Frontal Assault on the 30-Year Fixed Rate Mortgage
A few weeks ago, I had a CD post "Should We End the 30-Year Fixed-Rate Mortgage?", as a follow-up to a discussion Arnold Kling started. Now the WSJ has a related article today "Radical Ideas From a Federal Housing Bureaucrat," about Patrick Lawler, chief economist of the Federal Housing Finance Agency and his "frontal assault on the most sacred element in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to refinance at any time, with no prepayment penalty." Here's more from the article:
"Americans are very attached to their 30-year fixed-rate freely prepayable mortgages. They like not having to fuss about the possibility of 28% interest rates in 2032, even though most of us will move or die long before then. They love to refinance every time rates drop and then brag to their neighbors about how much they are saving per month. What they don’t stop to realize often enough is that they are paying a very large price for that privilege– twice.
1. Mortgage rates are higher than they otherwise would be. That’s because lenders and mortgage investors must build in protection for the risk that we will prepay and stick them with a lower yield than they were anticipating. Mr. Lawler estimates that Americans pay at least an extra 0.25 to 0.50 percentage point in rates because of this option to prepay without penalty. They also pay another premium-–sometimes a percentage point or two–for having a long-term fixed rate. Over 30 years, that translates into some real money, but no one ever mentions that when bragging to the neighbor.
2. Our nation has created the likes of Fannie, Freddie and the FHA to facilitate these oddball 30-year fixed-rate loans, which aren’t normally provided by the private market. For a long while, that seemed like a free lunch. Fannie and Freddie, we were told, were far better able to handle those complex risks than we dumb consumers ever could. But since the government had to rescue Fannie and Freddie in 2008, the taxpayers’ tab for this indigestible lunch has swollen to $145 billion, and it’s still rising. So that’s the second time we’ll pay for our irrational love of American-style mortgages – only this time, we all pay, not just mortgage borrowers.
Meanwhile, other wealthy nations–notably Canada–do without our kind of mortgages and yet somehow manage to have homeownership rates similar to ours. They do not pretend that there are risk-free ways to buy houses on credit."
MP: Actually, the homeownership rate in Canada (69 percent) is higher than in the U.S. (67.2 percent).