Who Wants a 30-Year Mortage?

The following is an excerpt from a New York Times Article.  Read the full article here.

Who Wants a 30-Year Mortgage?

By BETHANY McLEAN

As we all move forward with our New Year’s resolutions, it’s a good time to remember the promises our politicians have been making about the American mortgage market. The Obama administration, at a conference last August on the future of housing finance, pledged to have, come January, a plan for Fannie Mae and Freddie Mac, the mortgage giants that are now wards of the government. Congressional Republicans, in their recent position paper, made an even bolder resolution: to build a mortgage market that “does not rely on government guarantees” and “does not make private investors and creditors wealthy while saddling taxpayers with losses.”

This latter promise is pleasing populist rhetoric. The problem is, it may be neither politically nor practically feasible. Even if we forget about the gigantic near-term problem — namely, that the federal government is in the housing market mainly because most banks simply won’t issue mortgages that can’t be guaranteed by Fannie, Freddie or the Federal Housing Administration — there’s the fact that federal involvement in housing has been a constant since the 1930s. A market without government support would almost certainly involve the demise (for most of middle-class America) of that populist favorite, the low-cost 30-year fixed-rate mortgage.

For a homeowner, a mortgage with a 30-year fixed rate (especially one that he can pay off early without a penalty) is a wonderful thing. For lenders and investors, however, it is a financial Frankenstein’s monster, an unnatural product filled with the potential for losses. Absorbing some of the risk of those losses is a large part of what the government does in the housing market.

Fannie Mae and Freddie Mac, for instance, were created by the federal government to buy up mortgages from lenders, thereby enabling them to turn around and issue more mortgages. Among other things, this allowed the lenders to get off their books the two kinds of risk that a mortgage carries. We’re all now sadly familiar with one kind, credit risk — that is, the danger that a borrower won’t pay back the mortgage. The second is interest-rate risk, the danger that interest rates will rise sharply after the mortgage has been made, thereby burdening the bank with money-losing loans. (Interest-rate risk was the root cause of the savings and loan crisis.) The longer a mortgage lasts, the more difficult it is to manage both of these risks. And 30 years is an awfully long time.

Wouldn’t a better solution be for banks and other financial institutions to offer mortgage products that they actually want to keep on their own books? Maybe these would take the form of 15-year mortgages with a rate that would be adjusted after five years so that the banks wouldn’t have to worry about long-term interest-rate risk. This might not even mean the disappearance of 30-year fixed-rate mortgages — the private market has historically provided them to consumers whose mortgages are too big to qualify for a Fannie and Freddie guarantee. But these are usually issued only to the wealthiest, most credit-worthy consumers.

So be wary of politicians bearing promises of a perfect world where average Americans can get the mortgages to which we now all feel entitled and the government is nowhere to be seen. It’s a mirage.

Advertisements