If men could foresee the future, they would still behave as they do now.
-- Russian proverb
Maybe. Maybe not.
In the mundane world of consumerism, a mountain of evidence has suddenly arisen suggesting that today's American--perhaps for the first time in memory--has taken a look at the future and in one respect is sharply modifying his behavior on the basis of what he sees or thinks he sees, there.
A buying pattern--so firmly in place as recently as a year ago as to be considered engraved in stone--has so dramatically shifted that it leaves experts in the field confounded by its meaning.
Gone is the "of course" acceptance of the 30-year home mortgage ("so you're a long time building up equity, so what?"), and suddenly "in" is the desirability of paying off the home as quickly as possible. Erupting into almost overnight popularity are the 15-year mortgages and--in the roughly one dozen cities where it has been made available--the so-called "biweekly" mortgage.
"I'd like to think," one Midwestern lender said, cynically, "that home buyers have suddenly gotten smart--that they've looked at those figures and realized how much interest they're paying out over 30 years. God knows they've been dumb about it long enough."
'Fear of the Future'
But while disillusionment about a future of endless mortgage payments with little to show for it during most of the life of the loan is undoubtedly a part of the swing, John Blackburn, a professor of finance and law at UCLA, sees another possible explanation.
"I think that everybody, the lender as well as the home buyer, is a little bit fearful of the future--about the economy, the possibility of new inflationary cycles, and even the fate of the dollar itself."
Whether it's a new appreciation of the future, or a fear of it, however, the rush toward fast payoff is a phenomenon of 1985.
In all of 1984, for instance, Fannie Mae (the Federal National Mortgage Assn.), one of the two major marketers of home mortgages, bought only $232 million in 15-year mortgages--a negligible factor in the billions of 30-year mortgages it bought in the secondary market the same year. So far in 1985, however, spokesman David Jeffers said, 15-year mortgages account for no less than $2.4 billion of Fannie Mae's $35 billion in commitments--one in every seven mortgages bought and subsequently resold to investors.
At Freddie Mac (Federal Home Loan Mortgage Corp.), the swing is even more dramatic, according to spokeswoman Jean Ryan. With almost $4 billion in 15-year mortgage commitments made this year, the figure represents one in four of that agency's purchases.
More Auction Activity
"When we started buying and selling 15-year Mortgage Participation Certificates in mid-84," Ryan added, "there were so few of them that--unlike 30-year PCs which are auctioned off daily--we auctioned off the 15-year mortgage PCs about once every two months as we accumulated enough of them. As the volume increased, we went to weekly auctions and, finally, as of Oct. 7, we went to daily auctions. Investors really love them."
It's a pattern of sudden, almost explosive, acceptance of the 15-year fixed-rate mortgage that is repeated with the Mortgage Bankers Assn., too, where from "minimal attention" just a year ago, according Robert J. Spiller, the association's immediate past president, the accelerated mortgage now accounts, again, for about one in seven mortgages written.
"The move to early-payoff mortgages," Spiller added, "suggests growing consumer sophistication regarding home loans. Those home buyers who see retirement down the road, or face substantial outlays for children's college education, often choose early-payoff loans, we've found."
Tilted Toward Lender
While the common sense economics of an accelerated payoff has always been given lip-service by lenders, even the seasoned second and third-time home buyer--and, certainly, the first-time home buyer--loses sight of how heavily the standard, 30-year, fixed-rate mortgage is tilted in the lender's favor:
--That, during the first month of a $100,000 mortgage (at 13% and calling for monthly principal and interest payments of $1,106.20), only about $22.09 of that payment goes to principal and creation of equity.
--That, during the first year of the same mortgage, only about $290.07 of the total payments of $13,274 have gone toward principal.
--That it is normally in the 24th or 25th year of a 30-year mortgage before the home buyer's monthly payment of $1,106.20 splits 50/50 between interest and principal.
--That, at the end of 30 years, that $100,000 mortgage has cost the home buyer a grand total of $398,232--a mind-boggling $298,232 of it in interest.
--That, by cutting the same mortgage down to 15 from 30 years (and raising the monthly payments from $1,106.20 to $1,265.25), the total cost to the home buyer is $227,745 for a net savings in interest of $170,487.