Will the 30 Year Mortgage Go the Way of the Dinosaur?

This is the opinion of a few who feel that, if the federal government shuts down housing finance giants Fannie Mae and Freddie Mac, we will no longer see this type of loan

This past housing bubble and melt down has really put a crimp in home financing. When I got into the business 25 years ago, there were basically 2 types of loans. A fixed rate type, either for 30 or 15 years, and a basic adjustable rate loan. I was able to counsel my clients on the different types of loans. By year 10, there were so many versions of a home loan (variable rate loan but fixed for 3, 5, 7 or 10 years, interest payment only loans, negative amortization loans, etc., etc., etc) that I would call a loan agent in to explain the options for my buyers. Not so many options now and it’ll probably get worse.

Rewind to the 50’s, when Fannie Mae and Freddie Mac were brought into existence to support liquidity into the mortgage market. Fannie and Freddie made homeownership affordable by allowing borrowers to repay loans with fixed interest rates over an unusually long period of time. The 30 year mortgage became available by an act of Congress in 1954, and from then until now, the vast majority of such loans were issued only with government support (Fannie and Freddie).

Think about it…what typical investor would want to tie up money for 30 years, no matter what the return is? Unfortunately, the executives at both companies wanted more and more profitability, so they poured more liquidity into a system that did not need it (loans that only required borrowers to fog a mirror!).

Some also feel that the federal government shouldn’t be subsidizing homeownership for the middle class. Sometimes, the allure of stretching to afford something you want, but cannot really afford, it may not be a good thing anyway. Just a side note—the 30 year fixed loan is only an American thing. Few other countries offers this type of financing.

So, there is pressure from both sides (Dems &Reps) to dismantle these entities. If that happens, the 30 year mortgage may still be around, however, they may be considered a luxury product. They will require a larger down payment and become more expensive to obtain. Imagine paying 3 points (3% of the loan amount) to obtain a 30 year fixed mortgage.

William H. Gross, the co-head of Pimco, the major bond investment firm, estimated that would be their premium to purchase these investments…which, of course, would be passed on to the borrower. Also, fewer buyers would qualify for better rates because the down payment requirements would be higher. Theoretically, this is a good model. If a borrower put more money down when they bought a home, the risks associated with the loan would be less, therefore, the investor’s mortgage costs (and borrowers) would decline.

While we are talking about mortgage financing, why not talk a little about our nations tax policy? It rewards consumers who amass huge levels of debt when purchasing a home. Shouldn’t the homeowner who has more equity in a home be rewarded? I’m for that one! Tax credits could be provided based on the amount of down payment. Just a thought.

Lots to consider in wake of the past melt down. If this is needed to make our housing market stronger in the long run, then so be it. As in a prior blog, Where is the Market and Will I Ever Fit In?, I stated that homeownership isn’t for everyone. If it is, think it out.

Don’t over extend if you really can’t. Think about saving for a good down payment, so your monthly costs are lower. We are in a buyer’s market that shows no sign of ending anytime soon. I welcome any comments or feedback…contact me.