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.