The Demise of the 30 Year Mortgage

By: Victor Normand
Published: April 2015

The subprime lending crisis is history, but its effects on the residential real estate industry will remain with us for a long time. The most apparent changes have been tighter lending standards and greater transparency with consumer protections for home buyers, but other less visible changes may be happening, changes that could make home buying out of reach for lower and moderate income borrowers looking for an affordable mortgage.

At the time of the crisis in 2008, the federal government through “government sponsored enterprises” (GSE’s) Fannie Mae and Freddie Mac, guaranteed more than three quarters of all outstanding home mortgages in the country. Though federally chartered for the public purpose of providing low interest rate mortgages and affordable housing, the GSE’s are privately owned by their stockholders, stockholders who were interested in profitability. To achieve increased profitability, the GSE’s fought increases in capital requirements and regulation.

When the financial crisis hit in September of 2008, Lehman Brothers filed for bankruptcy and the big banks were threatened with collapse, it would not be long before the GSE’s suffered the same fate. Nearly $200 billion was needed to keep them solvent. The U.S. Treasury provided the funds under the terms of a conservatorship that took control of Freddie and Fannie and set the stage for their eventual demise.

The view of many in the housing and banking industry is that without Freddie and Fannie there will no longer be the 30 year fixed rate mortgage that has fueled the home buying market.   At the end of World War II when only 40% of Americans owned their own homes, the 30 year mortgage envisioned as part of the New Deal in 1938 was new on the scene, today over 60% of Americans own their homes. Without the guarantees provided by the government through the GSEs, it is unlikely that lenders would be willing to take such long term risks, particularly in the current low interest rate environment. Today, many higher income home buyers are opting for 10 and 15 year mortgages, but the 30 year mortgage is critical to many first time and moderate income borrowers.

The structure of the conservatorship seems to dictate its demise, probably by 2018. Legislation in Congress has bi-partisan support and recently the President has indicated his support for a change. The effects of a sudden end to government guaranteed mortgaged backed securities would be an economic disaster. Housing and housing related services accounts for over 17% of the country’s Gross Domestic Product. The progression that begins with buyers who can only afford smaller mortgages and moves to lowered home values and then loss of equity and finally to recession is very familiar to everyone.

The legislation to wind down the GSEs has names like “The Protecting American Taxpayers and Homeowners” and “Housing Finance Reform and Taxpayers Protection Act” both sound like just what the country needs, but the devil is in the details. The National Association of Realtors strongly opposes these bills and other efforts that disrupt the current housing finance status quo, but the damage has been done. Less dependence on the federal government for the health of the housing sector of the economy would be a good thing, getting from here to there needs to be done carefully, very carefully.