960s despite – or perhaps, because of – 30-year mortgages being introduced in 1954 for all houses.
Home owners in this new proposed program would not only own their homes free and clear 10 years sooner, they would also build equity twice as fast along the way. The bill summary says after just 3 years of ownership, you would have paid off $27,367 of the principal of a $200,000 mortgage but only $13,659 of the principal of the “traditional” 30-year $200,000 mortgage even with similar monthly payments.
That means if you couldn’t make your mortgage payments anymore due to job loss, illness or death in the family, you’d be much more likely to be able to sell the house and make some money with the 20-year mortgage. That’s one big reason why 20-year mortgages have half the foreclosure rate of 30-year mortgages – they build equity and family wealth twice as fast.
With the LIFT Act:
- Family wealth would grow faster and be far more stable for those with LIFT mortgages;
- Wealth inequality would fall;
- Homeownership would grow, and, eventually;
- The economy would grow faster when more homeowners own their homes free and clear, and they have more money to spend in the rest of the U.S. economy.
How are they able to make a 20-year mortgage have similar monthly payments to a 30-year mortgage with the same amount of money borrowed?
First, the home buyer has to pay FHA a 4% fee which is rolled into the mortgage amount borrowed.
Second, and more importantly, the Department of Treasury would buy the mortgages even though they would have below-market interest rates.
Currently, the Federal Reserve owns about $2.5 trillion of mortgage-backed securities, or about one-quarter of all mortgages in the country! The U.S. government is very happy to buy and hold a huge amount of mortgages. Why not LIFT mortgages, too?
All First-Time Buyers. My top suggestion to improve the program would be to make those mortgages available to all first-time home buyers who buy average-sized homes or smaller, not just lower-income, first-generation, first-time home buyers.
Portable. In addition, I would suggest we make the mortgages portable like in Canada. Currently, in the U.S. when you sell your house and buy another one, you have to pay off the old mortgage and get a brand new mortgage on your next house. With portable mortgages, if interest rates rise, you can just transfer what’s left of your old, lower-interest-rate mortgage onto your next house. Higher interest rates wouldn’t lock you out of moving when your family grows or your job changes.
LO-ARM. And finally, I’d like to make a radical suggestion. Make the mortgages Lower-Only Adjustable Rate Mortgages (LO-ARMs) so home buyers automatically get lower monthly payments whenever mortgage interest rates fall (but they don’t get higher monthly payments whenever mortgage interest rates rise).
Currently, to take advantage of lower interest rates home owners have to spend thousands of dollars to refinance, and then they typically refinance right back into another 30-year mortgage which adds years of mortgage payments onto the family.
Designed for American Families
Since the American government is the largest buyer of mortgages anyway, why don’t they buy mortgages designed for American families instead of Wall Street?
With the LIFT Act, family wealth would grow much faster, and, eventually, the economy would grow much faster as more and more families own their homes free and clear, and they spend more and more of their income in the real economy instead of on mortgage interest payments.
Maximize Free-and-Clear Home Ownership Instead of Mortgage Ownership
And maybe, in the same way, a government program change in 1954 led to 30-year mortgages becoming standard in the U.S., the LIFT Act, if passed, could eventually lead to 20-year mortgages becoming the standard in the U.S. again – even if the transition takes a decade or two or more.
Internationally, 20-year mortgages are common. One OECD report found that in nearly half the countries studied the typical mortgage was 20 years or LESS.
What would your family wealth be like today if your current mortgage was 20 years long instead of 30 years long?
P.S. Don’t expect to read about this renegade Senate bill in the mainstream media. The real estate industry is enormous and it’s great at controlling the public narrative. More free-and-clear home ownership clearly means fewer mortgages and a smaller mortgage industry. Naturally, the mortgage industry will fight that despite the huge benefits to home owners and the overall U.S. economy.
Added. I talk about the media and industry reaction to the LIFT Act in this Twitter thread.