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Depending on what approach Congress and the Obama administration take in reforming the GSEs, it could be the end of the 30-year fixed rate mortgage — but is that a good thing?
March 28 -
Given the high expectations, and long wait, surrounding the Obama administration's proposal to create a new housing finance system, it was inevitable that it would disappoint.
February 11
WASHINGTON — The bedrock of the U.S. mortgage market — the 30-year fixed-rate mortgage — may no longer have the same level of bipartisan support in Congress that it once did.
Congressional Democrats remain strongly committed to the 30-year fixed-rate loan, which protects homeowners against a rise in interest rates. But some Republicans, who want to scale back the government's role in the housing market, have growing doubts about the taxpayer-subsidized loan product.
During a Senate Banking Committee hearing Thursday, the panel's top Republican, Sen. Richard Shelby, asked a series of questions that critics of the 30-year fixed-rate mortgage have long been focused on.
"What unintended consequences have been created by subsidizing the 30-year fixed-rate mortgage? And what has the subsidy of this product already cost the American taxpayer?" Shelby asked. "We need to take a hard look at this product and determine if the preferential pricing resulting from these subsidies truly creates a public good."
Shelby was careful not to commit to whether he favored abandoning the 30-year fixed-rate mortgage as part of a reformed mortgage-finance system, but his questions suggested he was eyeing such a move.
Rep. Scott Garrett and other House Republicans have also suggested the 30-year fixed-rate mortgage should not be preserved at all costs.
But other Republicans in Congress have different views. Rep. John Campbell, R-Calif., is the co-sponsor of a bipartisan bill that seeks to preserve access to 30-year fixed-rate loans.
Still, there was a notable contrast in tone at Thursday's hearing between Shelby and three of the committee's Democratic members: Chairman Tim Johnson, Sen. Jack Reed, and Sen. Robert Menendez.
Johnson, D-S.D., reiterated his support for maintaining wide access to a 30-year, fixed-rate, prepayable mortgage. He did acknowledge that adjustable rate loans, and loans with shorter terms, may be better choices for some borrowers.
"However, any new housing finance system must ensure that the 30-year fixed-rate mortgage continue to be widely available to qualified borrowers across the country," Johnson said. "The prepayable, long-term fixed-rate mortgage allows households to budget their finances better and establishes a stable housing cost which is not always available by renting."
Meanwhile, Shelby and a Republican colleague, Sen. Bob Corker, asked a panel of witnesses a series of questions that emphasized the downsides of a 30-year fixed-rate mortgage.
Although the hearing featured three witnesses who want to preserve a government-backed 30-year fixed-rate mortgage, Shelby directed a series of questions to Anthony Sanders, a finance professor at George Mason University who testified that a shift away from fixed-rate mortgages would reduce taxpayer liability in the mortgage sector.
At one point Shelby asked Sanders to explain why mortgages that allow homeowners to refinance at no penalty when interest rates fall, as 30-year fixed mortgages generally do, are more expensive to borrowers than those that do not.
Sanders responded that he doesn't understand why the government encourages homeowners to take out 30-year fixed-rate mortgages when those loans have the highest interest rates. "To help them?" he asked sarcastically.
Shelby asked another witness, the economist Paul Willen of the Federal Reserve Bank of Boston, to explain why fixed-rate mortgages can be more harmful to borrowers than adjustable-rate mortgages.
"So people who had fixed-rate mortgages from 2005 and 2006 and 2007, most of them are paying 5.5% or more on those mortgages These are the people with negative equity," Willen responded. "The people who had adjustable rate mortgages, their rates are under 4.5, and a third of them are paying less than 3.5% on their mortgages. They do that without any assistance whatever from anyone. They don't have to beg their lender, they don't have to get a modification," Willen said.
Corker questioned why so many residential mortgages allow homeowners to refinance without penalty when interest rates drop. He contrasted the residential mortgage market with the commercial real estate sector, where it is common to assess a penalty when a borrower refinances.
"I own commercial buildings, or have in the past," Corker said. "When you pay the loan off, you've got to pay a penalty. I'm sorry. … If rates are lower than when you financed, you've got to pay a penalty."
But even if Congress wanted to force borrowers to take on the risk of increasing interest rates, it is not clear that it could do so, according to Susan Woodward, the former chief economist at the U.S. Department of Housing and Urban Development.
"It's my understanding that the absence of pre-payment penalties is mostly a matter of state law," Woodward said.
Woodward argued in favor maintaining the 30-year fixed-rate mortgage, saying that the current arrangement amounts to a desirable piece of risk-sharing across society.
"The critics of the 30-year fixed rate loan argue that this is unfair for households to get the benefits of reduce risk of fixed-rate loans while the taxpayers bear the risk," she said in her written testimony. "This criticism forgets that homeowners are taxpayers too."
