In housing finance overhaul, all eyes focused on 30-year fixed mortgage

Washington policymakers are fixating on how to preserve the 30-year fixed mortgage amid broader plans to overhaul
the housing finance system, but differences remain over how long the government guarantee should go along for the ride. 

{mosads}Some housing industry experts argue that cutting the government’s role too sharply will make the popular 30-year product too expensive for the majority of borrowers and shake the housing market’s stability.

But proponents of the government holding a smaller market share — the federal government guaranteed nearly 90 percent of new mortgage loans last year — say that any overhaul of the mortgage finance system that maintains a robust backstop not only leaves taxpayers on the hook again but will allow the market to wade right back into the quagmire that led to the housing crash and near economic collapse.

Meanwhile, President Obama and congressional Democrats and Republicans are touting proposals that they say preserve the popular loan, which is considered the bedrock of the mortgage industry, as part of a broader plan to eventually eliminate mortgage giants Fannie Mae and Freddie Mac.

Obama expressed his desire this week, in a series of speeches, to protect the 30-year fixed-rate mortgage and spur private investment while arguing that some level of government involvement is needed to ensure that the loan is available to a majority of middle-class borrowers.

“We need to preserve access to safe and simple mortgages like the 30-year, fixed-rate mortgage,” the president said in his weekly Saturday address.

David Stevens, president and CEO of the Mortgage Bankers Association, expects that the government’s role will fall to between 40 and 60 percent, based on economic conditions, from the nearly 90 percent now, as part of the overhaul.

Mark Zandi, chief economist with Moody’s Analytics, says the guarantee should apply to between about one-third to 50 percent of future mortgage originations, which would be consistent with times in the past when the housing finance system worked well.

“This would also ensure that the popular 30-year fixed mortgage loan remains a mainstay of the mortgage market,” he said.

“Without a government backstop, the loan would become a marginal loan product as it is nearly everywhere else in the world.”

Anthony Sanders, a real estate professor at George Mason University said, “the smaller the government share beyond FHA, the better.”

“They will likely start with a 50 percent government share and try paring it back to 20-30 percent.”

He argues that the mortgage market will never get to zero percent government share since government entities like the Federal Housing Administration (FHA) are “essentially cast in stone like Mount Rushmore,” Sanders said.

Stevens has cautioned Congress and the White House to tread carefully to avoid any shocks to the finance system that would put the 30-year loan out of reach for most borrowers and, in turn, create a drop in demand and prices.

“You don’t want to shake up the system because there will be fewer buyers in the market with lower demand for housing that will cause home prices to drop and could crash the market,” he said.

He argues that the 30-year loan has been done effectively for decades, that it didn’t cause the housing recession and that it provides liquidity and confidence in the market.

Yet he acknowledges that there must be changes to the current system.

“Clearly we don’t need to continue with 80 percent,” Stevens said.

Still, others argue that the 30-year loan is no longer needed.

Dean Baker, economist and co-founder of the Center for Economic and Policy Research, called the focus on the 30-year mortgage in the housing reform debate a “misplaced obsession.”

He is convinced that banks will answer the call of consumers who want a 30-year mortgage, although it will probably cost borrowers more than it does now.

“They will see the demand in the market for those who want a 30-year loan and banks will be happy to make a profit,” he said.

As mortgage rates rise, the 30-year loan may not suit all borrowers, so they may want to take a look at other products, based on their needs, that might save them money, Baker said.

But Baker is more concerned that despite all the work being done on new rules to govern the mortgage finance system that were required under the Dodd-Frank financial reform law that, in the end, regulators will bend to the industry and the market will circle back around to the abuses of the bubble years.

He argues that a sensible plan would be to keep Fannie and Freddie in place and gradually phase out the guarantee by dropping the cap on loans that the mortgage giants can purchase.

As the government guarantee is wound down, banks would pick up their pace of lending.

Still, the number of 30-year loans provides plenty of evidence that American homebuyers are hooked, especially amid rock-bottom mortgage rates.

In June, 82 percent of all purchasers snapped up a 30-year fixed loan — those loans accounted for 71 percent of those under $300,000.

Overall, there is broad agreement that the role of the government must be greatly reduced to rebalance the market, but there seems to be an understanding that the government guarantee isn’t going anywhere.

“No matter how hard they try to get rid of the government mortgage guarantee, they can’t do it,” Sanders said.

In the past six weeks, there has been a bipartisan effort in the Senate that would eliminate Fannie and Freddie and leave a government guarantee in place.

A House committee also recently approved a bill that would wind down Fannie and Freddie within five years and mostly create a private finance system, while maintaining a scaled-back version of the FHA, that would stand on its own outside of the Housing and Urban Development Department, to help first-time and moderate-income borrowers get mortgages.

That would mean a roughly 20-percent government guarantee, well below what most advocates want.