Are 30-Year Fixed-Rate Mortgages Really in Danger?

In February, the Bipartisan Policy Center's (BPC's) Housing Commission published a report that suggested reducing the government's role in the real-estate market. You don't have to be a free-market zealot to think that might be a good idea: according to the report, 90 percent of all single-family mortgages are currently backed, one way or another, by a federally-affiliated body such as the Federal Housing Administration (FHA), Freddie Mac, Fannie Mae or Ginnie Mae.

But the report also warned that a complete withdrawal from housing on the part of the government could cause some real problems, including the loss of our most popular form of home-loan borrowing: the 30-year fixed-rate mortgage.

“The presence of a government guarantee in the secondary market ensuring that investors will be paid even if borrowers default on their loans has eliminated much of the credit risk from these investments,” says the report, “thereby making them attractive to investors looking for instruments that are sensitive only to interest rate risk. In the absence of such a government guarantee, it is highly unlikely that private financial institutions would be willing to assume both interest rate and credit risk, making long-term, fixed-rate financing considerably less available than it is today or only available at higher mortgage rates.”

Is Government Always Bad?

Of course, some condemn all government intervention. Peter J. Wallison and Edward J. Pinto recently wrote in The Washington Times, warning that the new Qualified Mortgage rule, introduced in January by the Consumer Financial Protection Bureau, was "simply another and more direct way for the government to keep mortgage underwriting standards low. This sets the country up for a repetition of the mortgage meltdown of 2007 and 2008."

Wallinson and Pinto went on to allege that government policies directly caused the 2008 credit crunch. Hmmm. Many would accept that they were a contributory factor, but the big banks and rating agencies' actions in the mortgage-backed securities market were pretty important too.

Getting Home Loans Still Tough

As for Wallinson and Pinto's point about keeping mortgage underwriting standards low, that's something of a myth. VA home loans and FHA home loans offer some underwriting flexibility, but many still find lenders’ underwriting standards decidedly tough.

On Mar. 4, The Patriot-News explored the continuing problems that some borrowers have in this respect. Even those with good credit and a perfect record of punctual payments can struggle to meet the bureaucratic demands of those processing their refinance applications. Of course, they could always check out LendingTree's refinancing resources to see if they can find a more amenable lender.

But the point is: just as before the credit crunch, mortgage lenders continue to have the right to be as choosy and demanding as they wish. The government has never really forced them to lend to those they regard as too risky.

The Good News – For Now

Certainly, it's tough to find fixed-rate home loans in countries with less mortgage-related government intervention. In Canada, for example, fixed-rate mortgages generally come with anti-refinancing penalties to protect lenders when interest rates drop, and the rates on Canadian mortgages loans are fixed for a maximum of five years, which protects lenders when interest rates rise.

But here in the U.S.A., we still have:

  1. The option of locking in a rate for 30 years.
  2. Record-breaking housing affordability.
  3. Ultra-low mortgage rates.
  4. Home prices that are rising.

It's perfectly possible that in the US, there may never again be a better time to buy or refinance.

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