30-year fixed-rate mortgage tied to demise of Fannie and Freddie
The 30-year fixed-rate mortgage could be history if Fannie Mae and Freddie Mac go away. Ridding taxpayers of the burden to prop up Fannie and Freddie is a goal supported by both Democrats and Republicans. But the demise of Fannie and Freddie will likely make getting a mortgage a luxury for a majority of Americans.
Goodbye 30-year fixed-rate mortgage
The 30-year fixed-rate mortgage is threatened with extinction because the only reason it exists is through government support. Fannie Mae and Freddie Mac offer borrowers low mortgage rates because of money from investors who get a guarantee from the government they will make money even if borrowers default. That government guarantee cost taxpayers billions when the housing market collapse and now the housing market is too weak to stand on its own. Fannie, Freddie and other federal programs back about 90 percent of new mortgage loans because lenders can’t find investors in mortgages without a government guarantee.
Hello 10-year floating rate mortgage
Whether Congress abruptly pulls the plug on Fannie and Freddie or tries to gradually wean the housing market from government support, the 30-year fixed-rate mortgage isn’t expected to survive. Without the Fannie or Freddie guarantee, mortgage lenders will have no incentive to offer 30-year fixed-rate loans because they must assume the risk of rising interest rates over a very long time. Lenders will likely switch to a 10-year floating-rate loan to attract investors. The 10-year floating-rate loan would shift risk away from lenders and their investors to the borrowers. Borrowers will face higher loan fees, higher interest rate risk and a more acute “equity gap” risk in the event of a shorter term loan and falling home prices.
Profound changes in U.S. homeownership
Both Republican and Democratic voices on the housing issue want the government to replace Fannie and Freddie with a system that somehow offers borrowers similar benefits without the government guarantee. Others argue that a private market without government support would inspire investor confidence and offer middle class homeowners better loan products — products that would not include the 30-year fixed-rate mortgage. Without the 30-year fixed rate mortgage, a housing market staple since the 1950s, fewer Americans are likely to buy homes. The majority who will are likely to gravitate toward less expensive homes.