Monday, March 14, 2011

Do We Need the 30-Year Fixed-Rate Mortgage?

That question is the title of a recent worker paper by Mercatus  Center economists Michael Lea and Anthony Sanders, and I think the simple answer is "No." 

The authors present evidence that the 30-year fixed-rate mortgage (FRM) is really a creation of U.S. government policy, and certainly wouldn't dominate the mortgage market without direct government support and intervention.  The authors write:

"The FRM has been supported by government policy since its introduction. FHA and later VA-insured mortgages were the dominant instruments until the 1960s. Rates were set administratively that made it difficult for non-insured loans to compete with government insured instruments. Federally insured savings-and-loan institutions were restricted to offering only fixed rate mortgages until 1980. The creation of Freddie Mac in 1970 was motivated in part to assist savings-and loans in managing the interest rate risk inherent with the FRM."

Later in the paper, they write:

"David Min, of the Center for American Progress, has written “the 30-year fixed-rate mortgage remains the gold standard for mortgages throughout the world, offering superior stability for both homeowners and financial systems.” If this is true why is the U.S. one of only two countries in the world with this instrument (only U.S. and Denmark have long-term, fixed-rate, no-penalty prepayable mortgages.)? And why is the U.S. the country most afflicted with a housing bust? Given the catastrophic condition of Fannie Mae and Freddie Mac, it is clear that the 30-year fixed-rate mortgage is outright dangerous and not a gold standard. Perhaps his musing should be rewritten to say “the 30-year fixed-rate mortgage remains the fool’s gold standard for mortgages throughout the United States, offering superior stability for some homeowners and potential catastrophe for U.S. and global financial systems.” 

What would the U.S. mortgage market look like without "government life-support" for the FRM?

"What would emerge as “standard” U.S.-mortgage instrument without the government support of the FRM? We think a rollover mortgage similar to that offered in Canada and several European countries is the likely candidate. This instrument offers short- to medium-term payment stability to borrowers. Borrowers can manage interest-rate risk by adjusting the fixed-rate term upon renewal. Min’s assertion that borrowers would be unable to refinance is not borne out by modern international experience. Borrowers could hedge the interest rate risk by locking in a forward rate in advance of renewal. German lenders offer
forward rates up to five years—certainly U.S. lenders with a deep derivative market could do the same. Alternatively, they can adjust the degree of risk by varying the length of the fixed-rate period.

A complete and robust housing-finance system should offer borrowers a menu of mortgage options—ranging from short-term ARMs for those borrowers who can handle payment change, to long-term FRMs for those borrowers who value payment stability. To assert that the FRM is the preferred alternative for most borrowers is naïve. Many borrowers have shorter-term time horizons and can handle some interest-rate risk. Min’s assertion that the switch to shorter duration instruments would lead to massive defaults if and when interest rates increase is not supported by international experience."

Related: In a recent post on the Enterprise Blog, AEI's Alex Pollock wrote about "The Dark Side of the 30-Year Fixed-Rate Mortgage," and I followed with "The Dark Side of the 30-Year Fixed-Rate Mortgage, Part II."  Like the Mercatus authors, I also point to Canada's system of 5-year mortgages, and note that Canada didn't have a single bank failure during our S&L crisis when 3,000 American banks failed (partly due to FRMs) and didn't have a single bank failure during our recent financial crisis.  

68 Comments:

At 3/15/2011 4:35 AM, Blogger rjs said...

long term debt, be it mortgage or student loans, is just a stealth way to put people into indentured servitude, not much different than the company stores that the appalachian miners ended up owing their souls to...other countries dont have 30 year mortgages; why should people have to go into debt to the banksters for 30 years & be forced to work off the debt? in what we can now clearly see coming, the people's wages are driven down to below the level needed to service the debt, and the plutocracy succeeds in reducing the people into virtual slaves, which they look to do whenever the prevailing politics change to support such a system of mass debt bondage...the egyptians may be free, but not many americans are...

 
At 3/15/2011 5:09 AM, Blogger bob wright said...

It would be interesting to hear from a commercial mortgage broker (banker) on the products available in the commercial mortgage market.

I know that my commercial mortgage has a 20 year amortization but is recalculated every five years.

So every 5 years, the building is appraised (not good for me last year), the interest rate is adjusted to current market rates, additional capital can be required to bring the debt to equity ratio in line with the bank's requirement, and the borrower's credit is rechecked. My payment is then fixed for another 5 years.

My understanding is that most commercial mortgages are a variation on this theme.

This system is a natural governor on one's appetite for debt. Whereas a person with a residential mortgage is tempted to load up on other debt knowing that he has his mortgage "in his back pocket," the person with a commercial mortgage knows he/she had better be careful, because he has to be re-approved in 5 short years.

It would seem an easy transition to move residential mortgages to the system already in place for commercial mortgages here in the U.S.

 
At 3/15/2011 8:44 AM, Blogger Hydra said...

The authors present evidence that the 30-year fixed-rate mortgage (FRM) is really a creation of U.S. government policy, and certainly wouldn't dominate the mortgage market without direct government support and intervention.

Might be true, but that doesn't mean it was a bad policy. Or that all policy is bad.


"...why is the U.S. one of only two countries in the world with this instrument (U.S. and Denmark)? And why is the U.S. the country most afflicted with a housing bust? "

The housing bust has many causes. It is a mistake to suggest any one cause.


"....it is clear that the 30-year fixed-rate mortgage is outright dangerous and not a gold standard."

Dangerous to whoever winds up holding the note, maybe, but these are sophisticated players, if they don't like the risk, they don't have to buy the loans. And, the lenders all play under the same rules, there is nothing inherently unfair going on. However, shifting to a variable rate makes their business essentially risk free, putting all of the burden on the homeowner. We have heard a lot about how no one guaranteed homeowners a secure investment, prices can go down as well as up, but now it seems that the bankers want only guaranteed businsess. someone needs to explain to them the the price of money can go down and up, as well.

Finally, the 30 year loan was pure gold for the banks for a long time, and you never heard any complaints about it then. As long as they could make loans, sell them, and get out from under the risk, it was all good.

long term debt, be it mortgage or student loans, is just a stealth way to put people into indentured servitude, not much different than the company stores

Nonsense. It is a lot different from the company stores, which charged more for your daily bread thatn you were paid to earn it.

There is no reason to pay for something, up front, that you will use up over a long period of time. There is even less reason to pay for something up front which will lkely appreciate over time. A private home is most peoples single largest source of accumulated wealth, and making it harder to get in and start that process only makes people worse off. The average age of a homeowner in Canada for example is much higher than in the US, so it is wrong to say that eliminating the 30 year note comes without costs, or risks. On the other hand, Mauritia has a much higher rate of home ownership than the US, without the accompanying housing bust.

And, unlike the company store, people can sell their home, even if the process isn't cheap.

 
At 3/15/2011 8:49 AM, Blogger Hydra said...

A complete and robust housing-finance system should offer borrowers a menu of mortgage options....

Agreed, and that may require policy, or incentives from government, particularly when it is in governments interest to take a longer term view of things than private enterprise can do.

For example, long term we might need more farmland than the market can support right now, consequently we provide various means to preserve farm and forest lands. We could, of course allow the land to be developed, and then undevelop it when the price of food per square foot gets higher than the price of housing per square foot, but th elong term costs of that might be higher than the cost of farmland preservation.

On the other hand, if you think there is a dark side to the 30 year fixed mortgage, consider the dark side of perpetual conservation easements.


...why should people have to go into debt to the banksters for 30 years & be forced to work off the debt?

Who says you have to? You can always rent. Besides, a variable rate or shorter loans renegotiated are likely to mean you are in debt to the bankters for a LONGER period and pay them MORE, assuming that you want to own, rather than rent. As I understand it, in England, a mortgage is something you inherit: when you take one out you don't expect to pay it off, but maybe your children or grandchildren will. However, that is as much a matter of development policy as lending policy.

No doubt Bob Wright could get a fixed commercial mortgage, if the interest rate was right. And while we are at it, remember that his interest costs are tax deductible.

It is easy to see the advantages of a term renegotiable mortgage, but that has nothing to do with the 30 year fixed. Besides, what happens if you can;t renegotiate? It is like losing your lease: you would then have to sell, and shut down or move your business.

That might be a lot worse then being "trapped" in a "predatory" 30 year note.

 
At 3/15/2011 9:55 AM, Blogger Richard said...

Mark,

"why is the U.S. one of only two countries in the world with this instrument (U.S. and Denmark)?"

This is not true. Many other countries have 30 year fixed mortgages.

For the Netherlands, see:

http://www.abnamro.nl/nl/prive/hypotheken/tarieven_popup.html

The interest rate for a 100%+ financing (so no down payment or anything) is 6.8% (the most bottom right number)

The ABN Amro Bank is one of the biggest banks in the Netherlands, but other banks & insurance companies offer exactly the same.

 
At 3/15/2011 10:04 AM, Blogger Mark J. Perry said...

According to the authors, only the U.S. and Denmark have long-term, fixed-rate, prepayable (no penalty) mortgages. Perhaps the mortgages offered in Netherlands are long-term, but with pre-payment penalty?

 
At 3/15/2011 11:01 AM, Blogger morganovich said...

i think the takeaway here is simple:

any consumer product that requires governmental support to exist ought not to exist.

why is the government in the mortgage lending business?

this is just another kind of subsidy. however, unlike other subsidies, the costs of it are not apparent upfront. they only show in at a time like the last several years when the whole thing blows up.

of course, this is what makes it so attractive to politicians: they can give away goodies and leave someone else holding ht bag when it comes time to pay for them.

this seems to be the dominant strategy in our political culture since FDR.

as we are now in a time when these bills are coming due, it's going to be a rough ride. everybody likes to go to the party, but nobody wants to stay around and help clean up afterward...

 
At 3/15/2011 11:10 AM, Blogger morganovich said...

only 10% of mortgages in the Netherlands have a duration of 10 years or more.

50% of the market is on 5 year term.

http://finance.mapsofworld.com/mortgage/netherlands/

that is very, very different from the US.

 
At 3/15/2011 11:19 AM, Blogger morganovich said...

rjs-

"why should people have to go into debt to the banksters for 30 years & be forced to work off the debt?"

what an insane statement. did a banker put a gun to your head? you can pick any mortgage structure you want. you can pay cash. you can rent.

no one makes you go into debt.

the banks offer a service (with a price) that you can utilize or not as you see fit. that pretty much seems like the definition of freedom to me.

you can also walk away from a mortgage. unlike most of the rest of the world, us mortgage debt is secured by the house and otherwise is non recourse.

you have some very odd ideas about freedom if you think egypt is freer than we are.

freedom comes with the need to accept the consequences of how you use it. take out an unaffordable mortgage and you will wind up in financial trouble. smoke 4 packs a day and you'll get cancer. that's freedom for you.

you need to read dostoyevsky's "grand inquisitor" on this topic.

what is it that you would call freedom?

 
At 3/15/2011 12:36 PM, Blogger Mike said...

morganovich,

I think the costs are obvious, but the benefits may not be.... Just a single example: How many average or below average earners found themselves nearing retirement with a very nice real estate nest egg, as opposed life-long renting and being nearly (or fully) dependant on S.S. and other gov't programs for survival?

This is one subsidy I can understand and get behind when it's executed rationally.

 
At 3/15/2011 1:20 PM, Blogger morganovich said...

mike-

but that's a double edged sword.

if you reduce the cost of capital, prices rise. this means that the existence of the subsidy increases the need for the subsidy.

the same source of your purported "nest egg" is also the source of housing unaffordability.

this is exactly the nasty cycle that drove the egregious federal programs like the CRA that were such significant contributors to the current mess that has (inevitably) shattered millions upon millions of nest eggs and destroyed so many retirement plans.

better to take the government out altogether and avoid messes liek these.

sure, you might get a nice run until the bill comes, but when it does (and it has) you wipe out a whole generation.

 
At 3/15/2011 2:58 PM, Blogger Ron H. said...

rjs

"long term debt, be it mortgage or student loans, is just a stealth way to put people into indentured servitude..."

"...why should people have to go into debt to the banksters for 30 years & be forced to work off the debt?"

Wow! I wasn't aware that people were forced to do this. I always thought people chose 30yr loans because they were such a good deal for the borrower. Student loans always seemed like a way for people of limited means to get an education, then pay back the loans when their income is much higher thanks to the education they just bought with the borrowed money. Now tou tell me that they have no choice.

"in what we can now clearly see coming, the people's wages are driven down to below the level needed to service the debt, and the plutocracy succeeds in reducing the people into virtual slaves"

On what planet is this happening?
Maybe I need to get out more often,as this is news to me. And, I have a question: how can plutocrats become wealthy or stay wealthy if "the people" are virtual slaves & have no money to spend? Where does the wealth come from?

Aren't there any choices a consumer can make any more? It's all predetermined by the wealthy?

By the way, how do people become wealthy? In that recent past, it has been by providing something people want and are willing to pay for. The more that 'something' benefits people, the wealthier the provider can become. Bill Gates is a good example of this phenomenon.

Has something changed?

 
At 3/15/2011 3:16 PM, Blogger Ron H. said...

"Might be true, but that doesn't mean it was a bad policy."

It is a bad policy if taxpayers assume some of the risk.

"Dangerous to whoever winds up holding the note, maybe, but these are sophisticated players, if they don't like the risk, they don't have to buy the loans. And, the lenders all play under the same rules, there is nothing inherently unfair going on."

Except for the taxpayers who guarantee these loans. There is no risk to any of the players when taxpayers are on the hook.

"Finally, the 30 year loan was pure gold for the banks for a long time, and you never heard any complaints about it then. As long as they could make loans, sell them, and get out from under the risk, it was all good."

Correct. Same as above. Risk was shifted to taxpayers.

 
At 3/15/2011 3:39 PM, Blogger Ron H. said...

"Agreed, and that may require policy, or incentives from government, particularly when it is in governments interest to take a longer term view of things than private enterprise can do."

No, your collectivist "WE know best" attitude is showing again. Why should government have any interest in home ownership? It doesn't seem that it's a good thing for everyone, as evidenced by the higher number of defaults & foreclosures lately, due to higher home ownership rates promoted by government.

You understand, don't you, that someone with a foreclosure or loan default on their credit record will have a very difficult time borrowing money in the future, even when they are better qualified.

"For example, long term we might need more farmland than the market can support right now, consequently we provide various means to preserve farm and forest lands."

How can we possibly know how much farmland will be needed in the future? The market will make that determination.

"We could, of course allow the land to be developed..."

There you go again, you leftist.

 
At 3/15/2011 3:43 PM, Blogger Ron H. said...

morganovich

"any consumer product that requires governmental support to exist ought not to exist."

This is a true gem. Thank you. This is obviously true far beyond the subject of mortgage loans.

 
At 3/15/2011 4:02 PM, Blogger Ron H. said...

Mike

"How many average or below average earners found themselves nearing retirement with a very nice real estate nest egg, as opposed life-long renting and being nearly (or fully) dependant on S.S. and other gov't programs for survival?"

And, at retirement, how do these folks realize the gains from their nest egg without selling it? You might not be aware that many older people are very comfortable in their homes, and don't want the drastic changes involved in selling it, then renting. As long as you live in it, your nest egg is just subsidizing equivilent rent.

"This is one subsidy I can understand and get behind when it's executed rationally."

You don't mind paying taxes so others can retire more comfortably? I realize we are already doing that with entitlement programs, but government subsidies and guarantees are another form of tax on all of us.

 
At 3/15/2011 4:21 PM, Blogger Ron H. said...

"A private home is most peoples single largest source of accumulated wealth, and making it harder to get in and start that process only makes people worse off.""

You have this backwards, as usual. Making it easier for people to get into a home they can't really afford, is setting them up for failure. If a private lender, an expert in risk assessment, judges someone to be unqualified, why should you and I decide through government that they are in fact qualified after all, and we should guarantee their loan?

"The average age of a homeowner in Canada for example is much higher than in the US..."

And the default rate is much lower. How many Canadian financial institutions failed in the recent downturn? Any lessons here?

"...so it is wrong to say that eliminating the 30 year note comes without costs, or risks."

What costs? What risks? For whom?
What is wrong, is to ask taxpayers to subsidize homeowners who, in a real world, wouldn't qualify.

 
At 3/15/2011 5:04 PM, Blogger Dr. T said...

Anyone who needs thirty years to pay for a house bought too much house. It's hard for me to believe that so many people accept a mortgage that is less than half paid-off after twenty years of monthly payments.* Typical homeowners have paid-off only 20% of the original purchase price after ten years of mortgage payments.* If home values decline, their equity after ten years can be less than zero. For a typical household, the loss of a job during a bad home sellers market results in foreclosure and possibly bankruptcy.

*With on a 5% down payment and a 6% mortgage rate (compounded monthly), the principle owed after 20 years is 51% of the original purchase price and the principle owed after 10 years is almost 80% of the original purchase price.

 
At 3/15/2011 5:49 PM, Blogger Che is dead said...

"Dangerous to whoever winds up holding the note, maybe, but these are sophisticated players, if they don't like the risk, they don't have to buy the loans." -- Hydra

Fannie, Freddie, FHA - these entities were peopled by political cronies not "sophisticated players". Franklin Raines, Jamie Gorelick, Rahm Emanuel - the list of executives and board members reads like a who's who of the Democrat party.

 
At 3/15/2011 6:33 PM, Blogger Ron H. said...

Dr. T

"Anyone who needs thirty years to pay for a house bought too much house. It's hard for me to believe that so many people accept a mortgage that is less than half paid-off after twenty years of monthly payments."

If you think of the house payment as rent, it won't seem so silly. A person has to live somewhere, and buying with a 30 yr FRM gives them the most control. When someone rents, they have little control over how long they can stay, and little control over the amount of the rent.

Consider also that a 30 year FRM gives home buyers more flexibility than a shorter term loan. They can pay more than the required payment if they chose, and as their earnings increase over time, which is almost guaranteed due to inflation, which historically has been 3-4%. They can make only the regular payment any time they need to or choose to, and are not obligated to make the larger payment required of a shorter term loan.

They have control of the property for as long as they chose, unlike a rental, and are gaining any increase in home prices, which in most areas has increased by at least the inflation rate over time.

"*With on a 5% down payment and a 6% mortgage rate (compounded monthly), the principle owed after 20 years is 51% of the original purchase price and the principle owed after 10 years is almost 80% of the original purchase price."

Yes, and based only on inflation, and making only the minimum required payment, that house purchased for $100k in 1985 with 5% down and a 95k loan, was worth roughly $135-140k 10 years later, when their loan was 76k (80%). After 20 years, the house was worth roughly $180-190k when their loan was $48k (51%).

"If home values decline, their equity after ten years can be less than zero."

How many examples of this can you cite? While I'm sure this happens, I don't believe there are many areas in the US where this has occurred over a ten year period, and even then, so what? Although it's unfortunate, the homeowner still has a place to live, just as he did when he felt wealthier.

"For a typical household, the loss of a job during a bad home sellers market results in foreclosure and possibly bankruptcy."

This can occur at any time, no matter the length of the loan. In your sentence above, replace the word "foreclosure" with the word "eviction", and it applies just as well to someone who is renting.

 
At 3/15/2011 7:44 PM, Blogger Richard said...

Mark,

I don't know what pre-payable means.

Tell me what it means and I will call the bank (I have a mortgage also).

 
At 3/15/2011 8:09 PM, Blogger Mark J. Perry said...

Pre-payment means you have an option to pay off the mortgage early, whenever it is to your advantage, e.g. when interest rates fall and you re-finance.

 
At 3/15/2011 11:14 PM, Blogger Hydra said...

Any consumer product that requires governmental support to exist ought not to exist.

================
Pretty much eliminates autos.

 
At 3/15/2011 11:17 PM, Blogger Hydra said...

s mortgage debt is secured by the house and otherwise is non recourse.

==============

Depends on what state you are in.

 
At 3/15/2011 11:30 PM, Blogger Hydra said...

Whenever it is to your advantage, e.g. when interest rates fall and you re-finance.

======>>>>============
Or when you decide to sell. Prepayment penalties are a way to lengthen the contract ( customer needs more incentive to get out).

For the bank, it is free money. They already get the going rate, and now they get a bonus, for getting their money back.

Which, they will re-loan at the going rate.

Now, some modest " restocking fee" might be ok. But loans that had prepayment clauses were pretty punitive. The banks cover their costs of churn with loan origination fees, so early termination and churn actually protects the bank from the risk of long term rate changes.

 
At 3/15/2011 11:35 PM, Blogger Hydra said...

Who bought loan packages from Fannie and Freddie?

 
At 3/15/2011 11:40 PM, Blogger Hydra said...

It isa bad policy if taxpayers assume some of the risk.

=========<<<<<>=======

They should get the benefits of the policy with no risk?

We benefit from highways, but not without risk.

 
At 3/15/2011 11:52 PM, Blogger Hydra said...

u have this backwards, as usual. Making it easier for people to get into a home they can't really afford, is setting them up for failure.

=====>==>>>>>>==>>>>==

Or offering a chance to succeed. I ate a lot of spaghetti for a while, but I wasn't in totally over my head, and over time my income improved.

I know others who bought hovels or condos, and later moved up.

Had I needed a larger down payment, by the time I had it, prices would have risen, and I would need more. If I had to renegotiate the loan periodically, it might have consumed a larger part of my ( now larger) salary.

I would have been treading water far longer, than I was by taking the risk of failure and spaghetti overload.

 
At 3/16/2011 12:07 AM, Blogger Hydra said...

You take my we to literally.

We might need more farmland in the future or not. I made no claim one way or the other.

The market will make efficient short term use of the land, but if more farmland is needed long term, how would " the market" know that any better than we do?

Who is the market, but we, anyway?

Where is the market incentive to save the land for a time when it might be valuable?

 
At 3/16/2011 12:19 AM, Blogger Hydra said...

the default rate is much lower. How many Canadian financial institutions failed in the recent downturn? Any lessons here? "..

===<<<<<<<============<==<

Canadian government cares more for its bankers than its citizens? We have different systems of allocating risk and reward? More US citizens are able to own homes, sooner and longer. There is a risk to this, which falls on taxpayers. In the Canadian system the risk is you will never have the home to lose or the taxes to pay. I think Canadians pay plenty of taxes.

 
At 3/16/2011 12:26 AM, Blogger Hydra said...

No government involvement, no nuclear power.

 
At 3/16/2011 12:31 AM, Blogger Hydra said...

What percentage of homes in Netherlands are owned outright?

In the US its over 30%.

 
At 3/16/2011 2:10 AM, Blogger Ron H. said...

"It isa bad policy if taxpayers assume some of the risk.

=========<<<<<>=======

They should get the benefits of the policy with no risk?
"

What benefit do taxpayers get from guaranteeing 30 yr fixed mortgages? It is all risk. You don't seem to understand your previous comment on this point. try rereading it before you reference it again.

"We benefit from highways, but not without risk."

What possible connection could this have to a discussion of mortgage loan guarantees?

"Or offering a chance to succeed."

I don't know how else to say this, except the way I already have. It shouldn't be the responsibility of the taxpayers to offer people a chance to buy a house they otherwise can't afford. Your failure to understand that is just astonishing. Private lenders, who have something to lose, are best qualified to assess risk and approve or deny loans. Politicians, who have nothing to lose when they offer taxpayer money to guarantee such loans, are not. Why is that so difficult for you?

"I ate a lot of spaghetti for a while, but I wasn't in totally over my head, and over time my income improved."

No one cares about your personal experiences, as few of them are typical. Please don't use such anecdotes when attempting to support your arguments.

 
At 3/16/2011 2:32 AM, Blogger Ron H. said...

"The market will make efficient short term use of the land, but if more farmland is needed long term, how would " the market" know that any better than we do?

Who is the market, but we, anyway?

Where is the market incentive to save the land for a time when it might be valuable?
"

You don't seem to understand this either. Here's your original comment on the subject, as it appears you have forgotten it.

"For example, long term we might need more farmland than the market can support right now, consequently we provide various means to preserve farm and forest lands."

What various means? Are you calling for more government again? There is no valid reason to preserve something unless there's a demonstrable need for it. If more farmland is needed in the future, it will become available. But, there's no reason to believe that it will, as improvements in agriculture over time have made less land necessary for ever increasing crops.

I think you will find that calls for preserving farmland and undeveloped areas come mostly from current landowners who enjoy the open space and want to keep others out. They use government to force their wishes on others, at no cost to themselves, rather than buying the land they want to preserve at their own expense.

 
At 3/16/2011 2:41 AM, Blogger Ron H. said...

"More US citizens are able to own homes, sooner and longer. There is a risk to this, which falls on taxpayers."

And that's just wrong. Taxpayers should have no responsibility for guaranteeing loans.

You have missed my point about Canadian homeowners and lenders. I can tell, because your responses are nonsense.

Few borrowers have defaulted, and few lenders have failed, because few people have gotten in over their heads.

 
At 3/16/2011 7:10 AM, Blogger Richard said...

Mark,

Nearly all mortgages in the Netherlands are done over a period of 30 years (that's > 90% of them).

Usually the only point of discussion is for how long the interest rate is frozen. Usually that's 10 years, but 30 years is also possible.

If you freeze the rate for 10 years, after 10 years you can ask for a new offer or (if you don't like the new offer) apply for a mortgage at another bank/insurance company and pay off the original one. Or use your savings (if you have them) There is no penalty in that case.

If you freeze the rate for 30 years, then of coarse this does not apply since by the time you refinance, the mortgage is finished anyway. You have to repay. Or re-setup the mortgage again, go through the cycle. etc.

If you want to pay off the mortgage before your rate freeze is over, you have to pay a penalty if the rate is in favor of the bank. Otherwise you can pay off without penalty.

So if you freeze the rate for 10 (or 30) years and you want to pay off the mortgage after 5 years then:
- If the going rate is lower => you pay a penalty
- If the going rate is higher => you pay no penalty.

Both options play together. If you pay off before the freeze is over, you have to compensate the bank for its losses. If you wait until the freeze is over, you can pay off (or extend or switch) without penalty.

This holds for all freeze periods, be it 10 years or 30 years.

 
At 3/16/2011 9:06 AM, Blogger morganovich said...

richard-

"Nearly all mortgages in the Netherlands are done over a period of 30 years (that's > 90% of them)."

this is blatantly untrue.

only 10% of mortgages in the Netherlands have a duration of 10 years or more.

50% of the market is on 5 year term.

http://finance.mapsofworld.com/mortgage/netherlands/

do you have any data to back up that claim, because everything i have seen argues otherwise.

 
At 3/16/2011 9:16 AM, Blogger morganovich said...

""More US citizens are able to own homes, sooner and longer. There is a risk to this, which falls on taxpayers.""

this is untrue. if you introduce more leverage into any system (as a subsidized 30 year mortgage does) prices rise. this decreases affordability, particularly for young buyers who need to come up with a first down payment. the only way around that (and part of the cause for the recent crisis) is relaxing down payment standards.

however, inviting the young to buy with a no money down I/O liar loan just invites them to bit off far more than they can chew while further upping the level of leverage in the system and driving prices to wild levels, which, in turn, creates a crash.

the US has lower home ownership rates than a great many countries that do not subsidize or even use a 30 year loan.

http://2.bp.blogspot.com/_otfwl2zc6Qc/TKyMjp-A4lI/AAAAAAAAOfg/1sBQjV-Srp0/s1600/HomeownershipRates.jpg

the US is number 17 worldwide despite being so wealthy and there is no statistically significant difference in US rates and those of canada (though canada is now higher than the US).

 
At 3/16/2011 9:21 AM, Blogger Richard said...

Morganovich,

If you want to have a discussion, it does not help if you are going to state that what I say is 'blatantly untrue'.

The article that you quote is correct. I propose you read it yourself.

The mortgage is for a period of 30 years. The rate is fixed for much shorter, usually 5 or 10 years. That's what the article states.

However, if you want you can freeze the rate for 30 years.

 
At 3/16/2011 10:22 AM, Blogger morganovich said...

richard-

fair enough on the tone comment, but i still think you are wrong about your claims.

contrary to your claim, there is no information in the article i cited about % of 30 year mortgages. in fact, the number 30 appears nowhere in the article. try a search for it yourself.

perhaps you would be so kind as to show me the language to which you are referring before accusing me of not reading?

this:

"In the year 2005, about 50% of the mortgage loans offered were either floating mortgage loans or fixed mortgage loans, which were extended for a period of five years. Approximately, 10% of the Netherlands mortgage loans had a tenure of 10 years or more."

seems to contradict what you are claiming, a claim, i note, you have thus far failed to substantiate with any data at all.

so, for the third time in this thread, i ask you for substantiation of your 90% 30 year claim or any of your other claims.

according to this, fewer than 10% of dutch loans have even a 10 year duration.

a 5 year loan with the ability to re up at new rates 5 times is not the same as a 30 year fixed.

 
At 3/16/2011 12:31 PM, Blogger morganovich said...

richard-

you make a fair point about the tone, but i still think you are mistaken in your claims.

you have, despite several requests for it, failed to provided any substantiation of your claims.

further, your characterization of the article to which i linked is inaccurate.

the article makes no claims about 30 year mortgages or re upping short term mortgages at all. in fact, the number 30 appears nowhere on the page. search for it yourself.

perhaps rather than recommending that "i read it myself" you ought to do so. then perhaps you would be so kind as to show me anything in it that validates any of your claims which seem directly contradictory to it.

this:

"In the year 2005, about 50% of the mortgage loans offered were either floating mortgage loans or fixed mortgage loans, which were extended for a period of five years. Approximately, 10% of the Netherlands mortgage loans had a tenure of 10 years or more."

seems to imply that fewer than 10% of loans could possibly be as you describe making your 90% claim seem impossible.

i think you may be confusing paying off a house over 30 years with a 30 year mortgage.

re upping a 5 year mortgage 5 more times in not the same as a 30 year fixed at all.

you need to requalify and interest rates can change dramatically.

it's also much easier for a bank to hedge and givens them a great deal more flexibility.

far from countering dr perry's point, the example of the netherlands seems to bolster it.

absent government intervention, 30 year fixed loans are an insignificant portion of the mortgage market because no sane bank would offer them at prices consumers would find acceptable.

 
At 3/16/2011 1:46 PM, Blogger Mike said...

Morganovich,

I don't like gov't involvement in much of anything and I understand what you're saying, but I don't believe this has brought us to home unaffordability. I think building restrictions have a much greater role in that. In places with no restrictions, the increased demand (by those who may not be able to quite squeeze a 15-year mortgage payment but can work a 30) typically leads to an increase of supply by builders/developers.

Ron,

I have noticed that many older folks want to downsize after they retire. If they'd prefer to live hand-to-mouth rather than 'be uncomfortable' with selling, tough.

Maybe I missed it in the comments, but I have also noticed that a lot of people who have complained about this subsidy for average or below earners have not complained about the interest deduction which is (I would think) a larger subsidy for everybody. Eliminate the 30 year subsidy and see what happens to all related industry. Hey, I could be wrong, but it seems to me that this is at least a wash, if not slightly beneficial.

 
At 3/16/2011 3:13 PM, Blogger morganovich said...

richard-

the article i cited disagrees completely with your interpretation.

perhaps instead of recommending that i read it, you might do so yourself. i think you'll find that the number 30 does not even appear in it anywhere nor does it discuss rate freezes.

then, perhaps you would be so kind as to point out to me anywhere that it validates your claims about 30 year mortgages.

it says that fewer than 10% of dutch mortgages are 10 years or over. renewing a 5 year mortgage 5 more times is nothing like a 30 year fixed loan for either the borrower of the lender.

thus far you have provided zero evidence for you claims. perhaps you would be so kind as to substantiate them?

my suspicion is that you are confusing taking 30 years to pay with a 30 year loan.

 
At 3/16/2011 3:19 PM, Blogger morganovich said...

mike-

"I don't like gov't involvement in much of anything and I understand what you're saying, but I don't believe this has brought us to home unaffordability. I think building restrictions have a much greater role in that. "

the one does not invalidate the other. both may well have an effect.

any system into which you introduce additional leverage will see price increases. for an extreme example, look at a real estate market where mortgages first become available. (like russia or lebanon)

prices typically jump 400%.

you get the same effect (though far less extreme) from a drop in interest rates.

people think in terms of monthly payment. if the same payment can buy more house due to low rates, ceteris paribus prices rise.

this is doubly true of a reduction in money down. while that may make it easier for young buyers to get in, it also drives prices (and risk) WAY up by increasing the leverage of the situation.

you may be correct that restrictions are increasing prices, but that says nothing about the effect of rates, subsidy, and access to leverage which were the clear drivers in the latest bubble.

 
At 3/16/2011 4:56 PM, Blogger Mike said...

Morgabovich,
I do agree with your points, I just see some large-scale positive results for what I believe to be a relatively small cost. What I mean is; the 30-year option allows far more people a monthly payment that they can afford, or in cases like mine, a payment one can easily manage...along with paying my house keeper, gardener, pest control, maintenance folks, etc...and still have money left over to leave the house and go shopping and to dinner. If I was stuck in a 15, the impact would be a near-single stream of money from me to the mortgage company. I'm pretty sure I'm far from alone on this.

I don't think the low-or-no down deals are really part of the discussion as that was pure idiocy (as I said in my first post, 'when done responsibly').

All I'm saying is that I'd like to see the costs vs. all economic-impact benefits.
I wish Mark had posted a housing affordability chart that started with to introduction of the 30 year mortgage.

 
At 3/16/2011 6:28 PM, Blogger Richard said...

Morganovich,

On the website of the bank it indicates that all loans are (assumed) to be 30 years.

"** Voor een Aflossingsvrije Hypotheek kunt u kiezen uit verschillende looptijden. In dit voorbeeld is uitgegaan van 30 jaar (360 maanden). "

http://www.abnamro.nl/nl/prive/hypotheken/tarieven_popup.html

The only thing that is flexible is the period the rate is frozen. Usually that's 5 or 10 years.

 
At 3/16/2011 9:23 PM, Blogger Hydra said...

Taxpayers should have no responsibility for guaranteeing loans.

================================

Why not, if they are the ones that benefit from homeowning opportunities as a result?

You are advocating a risk free environment for taxpayers, which mayeasily cost them more than the taxes they would allegedly save.

Probably they wouldn't save any taxes, but the funds would be reallocated to other priorities.

 
At 3/16/2011 9:25 PM, Blogger Hydra said...

If I was stuck in a 15, the impact would be a near-single stream of money from me to the mortgage company. I'm pretty sure I'm far from alone on this.

+++++++++++++++++++++++++++

I think mike makes a good point.

 
At 3/16/2011 9:29 PM, Blogger Hydra said...

What benefit do taxpayers get from guaranteeing 30 yr fixed mortgages?

=================================

They get many benefits, including the availability of thirty year mortgages, and increased liquidity in the housing market as a result.

 
At 3/16/2011 9:39 PM, Blogger Hydra said...

"We benefit from highways, but not without risk."

What possible connection could this have to a discussion of mortgage loan guarantees?

==================================

You have a problem with analogies, or you can't see the big picture?


We pay for highways, same as we partially support mortgages. Both policies epose us to benefits and risks.

We could have all private highways, and what a mess that would be, but in the end, they would be built with our money, and we would deal with risks of using the highways same as risk of using a 30 year note: YOU MIGHT GET IN OVER YOUR HEAD.

But most people don't. They get a house they can enjoy, live in, and profit from, with as mike points out, some money left over.

What possible point is there in paying for a house in twenty years that you will live in for 40? Or more if your children and grandchilden inherit.



Nobody is seriously suggesting getting rid of the 30 year note to benefit consumers: this benefits the bankers.

That might be fine, but lets balance the costs, the benefits and the risks. Even if we advocate NO GOVERNMENT INTERVENTION, that is a policy that has costs and risks asociated with it.

 
At 3/16/2011 9:41 PM, Blogger Hydra said...

You have missed my point about Canadian homeowners and lenders. I can tell, because your responses are nonsense.

================================

Not at all, but you are ignoring the fact that canadian homeowners are much older when they acquire their homes and benefit from the ownership proportionately less.

 
At 3/16/2011 9:48 PM, Blogger Hydra said...

Few borrowers have defaulted, and few lenders have failed, because few people have gotten in over their heads.

=================================

And how many were prevented from ownership that would have succeeded?

When I bought my first home it was tight, but I wasn't in over my head. But now I had a level basis to work against, plus incentive, and soon my income improved. After that it was all benefit and no one got hurt.

It could have turned out some other way, through job loss, triplets, general downturn, fire, or many other reasons: none of which are the fault of the 30 year note.

I can't believe what you say about people over their head, because it does not match my experience or my observation of my siblings or even strangers.

Besides, if someone gets in over his head, isn't there a banker on the other side of the table? It is not as if they were forced to make loans, fair housing policy aside.

 
At 3/16/2011 9:52 PM, Blogger Hydra said...

you get the same effect (though far less extreme) from a drop in interest rates.

people think in terms of monthly payment. if the same payment can buy more house due to low rates, ceteris paribus prices rise.

==================================

It is non linear. Prices may go up, but not as fast as affordability goes up.

Unless building restrictions reduce the new supply.

 
At 3/16/2011 10:42 PM, Blogger Ron H. said...

"Why not, if they are the ones that benefit from homeowning opportunities as a result?"

Why not? Because they are taxpayers. Do you understand what that word means? They may also be borrowers, but those are 2 different hats. They have no interest in helping other people borrow money to buy a house, and shouldn't be expected to. There is no legitimate government interest in encouraging people to borrow money to buy houses if they are otherwise not able to afford them. You don't understand that concept either, based on your previous answers.

There are professional lenders, with money at stake, who assess risk and determine creditworthiness of borrowers. Politicians can't possibly make better decisions than lenders can, and decide to guarantee loans with taxpayer's money. If you don't understand this, and it seems you don't, then there's no hope for you.

"You are advocating a risk free environment for taxpayers, which mayeasily cost them more than the taxes they would allegedly save.

Probably they wouldn't save any taxes, but the funds would be reallocated to other piorities.
"

This is just speculative nonsense. You have no idea what you're talking about. If you have some actual data to support this drivel let's see it. It's easy to tell you are out of arguments when you write meaningless stuff like this.

 
At 3/16/2011 10:51 PM, Blogger Ron H. said...

"They get many benefits, including the availability of thirty year mortgages, and increased liquidity in the housing market as a result.

I can't believe you wrote that. Even you, as obtuse as you are, must see the problem. What has happened to the housing market recently due to increased liquidity?

Do you consider bailing out Fanny & Freddie to be "benefits"? How about the meteoric rise then fall of prices? A benefit again? How about the defaults & loans made good by taxpayeras? A benefit? How many taxpayers do you know that are happy with their benefits?

You REALLY need to think before you type.

 
At 3/17/2011 11:49 AM, Blogger Mike said...

There has to be a middle ground on this.
As long as we have the mortgage interest deduction, every mortgage is subsidized. With the 30 year, the wealthier among us aren't the only ones to benefit.

The interest rate probably should be a little higher and 20% down should be the standard - along with a good credit history. If these simple guidelines were followed, we wouldn't have the history of problems (at least nowhere near as severe).

 
At 3/18/2011 10:48 AM, Blogger Hydra said...

"Almost half-a-million people live in San Diego’s unincorporated areas. The new plan is designed to manage development to accommodate another 200,000 residents in the areas outside San Diego’s 18 cities’ boundaries over the next 40 years.

The proposed plan will leave almost 30 percent of acreage with zoning unchanged, increase building potential on 4 percent and down-zone development rights on 65 percent."

==================================

This strikes me as a typical downzoning plan, with all the bad features I have complained to EMR about. It is a guaranteed wealth plan for 4% and guaranteed less tHANn nothing for 65%.

Where is the equity in this?

 
At 3/18/2011 10:51 AM, Blogger Hydra said...

"They get many benefits, including the availability of thirty year mortgages, and increased liquidity in the housing market as a result.

I can't believe you wrote that. Even you, as obtuse as you are, must see the problem. What has happened to the housing market recently due to increased liquidity?

==================================


I can tell you what I have seen, as a result of increassed liquidity in the market.

I lost three, good, long term tenants, who were finally able to buy their own home.


I'm sorry the previous owners of those homes could hack it, or got in over their head, or were allowed in over their head, but I'm not sorry my former tenants finally have their shot at success.

 
At 3/18/2011 10:57 AM, Blogger Hydra said...

Do you consider bailing out Fanny & Freddie to be "benefits"? How about the meteoric rise then fall of prices? A benefit again? How about the defaults & loans made good by taxpayeras? A benefit? How many taxpayers do you know that are happy with their benefits?


==================================

Despite all those thngs I know that I am better off now than I would have been had I been shut out of the real estate market by the draconian methods you suggest.



You are not counting the benefits, but only the disbenefits. If you look at it as a total system, with all the involved people, then I think you get a different answer.


No one, however, is looking for the right answer, because they are tooo busy looking for answers that fit their preconcieved ideology. I still maintain that the right answer is the lowest Total Cost, where

Total Cost = Production Cost + External Cost + Government Cost

 
At 3/18/2011 10:58 AM, Blogger Hydra said...

I believe that Mike is correct.

 
At 3/18/2011 11:05 AM, Blogger Hydra said...

This is just speculative nonsense. You have no idea what you're talking about.

===============================

I am not speculating that you are advocating a risk free environment for taxpayers.


As for how the costs and benefits would play out, if anyone ever bothered to look, I really don;t care. If the costs prove that you are rightt, then I'm on your side, no problem.

But my basic argument about how you DECIDE the right answer is the same.

You are proposing a solution for which the answer is equally speculative, and you are proposing one that is based on only part of the information.

You proposed answer is as speculative as mine, and it involves only part of the system.

 
At 3/18/2011 11:12 AM, Blogger Hydra said...

"Why not, if they are the ones that benefit from homeowning opportunities as a result?"

Why not? Because they are taxpayers. Do you understand what that word means? They may also be borrowers, but those are 2 different hats.


=================================

They are nt two different hats because they are allpart of one system.

Once you properly understand the boundaries of the entire housing system, your position is harder to defend.

But, if you measure the results as I suggest, and the costs come down on your side, then I'm on your side.

Right now, the system we have includes taxpayers wo do not own homes, to the extent that they have to participate in the bailout.

The system includes taxpayers who do own homes, and have owned thme long enough that they were not affected, except on paper. Etc. Etc.

Sum the benefits and costs over ALL the players, not just the ones who got in lately, re borrowed over their head, or were not good candidates to begin with.

 
At 3/18/2011 11:26 AM, Blogger Hydra said...

How many taxpayers do you know that are happy with their benefits?


=================================

What are you suggesting? There is always room for incremental imprvements: better benefits for the costs.

But your tone suggest you belive that is not the case,and we are ALWYS better off to forego benefits, and save the costs.


However, foregoing the benefits has costs, too, which you seem to ignore, and I'm not just talking about to those who are direct recipients of the benefits.

 
At 3/18/2011 11:27 AM, Blogger Hydra said...

They have no interest in helping other people borrow money to buy a house, and shouldn't be expected to.

===============================


Really?

What if they are housepainters?

 
At 3/18/2011 11:35 AM, Blogger Hydra said...

There are professional lenders, with money at stake, who assess risk and determine creditworthiness of borrowers. Politicians can't possibly make better decisions than lenders can, and decide to guarantee loans with taxpayer's money.

==================================

The professional lenders are only concerned with one part of the total system.


A politician hwo is doing his job (If there is such a thing) is concerned with making the whole system bigger, which while make the lenders slice of the pie bigger - if it is done properly.


Your argument seems to be that it can never be done properly, and best not to try. Best never to look at the results of an untamed system, what the bankers achieve on their own, to see if a little cultivation can't improve it.

 
At 3/18/2011 1:22 PM, Blogger Ron H. said...

"This strikes me as a typical downzoning plan, with all the bad features I have complained to EMR about. It is a guaranteed wealth plan for 4% and guaranteed less tHANn nothing for 65%.

Where is the equity in this?
"

Well, there you are. Do you see the difficulty collectivists like you have with trying to be on both sides of this issue? On the one hand, you are an enthusiastic central planner, who knows what's best for egeryone else, and on the other you see that it doesn't appear to work in the best interest of hardly anyone, yourself included.

I'm curious about what you think an "equitable" outcome would be? You quote numbers of 4% and 65%, but those represent acreage, not parcels or owners, so It's not possible to tell how many people are affected. Acreage has no interest in this matter, only people.

Neither is it possible to know how many people are affected in a way they prefer from these numbers. How many want higher density for their property and how many don't? Would you consider it equitable if 50% were up-zoned and 50% down-zoned?

The only possible plan that even comes close would be for the county to allow sales of TDRs at market value. This would leave decisions in the hands of property owners, and best serve the needs of everyone.

Here's a quote from a typical central planner:

"Supervisor Diane Jacob says the board needs to balance the needs of individual property owners with the interests of the general community."

One has to wonder who she imagines the "general community" is, if not the individual property owners.

 
At 3/18/2011 4:06 PM, Blogger Ron H. said...

"I lost three, good, long term tenants, who were finally able to buy their own home.

Oh give me a break! This little bit of anecdotal evidence that overall, we are, as a collective group, better off because some people who could not buy houses before, were finally able to? Does this meet your test for lowest total cost?

"Despite all those thngs I know that I am better off now than I would have been had I been shut out of the real estate market by the draconian methods you suggest."

"Don't bother me with facts, I know I'm better off, so the rest of it doesn't matter." says Hydra

Here's the thing. Some of my property was taken from me by force, by government, to use to entice a lender to lend you money they might not have, otherwise. That's obviously good for you, but how is that an overall benefit?

Draconian? Do you even know the meaning of the word? How is it draconian to allow lenders to assess and assume their own risk, without outside meddling?

"They are nt two different hats because they are allpart of one system."

Here is your problem in a nutshell. We are each individual legos. We can't be made to fit together as one homogeneous mass like playdough.

"Once you properly understand the boundaries of the entire housing system, your position is harder to defend."

But there are no boundaries to be understood. The "entire housing system" consists of millions of individual interests, and can't be treated as one entity. See above explaination.

"But, if you measure the results as I suggest, and the costs come down on your side, then I'm on your side."

This is meaningless. Your simple little formula doesn't work in the real world. You can't measure costs accurately, and there are no final results to measure, as the process is ongoing.

"I believe that Mike is correct."

About what? That tighter lending standards could have prevented a lot of pain? Well, I certainly agree with that, but that doesn't fit with your notion that helping people get loans, even if they don't qualify, is a good idea.

As to specific down payments, interest rates, and standards of creditworthiness, only the lenders, who are risking their own money, can properly quantify those values. If they are mostly correct in their assessments, then they will prosper. If not, they will fail. What could be more fair than that? Interference by government distorts the market and produces mostly negative, unentended consequences.

 
At 3/18/2011 10:28 PM, Blogger Ron H. said...

"But your tone suggest you belive that is not the case,and we are ALWYS better off to forego benefits, and save the costs."

Who is WE in that sentence? WE are always better off if WE aren't forced to provide benefits for someone else.

"However, foregoing the benefits has costs, too, which you seem to ignore, and I'm not just talking about to those who are direct recipients of the benefits."

What can you even mean by that? Can you be even a little bit more specific? It's easy to ignore benefits you haven't described. What are they? Remember, no direct recipients.

"Really?

What if they are housepainters?
"

That is truly one of the stupidest thing you've written so far. We were discussing taxpayers and borrowers, and now you have introduced a third hat. If housepainters were truly interested in promoting their business by encouraging people to buy houses, they could merely offer deep discounts to home sellers and potential home buyers, and leave taxpayers out of it.

Please think before you hit the 'publish' key. You are wasting people's time with such blather.


"The professional lenders are only concerned with one part of the total system."

That's correct, and as it should be. Dentists, accountants, loggers, and pharmacists are each interested in their own business, as it should be.

"A politician hwo is doing his job (If there is such a thing) is concerned with making the whole system bigger, which while make the lenders slice of the pie bigger - if it is done properly."

Like so many other things, you don't understand politicians. their job isn't to make pies, or make existing pies bigger. That is something that a free market does.


"Your argument seems to be that it can never be done properly, and best not to try. Best never to look at the results of an untamed system, what the bankers achieve on their own, to see if a little cultivation can't improve it."

Done properly by politicians? Anything is possible, but I have never yet seen a political solution work as advertized, without unintended consequences.

Banks, without interference by government, for example removing risk by buying loans from them through a GSE such as Fannie Mae, would operate much as most other businesses do when at the mercy of a free market.

 

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