How the 30-year mortgage came to be

A mortgage application

TEXT OF STORY

Kai Ryssdal: An update now on a story we brought you a couple of weeks ago. About how Fannie Mae and Freddie Mac are trying to get healthy again by forcing banks to buy back billions of dollars in bad loans. Fannie and Freddie take over those loans to get more cash flowing into the national mortgage market. But the head of the Federal Housing Finance Agency told a House subcommittee today the banks seem to have seen the light -- they want nothing to do with those loans, so they are not buying them back. The government's trying pretty much anything it can to fix the housing market and figure out what it's role in that market ought to be. American home-ownership starts with one basic financial premise: The 30-year fixed rate mortgage.

Marketplace's Alisa Roth explains how that happened.


Alisa Roth: Most mortgages in the U.S. used to be short-term. But when the housing market fell apart in the Great Depression, the government stepped in and 30 years became standard.

Susan Wachter: Thirty years would allow the borrower to get through their earning years into retirement and at that point have a fully paid off mortgage.

Susan Wachter is a real estate professor at Wharton. She says you were supposed to work for 30 years.

Wachter: Then in the years when earning was no longer possible, the home owner would be free and clear.

That idea is a little outdated. Nowadays, most people either move or refinance or both before the mortgage is paid off. In most developed countries, 15-year mortgages are standard.

Ingrid Gould Ellen co-directs the Furman Center for Real Estate at NYU. She says 30-year mortgages are safe and predictable, but you pay a lot more interest on them because they last so long. And banks can't afford to have their money tied up for that long.

Ingrid Gould Ellen: So we need investors to come in and essentially buy up those mortgages so then banks can then lend more of them.

But because 30 years is such a long time for a loan, investors won't buy the mortgages unless somebody guarantees them, which is what the government has been doing.

That's not necessarily bad. But, as we all know by now, guaranteeing those mortgages is what got Fannie Mae and Freddie Mac into so much trouble. Which is why the government is looking to change its role in the housing market.

In New York, I'm Alisa Roth for Marketplace.

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