Policy Documents

Research & Commentary: The Future of the 30-Year Fixed-Rate Mortgage

December 19, 2011

Legislators and regulators in Washington, DC are now considering a gradual winding down of the two giant government-supported mortgage-securitizing enterprises, Freddie Mac and Fannie Mae. This could have a huge impact on the availability of the 30-year, self-amortizing, fixed-rate, no-prepayment-penalty mortgages most Americans have. (Ninety percent of all U.S. mortgages are fixed-rate.) Currently only one other nation (Denmark) has mortgage terms as generous as those in the United States for typical homeowners. 

Those who argue for preserving these fixed-rate mortgages claim they play an essential role in the U.S. housing market and ending these mortgages will make homeownership impossible for numerous Americans. One expert even called the availability of long-term fixed-rate mortgages for American citizens “part of their civil rights.” 

Others, however, including several Heartland Institute scholars, have begun to question the value of these mortgages. They note the 30-year fixed-rate mortgage emerged a result of government manipulation and probably would not exist in a truly free market. These critics also note many of the features of such mortgages are not necessarily beneficial—the lack of prepayment penalties, for example, makes these mortgages much more expensive. 

The following articles examine the 30-year fixed-rate mortgage and its future prospects from a free-market perspective.

Mortgaging Our Future: The Case Against 30-year Loans
http://www.weeklystandard.com/articles/mortgaging-our-future_613475.html
Eli Lehrer, vice president at The Heartland Institute and Ike Brannon, director of economic policy at the American Action Forum write in the Weekly Standard about 30-year mortgage and argue for the implementation of policies that do away with the implicit guarantees behind the 30-year mortgage. They argue that eliminating these subsidies could cut back a hugely expensive bureaucracy and stabilize the financial system with little consequence for homeownership rates.

Do We Need the 30-year Fixed-rate Mortgage?
http://heartland.org/policy-documents/do-we-need-30-year-fixed-rate-mortgage
Michael Lea and Anthony Sanders of the Mercatus Center examine whether the benefits of the 30-year fixed-rate mortgage are worth the cost and whether these mortgages would disappear if Fannie and Freddie no longer financed them. The authors also discuss mortgage alternatives that balance the needs of consumers and investors without exposing the taxpayer to risk. 

The Role of the 30-Year Fixed-Rate Mortgage in Maintaining the Pathway to Sustainable Homeownership for Hispanic Families: Testimony of Janis Bowdler before the U.S. Senate Banking Committee
http://heartland.org/policy-documents/role-30-year-fixed-rate-mortgage-maintaining-pathway-sustainable-homeownership-hisp
Janis Bowdler, director of the Wealth-Building Policy Project at the National Council of La Raza, testifies before the U.S. Senate Banking Committee about the important role the 30-year fixed-rate mortgage plays in encouraging homeownership for middle-income families and first-time homebuyers. Bowdler explains why she believes the government can help to maintain a viable path to homeownership for future generations of homebuyers. 

A Strong Housing System Relies on a Solid Foundation
http://www.americanprogress.org/issues/2011/07/mortgage_finance_reform.html
This article from the Mortgage Finance Working Group, sponsored by the Center for American Progress, states several cornerstone principles the group argues should be part of any future mortgage finance policy reform. Those principles include protecting the 30-year fixed-rate mortgage. 

Lawmaker Questions the 30-Year Fixed-Rate Mortgage
http://www.themreport.com/articles/lawmakers-question-30-year-fixed-rate-mortgage-2011-10-20 
Ryan Schuett of Mreport.com speaks with several legislators and economic experts from both sides of the debate about the 30-year fixed-rate mortgage. 

The Government’s Role in the Housing Bubble
http://www.theatlantic.com/national/archive/2010/07/the-governments-role-in-the-housing-bubble/60333/
Atlantic magazine Senior Editor Megan McArdle argues the unsung villain of the mortgage crisis is the 30-year, fixed-rate, self-amortizing mortgage with no prepayment penalty. 

The Dark Side of the 30-Year Fixed-Rate Mortgage
http://blog.american.com/2011/03/the-dark-side-of-the-30-year-fixed-rate-mortgage/
Alex J. Pollock of the American Enterprise Institute observes that the dark side of the 30-year fixed-rate mortgage occurs when interest rates fall to very low levels and house prices are also falling. This, Pollock notes, is the reality of the past few years. Under such circumstances borrowers find it extremely difficult to refinance because of the fall in house prices, so they are stuck with a very high nominal and even higher real interest rate, and their payments stay the same even as interest rates fall. The entire deflationary discount in the house price is thus imposed on them. Defaults rise, and house prices are pushed further down. 

Testimony of Paul S. Willen before the U.S. Senate Committee on Banking, Housing, and Urban Affairs Hearing on “Housing Finance Reform: Continuation of the 30-year Fixed-rate Mortgage”
http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=d7648c10-93bd-47a2-8313-d0e58c7082fe
In this testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Paul Willen, senior economist and policy advisor at the Federal Reserve Bank of Boston, talks about the 30-year fixed-rate mortgage, its history, and its failure to prevent foreclosures both in the 1930s and today. 

Housing Market Will Be Fine without 30-Year Fixed Loans
http://www.cato.org/pub_display.php?pub_id=12890
Writing in Investor’s Business Daily, Mark Calabria of the Cato Institute argues the advantages of the 30-year fixed-rate mortgage have been grossly exaggerated and subsidizing it should not serve as an excuse for continuing to put the taxpayer at significant risk. 

Are We Facing the End of the 30-year Fixed-rate Mortgage?
http://articles.latimes.com/2011/may/15/business/la-fi-lew-20110515
Lew Sichelman writes in the Los Angeles Times about the future of the 30-year fixed-rate mortgage. Many housing proponents say the government’s move to dismantle Fannie Mae and Freddie Mac means the most popular home loan will be more expensive—but how much more is a matter of debate. 

Government Must Jettison the 30-Year Mortgage
http://www.aei.org/article/economics/financial-services/housing-finance/government-must-jettison-the-30-year-mortgage/
In Real Clear Markets, American Enterprise Institute Resident Fellow Edward Pinto argues the demonstrated instability caused by the widespread availability of the freely pre-payable 30-year fixed-rate mortgage argues against continuing the taxpayer subsidies for the mortgages.