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As Congress begins debating the future of Fannie Mae and Freddie Mac, proponents of keeping the taxpayer on the hook for the mortgage market argue that without such support the 30-year fixed-rate mortgage would disappear. The advantages of the 30-year mortgage have, however, been grossly exaggerated. Subsidizing it should not serve as an excuse for continuing to put the taxpayer at significant risk.
First, we should recognize that the 30-year fixed isn't going anywhere. The "jumbo" mortgage market offers a 30-year fixed without a government guarantee. In fact, fixed-rate mortgages have historically been around half of the jumbo market.
Of course it is more expensive — but more expensive to the borrower does not mean more expensive to society. After all, someone has to pay for a subsidy. In all likelihood, it is that same homeowner who will pay for the subsidy in their role as taxpayer.
The difference between 30-year jumbo and conforming loans has been about 30 to 40 basis points. There are lots of reasons for this spread; the existence of a federal guarantee is only one of them.
In the absence of a federal guarantee, rates would likely go up somewhere between 10 and 30 basis points. That smallish jump would not have any impact on homeownership rates and is hardly an amount worth putting our entire financial system at risk.
The Obama administration is likely to propose that this guarantee be priced. If the pricing is actuarially fair and the fee is passed along to the consumer, then the spread between guaranteed and non-guaranteed loans will narrow even more — again raising the question: Why the need for a guarantee?
Some would argue that the 30-year fixed is worth subsidizing because it provides certainty to the borrower. But if borrowers do value that certainty, they should be willing to pay its true cost. More importantly, the certainty provided has proved to be false.
While the current system has given borrowers some stability in their monthly mortgage payment, it has done so by exposing households, as taxpayers, to massive, hard-to-predict contingent liabilities. There's been no bigger "hidden fees" or "payment shock" in the mortgage market than the cost of the bailout of Fannie Mae and Freddie Mac.
The typical borrower is also unlikely to require certainty on a 30-year time horizon. The typical mortgage today has a life of about five years, while the typical homeowner has been in their house less than 10.
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Posted By: a rightist Jim(220) on 3/16/2011 | 10:10 PM ET
Is there room for say a 15 year mortgage amortized over a 30 year life with a baloon due at the end of the 15th year? Lots of first time buyers as well as others need the certainty of monthly payments in order to get the loan in the first place.
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