Changing the 30-year mortgage
TEXT OF COMMENTARY
Tess Vigeland: The two bulwarks of the U.S. housing market — Fannie Mae and Freddie Mac — are under a serious microscope. There’s increasing talk of getting rid of them, or at least scaling them back significantly.
For potential homeowners that means without Fannie and Freddie, or something similar, banks won’t have a lot of incentive to keep offering 30-year mortgages.
Commentator Bethany McLean says that would be bad news for the middle class.
Bethany McLean: The 30-year mortgage has helped generations of Americans afford homes. The long repayment period allows for affordable payments and the fixed rate means that households aren’t subject to the shock of increasing interest rates. And that’s partly why more than 60 percent of Americans own their homes. But more than that — we’ve been taught that owning a home is a right in our current system and the 30-year mortgage is part of that.
But for lenders and investors, a 30-year mortgage is not such a great thing. In fact, it’s a financial Frankenstein. It’s an unnatural product that is filled with the potential for losses; a lender can be trapped by the interest rate or by the risk that we don’t pay our mortgages. That’s a big part of why the government created Fannie Mae and Freddie Mac, to buy up those mortgages, to make that 30-year mortgage available.
So where are we now? In the wake of the crisis, lenders and investors are understandably more terrified of credit risk than ever before. If the government won’t take the credit risk on long-term mortgages for average Americans, it’s not clear anyone will. One much-discussed solution is to create new companies that would do pretty much what the old Fannie and Freddie did: Provide a government guarantee of the credit on such mortgages.
A better solution might be for financial institutions to offer only the mortgage products that they wanted to keep on their own books. This would indeed get the government out of the mortgage business. But the important point is that there’s a trade-off involved. Any 30-year product would almost certainly be offered on a more limited basis and at a higher price than it is today. And it would make buying a home more expensive.
But that’s a conversation worth having. Is homeownership a government priority? Or should Americans who want to buy homes be forced to save more? Because the promise of a perfect world where average Americans can get low-cost mortgages and the government is nowhere to be seen is a mirage.
Vigeland: Bethany McLean writes for Vanity Fair.
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