Sunday, May 30, 2010

Should We End the 30-Year Fixed-Rate Mortgage?

The United States is one of the only countries in the world with 30-year fixed rates for mortgages, and Arnold Kling suggests that this is "an artifact of government intervention, and that without it we would have a simpler, safer mortgage finance system."  For example, Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate.  That type of five-year mortgage is much more typical around the world than the U.S. system of fixed-rates for 30 years.   

The reason the 30-year fixed-rate mortgage has to be a creation of government intervention, and not the market, is that it is a one-sided loan arrangement that bestows huge benefits on the borrower, but with almost no compensating benefits for the lender/bank/thrift, i.e. it's "pro-borrower and anti-lender."  

As Arnold points out, there is an extremely valuable pre-payment option on a 30-year fixed-rate mortgage that favors the borrower, who can re-finance the mortgage whenever it is to his/her advantage over the 30 years, i.e. when rates fall enough to justify the refinancing costs.  Lenders have no such option to renegotiate the rate when it's to their advantage - when interest rates rise.  Or to be more accurate, the pre-payment option favors the borrower when it is under-priced, which is the case in the U.S., likely as a result of government influence.   

Looking again to Canada, refinancing mortgages is allowed, but there are very stiff prepayment penalties equivalent to about three months of mortgage interest (about $1,500 for every $100,000 mortgage amount), which discourages the kind of refinancing that frequently takes place in the United States and contributed to our real estate bubble and financial crisis.  In other words, the pre-payment option under the Canadian system is probably much closer to a market-driven price than in the U.S.

The chart above shows the potential danger to banks of 30-year fixed-rate mortgages, and illustrates how they contributed to the S&L crisis.  Because S&'L's were "borrowing short and lending long," or financing 30-year fixed-rate mortgages with short-term deposits at interest rates approximated by the 1-year T-bill rate, S&Ls were "upside down" by the early 1980s. They were paying more on short-term deposits (e.g. 10-15%) than they were earning on their 30-year fixed-rate loans (e.g. 4-8%). 

Simply put, 30-year fixed-rate mortgages were a major factor in 3,000 bank failures during the S&L crisis, and this helps support Arnold's position that they have to be an artifact of government intervention because banks wouldn't willingly expose themselves to such a huge level of interest rate risk with 30-year fixed-rate mortgages with under-priced pre-payment options.  All it took was a period of rising interest rates in the 1970s and 1980s to force thousands of thrifts into insolvency, largely because their assets were so heavily concentrated in 30-year fixed-rate mortgages. 

Q1: Now that 30-year mortgage rates are below 5% and close to historical low levels, are we in danger of setting up another S&L-type crisis sometime over the next several decades?  It wouldn't take much of an increase in inflation and short-term interest rates before many banks/thrifts could see their interest margins squeezed, and short-term rates could conceivably even rise above 5% sometime in the next 30 years, which could put the banks "upside down" again and lead to failures. 

Q2: Shouldn't financial reform include putting an end to the pro-borrower, anti-lender 30-year fixed-rates mortgages in the U.S.?

40 Comments:

At 5/30/2010 9:06 AM, Blogger juandos said...

Hmmm, I like Kling's ideas on this 30 year thingie but wouldn't be cheaper and much easier all around if we just pulled GSEs out of the housing marketplace altogether?

 
At 5/30/2010 10:09 AM, Anonymous Anonymous said...

What juandos said. And lenders should be allowed to design and market there own mortgage products without interference from the government.

 
At 5/30/2010 10:11 AM, Anonymous Anonymous said...

Now I understand why the government has such a fetish about keeping interest rates way down.

 
At 5/30/2010 10:50 AM, Anonymous Anonymous said...

"refinancing that frequently takes place in the United States and contributed to our real estate bubble and financial crisis. "



Part of the problem was that people couldn't pay back their mortgages because they lied on the mortgage applications and borrowed more than they could afford. People who bought mortgage backed securities couldn't estimate value those securities because no one knew whether or not the underlying mortgages were going to be repaid. Without knowing the value of those securities no one knew the value of their assets and so the didn't know how much the could lend against them. This led to the liquidity crunch.

Everything you say about refinancing helps people pay their mortgages and allowing them to increase when interest in general increases would make mortgages harder to pay back.

Don't most lenders sell their mortages to other institution? Doesn't that protect them from intrest rate variability?

Fixed rate mortgates have higher initial rates than variable rate mortgates. This protects the lenders from interest rate risk.

 
At 5/30/2010 10:55 AM, Anonymous morganovich said...

this sort of maturity imbalance is incredibly easy to hedge using derivatives. this whole issue is a red herring in the modern financial world if banks posses even a modicum of sophistication.

of course, the "volcker rule" sort of thinking that deposit taking banks ought not have derivatives arms or possibly even trading desks would disrupt this and bring the problem back, undoing decades of progress and doubtless increasing both borrowing costs and systemic risk.

by far the bigger difference between the US and Canadian mortgage system lies in the conditions of the loan, not the fixed duration. canadian mortgages have much more stringent down payment requirements, but more importantly, are full recourse loans. you can't just walk away from them they are secured by ALL your assets and future wages.

frankly, i would mind having the choice to take out such a mortgage in the US in exchange for lower interest rates.

 
At 5/30/2010 11:00 AM, Anonymous Norman said...

The 30-year mortgage allows the borrower to plan his long term expenses and is invaluable for stability. Just like the teaser rates destroyed the housing markets because that rate went up putting payments out of the reach of the home owners having a rolling 5 year mortgage would do the same thing.

How would you like to have a 5% mortgage and because of inflation or a dysfunctional budget system (read Greece, etc) some where down the road have to roll your HOME mortgage into a 10% loan, doubling your payments when the economy is in the tank? Would you be sleeping well at night? Feel your children were safe? No.

The rest of the world should adopt our 30-Year mortgage not the other way around. This is kind of like the USA adopting the European health care system while our standard of living is 40% higher than theirs. The rest of the world should follow us not the other way around.

 
At 5/30/2010 11:04 AM, Anonymous grant said...

YES 30 YR MORTGAGES SHOULD BE ENDED for the reasons you have set out here.

 
At 5/30/2010 11:29 AM, Blogger Kamesh Kompella said...

Adding to what Morganovich and another poster wrote here, it seems to me (in all my naiveté) that a bank can easily hedge against interest rate movements by entering into various swap agreements or other derivatives -- that should take care of the upside problem. Also, with Fannie and Freddie buying out the loans (isn't that why they were created in the first place?), the thrift outfit is out of the woods as it gets loan back. If anything, Freddie and Fannie may be the suckers to have gone long on the loans. All of this is, of course, moot if Fannie and Freddie are not involved.

If my premise above is true, however, the entire topic may be a red herring (well, at least I tried to provoke you into a rebuttal :) ).

 
At 5/30/2010 11:39 AM, Anonymous gettingrational said...

A more "pro lender" loan is:

Amoritization: Monthly principal and interest payments based on a thirty (30) year amortizaiton.

Loan Term: Ten (10) years.


Thus, the lender goes out ten years on an interest rate commitment. The loan repayments are based on a 30 cycle.

BTW, the above is a direct quote from a multi-family building loan I took out in 2005. The chances of higher interest rates in 2015 are scary.

 
At 5/30/2010 11:52 AM, Blogger moneybagzz said...

I doubt if the problem is the 30-year mortgage.
Governmental interference, in the form of Fannie, Freddie, Chris Doss and Barney Frank, and not to mention 40-1 leverage for the investment banks' trading desks.....that was leverage on top of leverage.

I would like to see more 15, 20, and 25 year mortgage terms; but there isn't that much liquidity in the market for such instruments (yet).

 
At 5/30/2010 12:26 PM, Anonymous Anonymous said...

Interest rate risk can be hedged, but someone has to be on the other side of that hedge.

With such a huge value of mortgages, there will continue to be AIG's out there who have too much of the wrong side.

It is much better if the risk doesn't carry so far out. Trying to hedge 10 years is much more expensive than hedging just a few years.

A 7 year or 10 year renegotiation wouldn't be too burdensome. By that time the loan balance is paid down a good amount, plus inflation has reduced the real value of that payment. Considering all the tax benefits along the way, buyers already get a lot of benefits.

 
At 5/30/2010 12:32 PM, Blogger randian said...

Last I checked 30 year fixed loans aren't mandatory. 5/30 ARMS are popular, though the US versions usually have annual rate adjustments after the 5th year. There's no legal obstacle to Canadian-style 5/30s that adjust every 5 years.

Don't most lenders sell their mortages to other institution? Doesn't that protect them from intrest rate variability?

Depends on whether there's a buyback provision, and how stiff it is. Usually conduits want a 1 or 2 year buyback, so if the loan goes bad they can get their money back. It's protection against lax underwriting by the originator. It's too short for an originator to get squeezed unless they're writing a bunch of bad loans. The conduit can't demand a buyback if they're getting squeezed.

canadian mortgages have much more stringent down payment requirements, but more importantly, are full recourse loans. you can't just walk away from them they are secured by ALL your assets and future wages.

Whether a loan is full recourse is a state-by-state matter. Only a few states (California) make purchase money loans non-recourse. Most states allow deficiency judgments, making the loans full recourse. Even in California, you can get a deficiency judgment if you're willing to do a judicial foreclosure, but that's usually too costly and time consuming for lenders to bother with. Also, refinance or equity loans are full recourse in California.

 
At 5/30/2010 3:41 PM, Anonymous morganovich said...

anon 12.26-

aig was not sunk by interest rate swaps, but default swaps.

the former is much easier to deal with and lay off than the latter which often has 200:1 payout.

there are lots of natural participants in rate swaps and they can be (and are) paired.

CDS's have no natural seller apart from the issuing governments, and clearly, that's not terribly credible.

 
At 5/30/2010 4:27 PM, Anonymous Anonymous said...

Morganovich, the point about AIG wasn't that they had the same problem, it is that they had too much of one side. Which will happen in the next crisis to some other big financial firm.

Plenty of holders were also unhedged, like many European banks.

So while it is possible to hedge, the history is people do not hedge enough in time. Witness the airlines and oil, pension funds and the stock market, or banks and mortgages.

Since the post deals with reality now, how many banks are hedged for the interest rate risk the post discusses? The yield curve is so nice right now, I doubt any are even worried.

 
At 5/30/2010 5:26 PM, Blogger Ron H. said...

Anon @ 10:09 said: - "And lenders should be allowed to design and market there own mortgage products without interference from the government."

Yes! And they should also be allowed to calculate and assume their own risks without interference from the government. That includes the risk of going out of business.

Incentives matter. If lenders assume little risk because loans are sold to the secondary market, then we should expect them to make loans they wouldn't make if all the risk was theirs.

If GSEs risk little due to implied and now actual bailout by taxpayers, then we shouldn't be surprised at what has happened.

 
At 5/30/2010 8:09 PM, Blogger sethstorm said...

Realistically, lenders have more tools to screw with borrowers versus borrowers do with lenders. This is said, even with the regulatory climate that currently exists.

What you suggest would make things worse - given that you've just made every loan a long-term ARM.

You just want to suggest that it's fine to let that happen. Just because the rest of the world does it, does not make it any more correct. It should have no part of the reform.

 
At 5/30/2010 8:41 PM, Blogger Ron H. said...

Sethstorm! I didn't know you were interested in this subject, There's been no discussion of employment or importing Jamaicans here.

One of the big tools borrowers currently have to screw with lenders is known as "walking away".

I'm not sure what tools you think lenders have to screw with borrowers, but it seems to me that once a loan is made, and everyone has agreed on the terms, the lender is pretty much stuck. The borrower has all the options after that.

 
At 5/30/2010 10:05 PM, Anonymous Lyle said...

What you do have in the issue between borrower and lender is an asymmetric information situation the lender knows far more about the business than the average borrower. Then you add the rush put on at closing to sign sign sign not reading everything because it takes a lot of time (since the docs are not provided in reading copies ahead of time). Given that a lot can barely read, they will not notice even large print.
It used to be said that you should bring a lawyer to closing to read the documents and explain them to you, but that hardly ever happens.
In any case we have gotten to a state where a mortgage is a pure business decision, the contract in addition to state law specifies what happens if you don't pay, so you know the downside. The business community in its loans has shown no morality, so why should the average consumer behave any better? Sauce for goose sauce for gander here.

 
At 5/30/2010 11:15 PM, Anonymous Anonymous said...

Does anyone know what percentage of new home mortgages are 30 year fixed rate mortgages?

With all the other mortgage options available, I'm just curious to see how widespread this 30 year fixed mortgage business really is.

With the current interest rates, I suspect that many newly issued 30 year mortgages may be held to maturity - if you believe that the interest rates are now at a near-historical low and will go up.

 
At 5/31/2010 12:05 AM, Anonymous Lyle said...

It has been pointed out that the average mortgage before the great wave of the 2000 lasted about 7 years since people move in that time frame. Now it should be noted that there do exist other fixed income estimates called callable bonds that look like mortgages in terms of interest rate risk. (The borrower pays more for the callable feature) Since everyone going into the transaction of a 30 year fixed knows about the call feature it should be priced into the deal already. If the 7 year average duration is indeed true then except for some folks who don't move a 10 year fixed with balloon would be about the same.

 
At 5/31/2010 12:22 AM, Blogger sethstorm said...


One of the big tools borrowers currently have to screw with lenders is known as "walking away".

That presumes the person is prepared/willing enough to use that option. I believe in this case, it is Strategic Default.

It would be not without difficulty, but it would also allow price discovery to work. They can't hide the assets, but at the requirement of the borrower to prepare for the consequences of default.




I'm not sure what tools you think lenders have to screw with borrowers

Writing the terms of the loan in such a way that be correct, but discourages someone from trying to understand it. While it is in the best interest for someone to fully read the contract, there are various levels of understanding that can affect negotiations.

Second, the lender has more knowledge (on average) on lending money. They do not have an incentive to make this knowledge easier to access. If they do, it is in their wish to provide better service.

Finally, the lender can make it subtly difficult for interacting with them (e.g. customer service) when adverse consequences exist and are not in the favor of the lender to avoid them.

 
At 5/31/2010 12:26 AM, Blogger bobble said...

as far as i know, there is no legal requirement that lenders issue 30 year fixed mortgages.

so what's the problem?

 
At 5/31/2010 12:43 AM, Blogger Michael said...

It's interesting no one mentioned the value of the dollar. The highest rate of bank failure during the 30s occurred after FDR devalued the dollar.

It's also interesting to note that there was a sharp increase in S&L failures after 26 U.S.C. § 469 passed devaluing the assets of S&Ls.

Both these events occurred when government was altering the value of the asset or the currency used to negotiate the asset.

 
At 5/31/2010 1:29 AM, Blogger Ron H. said...

>"The business community in its loans has shown no morality, so why should the average consumer behave any better? Sauce for goose sauce for gander here."

What are you suggesting borrowers do here?

 
At 5/31/2010 1:48 AM, Blogger Ron H. said...

>"While it is in the best interest for someone to fully read the contract, there are various levels of understanding that can affect negotiations."

sethstorm, if someone doesn't understand a contract, they shouldn't sign it. Surely even you who agree with almost nothing must agree with that.They should either get it explained, or not agree to it. It's really stupid to say later, "Duh, I dinnit unerstan what I was signing."

>"Finally, the lender can make it subtly difficult for interacting with them (e.g. customer service) when adverse consequences exist and are not in the favor of the lender to avoid them."

Do you mean like when you are in foreclosure and they stop returning your calls?

>"That presumes the person is prepared/willing enough to use that option. I believe in this case, it is Strategic Default."

Is this from your own playbook?

 
At 5/31/2010 9:30 AM, Blogger sethstorm said...


Is this from your own playbook?

Not sure what you're talking about here. If you're thinking that one should simply stop paying bills just for no purpose other than that, no.

At the very least, a short sale would be a better alternative - should that be an option.

Now if you have a large enough (in value) property under foreclosure, they may not be immediately interested in having it sold at the reduced value. While you're really supposed to leave at that point, they don't seem to want to honor their end and take ownership. Not speaking from experience, but if they'd be taking a huge loss, they aren't going to want to take it unless they have to take it.


sethstorm, if someone doesn't understand a contract, they shouldn't sign it. Surely even you who agree with almost nothing must agree with that.

This is where I do agree with you. I make it a point to not only read any contract I sign, but to do even if it appears to be the same contract. Whether it is car repair, a credit card agreement, or some place I am not familiar with, I read it. If I have questions, I ask them.


They should either get it explained, or not agree to it. It's really stupid to say later, "Duh, I dinnit unerstan what I was signing."

Still agree with you, but only on the matter that they should be able to get a good explanation w/o being pressured to sign. Absent said pressure and/or desire to deceive, I would agree.

What happened to a contract that isn't weasel-worded? Or did both parties end up trying to cover themselves by writing it?


Do you mean like when you are in foreclosure and they stop returning your calls?

More like you're wanting to talk to them before foreclosure happens. That is, you don't mind working with the bank to prevent a foreclosure, but otherwise honor the terms of the loan. Where that becomes a problem is where they only wish to foreclose, or "forget" that you paid, called, and/or wrote.

 
At 5/31/2010 9:31 AM, Anonymous morganovich said...

anon-

i couldn't tell you to what extent banks are hedged, but i suspect it's higher than you think. this is a GREAT time for banks to lock in a cost of funds.

further, a lot of the mortgages have been packaged and sold, meaning a refi is no longer the bank's problem.

duration imbalance has simply not been a major issue in this crisis nor does it look poused to be.

randain-

you sure about that? i know that many second mortgages are full recourse, but i'm pretty sure that most US mortgages are not (a situation fairly unique to the US). they can take your house and slam your credit rating, but for the most part, the rest of your assets are not collateral for a first mortgage.

I've never even seen of heard of a full recourse US mortgage, and i've held 4 in 3 states.

what's your basis for thinking that any significant portion are full recourse or are you just arguing that they don't have to be non recourse in most states.

 
At 5/31/2010 10:53 AM, Blogger randian said...

they can take your house and slam your credit rating, but for the most part, the rest of your assets are not collateral for a first mortgage

Collateral has a technical meaning I'm not sure you're applying here. Your assets are never collateral before the fact, only after, upon filing for a judgment.

Only a handful of states disallow deficiency judgments: Delaware, Iowa, Massachusetts, Mississippi, Nebraska, South Dakota and West Virginia. California bars them on purchase-money, including 2nds, but not refinances or equity loans. New Mexico bars them if your household made less than 80% of median income at the time of the loan transaction. Pretty much everybody else generally allows deficiency judgments on owner-occupied residential foreclosures.

Whether your other assets are actually at risk depends on what may legally be seized by a judgment creditor under your state's law, and whether the lender pursues a deficiency judgment at all. Most of the time the lender won't bother, because they perceive the costs of recovery to be too high compared to what they're likely to get in return. After all, most defaulting homeowners have little to seize. Strategic default is another matter. Banks like to make examples of people like that. If the bank believes you have a lot of cash, a second home, expensive cars, or whatever, and you're not paying because you don't want to, rather than because you can't, then banks often aggressively pursue borrowers for what is owed to them.

 
At 5/31/2010 11:14 AM, Anonymous morganovich said...

r-

but in practice, going to get a deficiency judgment is expensive and time consuming. while it may be possible, this certainly makes it less attractive as an option and therefore less utilized.

this is doubly true of mortgages that have been packaged and sold.

i'm still not sure that deficiency judgments are available on non recourse loans. further, a number of states are also "one action" in which a lender can either foreclose or try to collect the debt, but not both.

if you walk away from a mortgage due to financial hardship, the likelihood that you will have future wages garnished is very different in the US that the rest of the world. in many countries they can even go after the rest of your non-nuclear family.

all this said, it was a collapse in lending standards, not recourse issues that drove the current crisis, and for that, i fear we have the government to blame. HSA looked like a big vore winner right up until it blew up. forcing banks to lend a trillion dollars to subprime borrowers at rates too low to reflect their risk (and often with no money down and no income verification) could pretty much only end one way.

 
At 5/31/2010 1:29 PM, Anonymous Anonymous said...

Bobble, there's no legal requirement to offer 30 year fixed mortgages, but as long as those are conforming loans with Fannie and Freddie, that's what competitors will be offering.

Get Fannie and Freddie out of the equation, and 7 year balloons, or 5 or 7 year ARMs aren't going to be just a little cheaper, they'll be a lot cheaper than 30 year fixed.

Morganovich, the point isn't that banks have more interest rate hedges than I think, the question is, do they have enough or will they put them on in time?

And why have the problem in the first place? It would be better not to have so much risk to hedge. There's nothing about a 30 year fixed that lets people do something they couldn't do otherwise. Why insulate home buyers for so long? There's no similar protection for the cost of food or gasoline increasing.

 
At 5/31/2010 1:56 PM, Anonymous morganovich said...

anon-

i agree with you completely that freddy, fanny and the like are big part of the problem. take them out of the equation and banks will behave more conservatively including hedging.

no one can make sure banks hedge effectively, but absent F+F, they have a great deal more incentive to do so and that they certainly have the ability to do it if they wish.

firms that figure it out prosper and grow, those that don't go away. several airlines (southwest, virgin) that hedged fuel effectively used the 2008-9 downturn to grab share. banks will act similarly if we return market disciple to their lending.

whether or not the offer 30 year fixed loans is not the issue, it's how they handle the back end and lending standards that matter.

 
At 5/31/2010 2:36 PM, Blogger Michael said...

Sethstorm has some valid points. My first house was a FHA ARM. What was an affordable house quickly became unaffordable.

I ended up moving to NYC from Salt Lake and my tenant bailed on the house. I tried to work with the holder of the loan, but they made it clear foreclosure was their goal. (It was an insured loan.)

With my second house, I told the bank I wanted a fixed rate. At the closing, I found out the bank wrote the loan as an ARM. I told them they were going to pay for fucking up the closing and either rewrite the loan as fixed or I'd find someone who would.

Mortgage language needs to be cleaned up. I was told that the ARM rate is reset based on market conditions. When I had my first loan, inflation, prime and the ARM starting rate were all dropping, but every chance the current holder of the loan got, they maxed the rate increase.

I won't mind a little regulation where the bank had to show the maximum monthly payment and the maximum cost of an ARM loan to a borrower.

 
At 5/31/2010 3:08 PM, Blogger Dan Ferris said...

Too bad these excellent solutions (no GSEs, no 30-year money) won't happen in our lifetime. It's more politically acceptable to create a new disaster than admit a mistake and get the government out of the way.

 
At 6/01/2010 3:40 PM, Anonymous sprewell said...

Excellent discussion. Those saying that a lender can always try to hedge away the risk are missing the point. The fact is that it is impossible to effectively look ahead 30 years and know what your risks are. Just because you can find some dummy who's willing to take that trade doesn't mean you're covered, as AIG demonstrated. There is no reason for 30-year fixed loans, beyond people just being used to such a dumb idea.

 
At 6/01/2010 5:31 PM, Blogger Ron H. said...

sprewell said - "There is no reason for 30-year fixed loans, beyond people just being used to such a dumb idea."

But you're OK with lenders writing these if they chose to because borrowers want them, right?

Just askin'...

 
At 6/01/2010 9:17 PM, Blogger Washington Hogwallop said...

Most states are full recourse on a defaulted mortgage - and filing for a deficiency is not very time consuming or expensive. My bank does it 100% of the time we do not take a deed in lieu of foreclosure.

The question is - how easily can you collect on a deficiency judgment? Not sure about that. I know you have 10 years to do it in Georgia.

 
At 6/02/2010 10:15 AM, Anonymous Fish said...

Why the hell would you suggest we eliminate the 30-year FRM? It should be an option available to borrowers and lenders. If lenders know how to price liquidity and pre-payment risk properly and if securitization markets return, the 30-year FRM is a perfectly viable loan product.

As I recall, Congress allowed the ARM precisely to address concerns over inflation ruining banks.

With the creation of the 5/1 and 7/1 ARMS, you actually had a loan product which more closely matched the mobility patterns of borrowers who typically live in a house less than 8 years. However, the borrowers and the lenders (as we've seen) are both at risk of systemic risk.

The problem with 5/1 ARMS was not that the products are overly risky, but that underwriting standards collapsed when the GSEs started purchasing every piece of dirty toilet paper originated by banks.

The interest only and negative amortization products helped fuel the housing bubble by enabling people to offer prices they otherwise couldn't afford.

 
At 6/02/2010 10:35 AM, Anonymous sprewell said...

Ron, as in would I ban 30-year loans? Of course not, I'm all for letting people shoot their foot off if they want. ;) But the point is that such long-term loans likely wouldn't exist without the large govt subsidies and regulation pushing them today, since they are bad contracts for which the results are impossible to foresee and plan for.

 
At 6/02/2010 8:15 PM, Anonymous Anonymous said...

I don't see why a 30 year, fixed rate treasury bill is ok but a 30 year, fixed rate mortgage is not.

 
At 6/03/2010 8:38 AM, Anonymous Anonymous said...

Kling's post is odd. It's nominally directed at the 30-year fixed-rate mortgage, but in fact it has nothing to do with it. He provides no direct connection b/t the bad government regulations and the existence of the 30-year-mortgage, just states conclusorily that it's an artifact, and doesn't say anything about the fact the fact that banks are free to not offer them, to offer prepayment penalties, to offer them at higher rates, etc. As a result, the post totally misses the mark. Undoubtedly, 30-year fixed-rate mortgages were given at too-low rates to too many people with not enough ability to pay. But that doesn't mean they should necessarily be gotten rid of entirely, or that they would disappear in the absence of government regulation.

 

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