Has the Fed found a better long-term mortgage product?


WASHINGTON — Economists at the Federal Reserve are suggesting an intriguing new alternative to the traditional 30-year fixed mortgage that could be better for consumers, more profitable for banks, and safer for both.

In a paper last month, they proposed a new mortgage product that would allow home buyers to build equity faster than the standard 30-year fixed-rate mortgage with little or no down payment. This mortgage is built around the cost of funds, or COFI, index published by the Federal Home Loan Bank of San Francisco. It reduces the incentive for borrowers to refinance and theoretically makes it profitable for banks to hold these fixed-rate mortgages in portfolio.

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