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Days after Donald Trump's party lost several key election contests that centred on cost-of-living concerns, the president floated the prospect of a 50-year mortgage to help voters tackle one of their top concerns: housing affordability.

"All it means is you pay less per month," Trump said in an interview that aired on Monday (Nov 10).

Yet the president's idea is struggling to gain traction in the housing industry as experts largely dismiss it as a short-sighted model that provides little cost relief and ends up hurting homeowners over the long term.

Paying for a home over five decades would increase the amount of interest homeowners would pay while slowing the amount of equity they build in their homes. Experts also caution that the plan could stoke demand that further raises home prices in a market constrained by a lack of supply.

"A 50-year mortgage dramatically depreciates the biggest value of homeownership — wealth building," said David Dworkin, president and CEO of the National Housing Conference. "Over time, the loss of equity quickly overcomes any savings on payment."

Consider a US$420,000 (RM1.74 million) mortgage with 20% down and a 6.3% interest rate. The monthly payment would be US$236 lower for a 50-year loan than a 30-year loan, said Lawrence Yun, chief economist at the National Association of Realtors.

But "the total cost of the home would rise to roughly US$1.1 million, with nearly US$360,000 more in interest paid over the life of the loan," Yun said. "It would also take almost 40 years to pay off half the balance, meaning most borrowers would not begin building meaningful equity until the final decade."

In a world where people are buying their first home at an older age — the median age of a first-time buyer has risen to a record of 40 years old, NAR reported last week — that's a problem.

The idea would also take time to implement. For starters, the Consumer Financial Protection Bureau would have to amend the Qualified Mortgage rule to allow loans with terms longer than 30 years to be eligible for that designation — a process that would take at least a year to carry out, given the notice-and-comment requirements involved with rulemaking.

Fannie Mae and Freddie Mac, the two government-controlled companies behind more than half the residential mortgage market, could theoretically create a market for 50-year loans in the interim by buying them from lenders. But lender appetite would depend to some extent on the legal liability protection afforded by the Qualified Mortgage rule.

"Lender willingness to offer a 50-year mortgage product is likely to be muted given that Fannie Mae and Freddie Mac are currently prevented from buying non-QM mortgages," said Mortgage Bankers Association spokesperson Falen Pitts.

Fannie and Freddie buy mortgages from lenders and package them into securities to sell to investors, freeing up the lenders to make more loans.

And while the smaller monthly payments of a 50-year product might be welcome, the model might lead to other homebuyer frustrations down the road.

'Trading up'

"The slow equity build would make trading up or down very difficult," said Yun, referring to the ability of homeowners to cash in their equity by selling their homes to buy either more expensive or cheaper housing.

That leaves it unclear whether homeowners will ever face the choice of signing up for a 50-year mortgage. On Saturday, Federal Housing Finance Agency director Bill Pulte called the proposal "a complete game changer". A day later he seemed to backtrack, casting the idea as "simply a potential weapon in a WIDE arsenal of solutions that we are developing".

The Trump administration also signalled that any move toward implementing a 50-year mortgage is a ways off.

"There's a lot of legal analysis but if it requires legislation, then it wouldn't be imminent," White House economic director Kevin Hassett said.

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Talks between the billionaire Cheng family and potential investors in New World Development Co. are stalling, underscoring the challenges facing the indebted company as it seeks to secure much-needed funding.

The impasse is due to disagreement over how much control the clan is prepared to hand over in return for a capital injection and risks gutting the chance of a deal, said people familiar with the matter.

The Chengs are looking for a partner to match a possible capital injection of about HK$10 billion ($1.3 billion) in return for an equity stake, Bloomberg News reported in September. In recent months, Blackstone Inc. has made an investment proposal, which includes control in the deal, the people said, asking not to be identified discussing private talks. CapitaLand Group Pte has also been in discussions for a potential investment, they said.

The proposals have so far failed to elicit a clear response, while the family has yet to fully comply with requests to conduct due diligence on New World's assets, the people said.

Pressure to finalize a deal is mounting. Although New World secured a record $11 billion in loan refinancing earlier this year, the company needs funding to help reduce its debt load and maintain operations. The developer has about $7.9 billion of outstanding bond repayments, according to Bloomberg-compiled data. Total liabilities were around HK$213.5 billion at the end of June.

"Absent a capital injection from the Cheng family, any new financing plan could still fail to satisfy market expectations, even if it manages to attract support from bondholders," said Brock Silvers, managing director at private equity firm Kaiyuan Capital.

Concern over New World's outlook has dragged its shares down 86% since a 2019 high, wiping out $15.6 billion in value. Most of its perpetual bonds are trading at around 45 cents on the dollar.

Part of the problem is patriarch Henry Cheng needs to balance the interests of a wide number of family members, people familiar with the matter said, adding that members hold a range of opinions on a potential rescue plan.

More than half of the Cheng family's key decision makers don't have a board role or direct equity holding in New World. Some of those see growing their own businesses as a higher priority, people familiar with the matter said.

Other companies in the family empire include listed arms Chow Tai Fook Jewellery Group Ltd., co-led by Henry Cheng's daughter Sonia; CTF Services Ltd., co-headed by son Brian; as well as the private investment vehicle Chow Tai Fook Enterprises Ltd., co-led by son Christopher.

Some family members are concerned that even after pouring billions of dollars into New World's rescue, they will still end up losing control of prized assets if a deal goes ahead, separate people familiar with the matter said. The family is still weighing other options including funding proposals by different investors as well as asset sales, the people said.

The Chengs are worth about $31.7 billion, making them one of the richest families in Asia, according to the Bloomberg Billionaires Index. New World, one of Hong Kong's "Big Four" developers, was founded in 1970 by Cheng Yu-Tung.

Representatives for Chow Tai Fook Enterprises and New World didn't respond to requests for comment.

A spokesperson for CapitaLand's listed asset manager arm CapitaLand Investment said it doesn't comment on market rumors or speculation. A Blackstone spokesperson declined to comment.

New World is pushing ahead with ways to tackle its debt burden and address its liquidity issues. The company last week unveiled a plan to swap some of its existing dollar notes to as much as $1.9 billion in new debt — a sign the earlier record refinancing didn't do enough to stop the bleeding.

Banks are increasingly reluctant to offer further support, reinforcing the need for some kind of outside investment. While New World secured a HK$3.95 billion loan in September, the amount was 75% less than the upper end the company had earlier been seeking.

New World's cash remains tight and the company is estimated to face a funding gap of up to HK$15 billion in the current financial year ending June, said Zerlina Zeng, head of Asian strategy at Creditsights Singapore.

Many of New World's assets have already been pledged to banks for loans, including its prized Victoria Dockside complex, its headquarters New World Tower, as well as office buildings at its 11 Skies Mall next to the airport. The value of investment properties held by the firm was about HK$205 billion at the end of June.

"Banks will most likely refrain from increasing exposure to New World, while adding collateral and interest rate requirements to the refinanced loans," said Jeff Zhang, an analyst at Morningstar Inc.

Hong Kong banks have been stepping up scrutiny on lending to the real estate sector as they grapple with bad loans that ballooned to a two-decade high of $25 billion. HSBC Holdings Plc, the city's biggest lender, warned last month that the commercial property sector continues to face "downward pressure."

Another obstacle to any deal is New World's rental obligations at 11 Skies. Under an existing agreement, the developer will pay a guaranteed rent of HK$1.8 billion a year, or up to 30% of the project's annual gross revenue — whichever is higher, according to stock exchange filings and a note from UBS Group AG.

The company is in talks with the Airport Authority to waive at least part of the requirement at the struggling mall, Bloomberg News has previously reported. Yet investors are reluctant to push ahead with a concrete proposal until there is clarity on the outcome of the discussions, people familiar with the matter said.

It's unlikely any deal could be reached before year-end due to the complexity of dealing with a government counterparty, the people said.

"Regardless of what final form it takes, New World needs more capital injection to reduce debt and leverage," said Gary Ng, senior economist at Natixis. "It is a tug-of-war over how much capital the family is willing to inject and the risk premium that outside investors are willing to accept."

Source: Bloomberg Europe

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