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Why we can't let go of the fixed-rate mortgage

Pedestrians walk by a Wells Fargo home mortgage office on October 11, 2013 in San Francisco, California.

Step back, take a look at the economy, and the 30-year fixed-rate mortgage stands out. Americans live in a fast, fast world. Jobs are temporary. Companies fetishize short-term profits. Every minute people are supposed to be optimizing opportunity, seizing the financial future.

“In some ways the 30-year mortgage is an anachronism for the go-go capitalism we live under today,” says Louis Hyman, a history professor at the ILR School at Cornell University. 

Most of our financial lives are in flux, demanding constant attention, except our mortgages. Nearly 90 percent of the home loans issued during the first half of this year were 30-year fixed-rate loans.

Where you pay the same amount. Every single month. “It speaks to the way in which most American's still want to have stability in their lives,” says Hyman, “so there's this real disconnect between the larger movements of capitalism and how we would actually prefer to live our lives.”

The 30-year fixed-rate mortgage is remarkably pro-consumer and anti-go-go-capitalism. It stretches the payment out over a long period of time, protecting borrowers if interest rates go up. And it lets them refinance if interest rates go down.

It can be hard to understand, when so many other facets of our lives have been turned over to the market, why government policy favors (actually creates) this dependence on the 30-year fixed-rate mortgage.

Here's President Barack Obama is August: “We should preserve access to safe and simple mortgage products like the 30-year fixed-rate mortgage. That's something families should be able to rely on when they are making the most important purchase of their lives.”

The audience clapped. But why? Is this love a love for calm? For predictability in otherwise unpredictable lives? Or, something more?

The answer is both. And more.

“The stability, and the ability to build up savings without really thinking about it, which is really important, are the two biggest benefits to the individual,” says Ellen Seidman, a fellow at the Urban Institute. 

There are also social benefits. Seidman says there is evidence that homeownership generates “a greater interest in maintenance of the home, in stability, and greater civic interest in the community.”

So, the cheap 30-year fixed-rate mortgage, has a lot of feel-good going for it. It can do good things for people and for neighborhoods.

But there’s another reason policy makers love the long-term fixed-rate mortgage. The economy counts on it. Long-term, low-cost mortgages and other government-sponsored affordable housing programs help more people buy more homes. Which means more people remodeling. Refurnishing. Keeping our consumer economy going strong. 

No surprise then that businesses like home builders, realtors and mortgage lenders find themselves lining up with housing advocates in favor of keeping the 30-year home loan going strong. “They are a very powerful lobbying force,” says George Mason University professor Anthony Sanders. “They want more housing, they want to keep this game perpetuated.”

“If I want to get booed ceremoniously," Sanders says, "I should show up at the National Association of Realtors meeting and tell them we're going to get rid of affordable housing policy.”

But, there are costs to keep things going the way they are. Sanders says homeowners pay more for fixed-rate mortgages than adjustable-rate mortgages.

There are costs to the government, from housing friendly tax policies. Costs as the Federal Reserve borrows money to keep interest rates low. And costs to taxpayers, when government backed mortgages go bad. “We're used to very high levels of subsidization of the housing market,” says Sanders, “we subsidized to the point that it blew up. But we'll continue doing it, because it's what everyone knows right now.”

Freddie Mac and Fannie Mae currently guarantee trillions of dollars worth of mortgage-backed securities.

Whether it is familiarity, or risk aversion, or the fear of another drop in the housing market, the lure of stability -- for homeowners, their communities and the economy -- could be enough to keep the 30-year fixed-rate mortgage going well into the future.  

 

About the author

Adriene Hill is a senior multimedia reporter for the Marketplace sustainability desk, with a focus on consumer issues and the individual relationship to sustainability and the environment.
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I kept waiting for the article to explain why we _should_ let go of the 30-year mortgage, but I don't see any really compelling reasons. Just because some gamblers on Wall Street keep pushing us into a 'go-go' economy, doesn't mean we should go along. The fact that the majority are once again opting for a traditional mortgage is probably a good thing.

Adjustable rate mortgages drove many of the abuses that lead to the mortgage meltdown and economic crisis. The finance industry created teaser rates, payment option ARMS and pick a payment loans that for most borrowers were essentially short term mortgages with balloon payments, since the payments were only affordable for 2 or 3 years. This combined with the inflating bubble of home prices allowed for frequent refinancings for which loan originators were richly paid with up front fees. The private and public guarantors of intergrity were on the take in some way. Appraisers and ratings agencies were only paid if deals went through, while government preserved a disfunctionally regulated or deregulated marketplace, aided by campaign contributions to Congresspeople and a revolving door for regulators from government into industry. The supply of money seeking high yields drove mortgage securitizers to demand more and more loans, while there were really no consequences for making bad loans. The resulting "go go capitalism" means a go go foreclosure market, essentially a transfer of wealth from middle America to investment bankers, securitization facilitators and speculators, but also a huge loss of societal wealth as vacant foreclosed on houses are stripped, burned down or fall down, costing the wealth of entire neighborhoods and cities, to say nothing of investors victimized by the toxic assets created to collect these unaffordable mortgage payments. When the fed lets mortgage rates go up there will be another foreclosure crisis as ARMs become unaffordable. Adjustable rates are undesiable or predatory for all but those few who have dependably rising incomes. If as suggested, old fashioned employment with steady incomes sufficient to allow savings is a thing of the past, the mortgage will have to adjust even more, perhaps to some percentage of income, if widespread affordable homeownership is to continue. This may have to happen even if it makes the finance industry unhappy. In the meantime we will see if the Consumer Financial Protection Board has the legal power and political will to curtail exploitative mortgage products such as adjustable rates.

Mortgage debt reduces economic mobility, and increases unemployment. Germany has the highest percentage of renters in Europe, and the LOWEST unemployment.

In America, the 1950s-era economy: lifetime jobs, and the "gray flannel suit"are obsolete. The entire consumer economy, investing, & real estate are based on the outdated assumption of decades of stable income from a single employer.
However, the MAJORITY of workers are now temp, contractor (1+yr temp/permatemp), p/t, or self-employed.
In this lean & mean economy, high unemployment is the "new normal".

As I attempted to explain in my comment to yesterday's commentary on mortgage lending, the pros and cons of government standing behind the 30-year fixed rate mortgage loan are very involved. The impact on property market cycles and even on wealth distribution are not well understood or thoroughly analyzed by economists. The ownership of a residential property is for most households the only means of participating in the rent-seeking investment behavior that yields enormous personal wealth for the top 1 percent. Owning a residential property provides both shelter and the strong potential for unearned gains in land value. The ability to obtain a long-term mortgage loan at a fixed rate of interest (and to refinance inexpensively in a period of falling interest rates) creates net worth for millions of households who otherwise do not have income sufficient to save for retirement. During periods of inflation, the mortgagors are repaying mortgage debt with dollars that have a lower (sometimes much lower) purchasing power than the dollars borrowed. The deduction of mortgage interest from gross income in calculating federal income tax obligation further reduces the effective cost of this type of credit. However, in terms of wealth distribution the top few percent of households enjoy a disproportionate portion of the societal subsidies, raising difficult questions regarding the extent to which mortgage interest should be a permitted deduction on a tax return. Some economists have actually argued that all owner-occupant property owners enjoy an imputed income stream in the form of the rent that does not have to be paid to a landlord, and that this income should be quantified and reported.

Those who live in rented apartments or homes do not enjoy the privilege of deducting any of their "housing" expenses from gross income. However, if they were allowed to do so market forces would in most cases capitalize the increased disposable income into higher rents charged for their living space.

Absent the full public collection of land rent (i.e., the potential annual rental value of a location), rent is always capitalized into a selling price for land. And, when the effective rate of taxation on land rent is very low -- as it is almost everywhere across the United States because, in part, land is universally under-assessed -- large tracts of land are held off the market for years or decades for speculative gain or because the annual taxes are so low owners feel no pressure to bring the land to its highest, best use. Thus, the market data shows up strangely on a supply-demand graph as a leftward-leaning supply curve for land. As prices are rising for land, more and more land is acquired not for development but for hoarding in anticipation of even higher prices.

The consequences are readily apparent in urban neighborhoods experiencing revitalization often referred to by affordable housing advocates as "gentrification." As soon as the early phase of public and foundation subsidies starts to have a positive effect, contiguous parcels of land are acquired by speculators who then hold nonprofit developers hostage. The new housing unit that could be built for, say, $150,000 when land was gifted by the city may at this point require an additional $50,000 or $100,000 subsidy in order to buy out the speculator. Fewer and fewer affordable housing units can be built, and the process of displacement accelerates. This, sadly, is what amounts to our nation's housing policy!

Edward J. Dodson
(retired Housing & Community Development market analyst and business manager with Fannie Mae)

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