Year Balloon Note Freddie Mac: Fill & Download for Free

In the 1930’s and 40’s the USA developed ways to have long term fully amortized loans. Before that we often had five year or ten year balloon notes of some sort- no real standardization. In the great depression farms mortgage came due. no one wanted to buy and the banks did not have the money to extend or renew the loans and so people often were forced off the property. Same happened with some houses.Of course sellers often loaned the money to their buyers- allowing them to pay out the purchase price over time.FNMA, Freddie Mac, FHA and VA loans were created to standardize and fully amortize the mortgages.

Note, this answer contains no proprietary information and is based only on information that is publicly available.It is likely that the secondary market for mortgages would be much, much smaller if MBS didn't exist. That's not just an issue for Fannie Mae and Freddie Mac, but for all banks and non-banks that buy mortgages and package them for resale.If MBS didn't exist, mortgages would be more expensive and the terms for mortgages would likely be more onerous for borrowers. It is the liquidity of the secondary market and the bundling of mortgages into MBS that allow investors to not lock up their money for 30 years in a 30 year mortgage. They know they can sell the security backed by the mortgage much more easily than they could a direct mortgage.And MBS give banks greater access to capital. Even a huge bank has some limit on the capital it had available to lend out. The secondary market allows them to continuously lend and sell mortgages.Before MBS, a typical home loan was often a fixed term interest-only balloon loan that needed to be paid off or rolled over at maturity. These were expensive and limited home ownership. The creation of the 30-year mortgage and MBS significantly fueled the expansion of home ownership in the US. And helped create an industry that is a major employer across the country. And it gave investors a relatively safe place for large sums of money that paid much better than t-bills or other gov't bonds.

First, thanks for asking this question. I’ve been working in fixed income for almost twenty years and I really had to think about this one. I think a lot of easy stories are just plain false and of what I’ve seen written so far, Aaron Brown’s is the only answer that I find plausible. But there are caveats to his answer that are worth discussing as well.Note that there are corporate bonds with sinking funds, but they are never level-pay (meaning the same equal payment each month) and rarely monthly pay. I think level pay evolved because it is easy for borrowers to pay the same amount each month. I agree that paying all the principal at the end would be kind of crazy for a consumer who intends to live in the house for a long while…except: these types of “balloon” loans (loans where you owe a large amount of principal at maturity) DID and STILL DO exist.For example, prior to the great depression, the 30-year fixed rate fully amortizing mortgage DID NOT EXIST. Consumers were expected to find another loan after the first 3, 4 or 5 years. When the depression hit, and banks stopped rolling over their loans…catastrophe! In many countries (non-US), the majority of loans ARE NOT fully amortizing fixed rate fixed payment mortgages. Examples: in Canada and the UK, mortgages are adjustable rate and still can balloon in 5 years (etc). Even in the US, there are still “balloon” mortgages, that amortize over 30 years, but are due earlier. For example you can get a 30-year amortization schedule with a 10-year balloon. This means that while the balance will decrease, in 10-years you would still need to find a new loan if you were still in that house. But most people don’t actually live in their house for 10 years or more! So this kind of loan is actually perfectly safe for many people. If for some reason, 30-year funding were to dry up but 10-year funding was still widely available, the rate differential between the two might be worth it…as things stand, 30-year funds are quite easily available.Similarly, let’s think about interest-only loans. Suppose you have a 100k house and take out an 80k loan on it, putting 20k down, and it is interest only for 10 years, and then you would have to pay it down in the remaining 20 years (so the payment would jump quite a bit at that point). Is that such a bad idea? Well, in 10 years, your income could potentially grow between 30 and 50 percent. As long as the jump from amortization didn’t exceed that, your ability to cover that could be just fine. And as already stated, most people move in 10 years or less. Finally, the house would likely have appreciated from 100k to 130k or 150k, so your LTV ratio in 10 years would have improved from 80. So it would be an OK product. Except that just before the financial crisis, the people who lied the most about their income in order to qualify for over-inflated properties really got into these types of loans, giving them a terrible reputation.I think the fundamental reasons are primarily historical. We had a really bad experience with balloon loans. Fannie Mae (and then Freddie Mac) came along, and over time they really encouraged 30-year fixed rate fully am loans. We have a system where those loans enter securities and investors who have gotten used to buying 30-year bonds (and in addition, we have technology to chop up 30-year bonds into shorter and longer bonds, and ways to distribute the different kinds of interest rate risk to appropriate financial institutions). Many countries have not invented similar financial technology, so they choose to leave that long-term payment shock or rollover risk in the hands of their consumers rather than distributing it to sophisticated institutions that are better equipped to handle it.Another aspect of this historical success is the stability of inflation in the US vs other countries. In countries where inflation has a tendency to spike a lot periodically, lenders would hate to lend at a fixed rate…because if the coupon is 6% and inflation suddenly spikes to 12%, and you’ve lent at that 6%, short-term rates will soon also spike to 12% or 15% and as a lending institution you’ll soon run into BAD trouble (this actually happened here in the 1980s, aka the S&L crisis…). Having stable inflation allows us to keep a 30-year fixed rate mortgage market. Thank the federal reserve for this…