Abolish the 30-year fixed-rate mortgage!

By Felix Salmon
October 21, 2011
File under "Republican ideas which are actually rather good":

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File under “Republican ideas which are actually rather good”:

Congressional Democrats remain strongly committed to the 30-year fixed-rate loan, which protects homeowners against a rise in interest rates. But some Republicans, who want to scale back the government’s role in the housing market, have growing doubts about the taxpayer-subsidized loan product.

During a Senate Banking Committee hearing Thursday, the panel’s top Republican, Sen. Richard Shelby, asked a series of questions that critics of the 30-year fixed-rate mortgage have long been focused on.

“What unintended consequences have been created by subsidizing the 30-year fixed-rate mortgage? And what has the subsidy of this product already cost the American taxpayer?” Shelby asked. “We need to take a hard look at this product and determine if the preferential pricing resulting from these subsidies truly creates a public good.” …

Shelby asked another witness, the economist Paul Willen of the Federal Reserve Bank of Boston, to explain why fixed-rate mortgages can be more harmful to borrowers than adjustable-rate mortgages.

“So people who had fixed-rate mortgages from 2005 and 2006 and 2007, most of them are paying 5.5% or more on those mortgages. These are the people with negative equity,” Willen responded. “The people who had adjustable rate mortgages, their rates are under 4.5, and a third of them are paying less than 3.5% on their mortgages. They do that without any assistance whatever from anyone. They don’t have to beg their lender, they don’t have to get a modification,” Willen said.

That’s just one reason why the 30-year fixed-rate mortgage is a bad idea, and it’s not even the strongest one. The real reason this product should be abolished is that it simply doesn’t exist in any free-market system. In order to create it, you need to invent Fannie Mae and Freddie Mac — and just about everybody agrees that those two entities, which have cost the government hundreds of billions of dollars of late, and will probably cost even more going forwards, need to be radically downsized.

The simple truth is that without Frannie, you can’t have 30-year fixed-rate mortgages. Banks would never offer such creatures, and if they did, the interest rate on them would be so high, relative to adjustable-rate loans, that nobody would ever take them out.

A lot of the debate here seems, sadly, to surround the idea that such mortgages should be prepayable. Maybe if there was a prepayment penalty, they’d make more financial sense. But I’m not a fan of prepayment penalties at all — people should always have the ability to repay their loans just by paying back the full amount they owe.

At heart, it comes down to this: the 30-year fixed-rate product is always going to shift a huge amount of interest-rate risk onto the government in one form or another. Even the product’s defenders, like Susan Woodward, understand that:

“The critics of the 30-year fixed rate loan argue that this is unfair for households to get the benefits of reduce risk of fixed-rate loans while the taxpayers bear the risk,” she said in her written testimony. “This criticism forgets that homeowners are taxpayers too.”

No, it doesn’t. It’s true that homeowners are taxpayers. But it’s also true that renters are taxpayers. And homeowners already get far more than their fair share of tax relief, not least through the dreadful mortgage-interest tax deduction. We shouldn’t subsidize them even further by offering them financial products which would never normally exist in the wild.

51 comments

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Downsizing Frannie and keeping the 30-year would discourage people from buying houses, right? And isn’t that something you’ve long said was a ‘good thing’?

Posted by Sprizouse | Report as abusive

While after sitting around and thinking for a couple minutes I think I see what you’re getting at, Felix, I think this is one of those posts you should explain a bit more fully.

Posted by AnonymousChef | Report as abusive

I don’t get it, Felix – there is not a doubt in my mind that the average American homeowners is not nearly financially savvy to be able to manage the risks of an adjustable rate mortgage long term. What happens when rates rise? Everyone defaults?

Posted by KidDynamite | Report as abusive

“The real reason this product should be abolished is that it simply doesn’t exist in any free-market system”

That’s not a good reason, as a pure free market system isn’t perfect. And we don’t have one, anyway. A free market system allows managers to run their firms for their personal interest, not the best interest of the firm, so a pure free market system isn’t ideal.

You might want to end the 30 year fixed mortgage after you update social security. Either that, or get a dictator to run things.

Posted by KenG_CA | Report as abusive

One of the reason 30 year mortgages exist is surely to make them a securitised commodity? In Europe we don’t have such things and we don’t suffer for it. Our banks and lenders only started getting into trouble when some slick snake oil Wall Street salesmen got them hooked on securitisation. Northern Rock used it a lot and went bust.

If people lived in the same house for 30 years it might be possible to make a case for them for consumers too, but few people fit into that category. Most of my clients move house every seven years at least, on average, and being able to shop around from time to time keeps competition in the marketplace healthy.

Posted by FifthDecade | Report as abusive

Felix is dead wrong. Fannie Mae and Freddie Mac are principally in the business of taking on credit risk, not interest rate risk. Holders of mortgage backed securities guaranteed by Freddie and Fannie take on the interest rate risk. In addition, I think the existence and success of the 30 year jumbo mortgage proves the viability of a 30 year fixed-rate product sans government assistance.

Posted by Basho213 | Report as abusive

I’m with Kid Dynamite, though not so charitable.

The 30-year “fixed rate” mortgage is a boon to =banks.=

And I want to see the evidence that “The people who had adjustable rate mortgages, their rates are under 4.5, and a third of them are paying less than 3.5% on their mortgages. They do that without any assistance whatever from anyone. They don’t have to beg their lender, they don’t have to get a modification.”

(And, yes, I am speaking as someone who just refied into 3.99% fixed. So when Dallas Ahole, Minneapolis Ahole, and Philly Ahole get their ways, that 1/3 who are saving $28.37 on each $100K of principle get to cut their discretionary spending as the economy heats up and inflation rises. And let’s not even think about the other 2/3s.)

Posted by klhoughton | Report as abusive

The problem with adjustable rates is when rates rise, but that’s more of a cash-flow problem than a solvency problem; high interest rates, especially for extended time periods, are associated with home price appreciation. Conversely, when rates are low it’s more likely that the house is depreciating, perhaps more quickly than payments are being made. It seems like you could keep the cash-flow problem more or less solved (as it is with fixed rates) while adopting the benefits of floating rates if you allow negative amortization and keep the required payment less variable; changes in interest rate would primarily affect the rate at which principal is amortized, and would only affect payments gradually and to a small extent until it gets close to its scheduled maturity.

Posted by dWj | Report as abusive

@fifthdecade – great point about not living in the house for 30 years… so what is the alternative that you prefer in Europe?

Felix seemed to be suggesting ARMs for the masses here, which I think is a terrible idea. The alternative is a shorter term fixed rate mortgage, which makes a lot of sense… but means you have to pay more each month, of course!

Posted by KidDynamite | Report as abusive

My main takeaway was the top Republican, repeat Republican was talking about raising taxes. And not just raising taxes, but raising taxes on the middle class because extremely large mortgages don’t qualify for deduction.

Posted by jomiku | Report as abusive

FifthDecade: The thirty-year fixed predates the explosion of securitization in this country, and the history of securitization suggests that it is a response to the fact that mortgages are structured the way they are, not the cause of that structure. It’s more popular with borrowers than with investors; the financial engineering was done in an attempt to turn a pile of loans investors didn’t want into a pile of loans that’s closer to what they do want.

Posted by dWj | Report as abusive

“The simple truth is that without Frannie, you can’t have 30-year fixed-rate mortgages.”

Really? Then 30-year “jumbo” loans–loans too large to be guaranteed or purchased by the GSEs–shouldn’t exist, but they do. Admittedly, at higher rates, but not so much higher that no one takes them.

And I’m with Ken–I’d certainly want to see some evidence that Shelby is not talking out of his bunghole. And the example given seems to suggest that they’re bad solely because today we have historically extremely low rates. Why do we have those rates? Oh, right, the Fed. That’s not a subsidy? Which means that someday, in the future, rates will likely rise again. So people who get ARMs now will be f’d.

Posted by Moopheus | Report as abusive

““The people who had adjustable rate mortgages, their rates are under 4.5, and a third of them are paying less than 3.5% on their mortgages. They do that without any assistance whatever from anyone. They don’t have to beg their lender, they don’t have to get a modification,””

What kind of revisionist history nonsense is this?

Did everyone forget what happened in late 2007 and 2008? Rates on ARMs spiking and lack of refinancing ability? Hello?

Posted by RueTheDay | Report as abusive

Is it possible to troll your own blog?

Posted by RZ0 | Report as abusive

I can’t say for sure, but I think if all those people who got ARMs on their zero down mortgages back in 2003-2007 instead had fixed rate mortgages, many of them wouldn’t have defaulted. And maybe the crash of 2008 wouldn’t have happened.

And how do you qualify people for ARMs? Just hope their income will go up with interest rates? The fixed rate mortgage is a double-edged sword, for while it does have a cost associated with it, there is less risk of default, for its easier for people to predict and therefore manage their payments. That’s gotta be worth something.

As for that example of people with ARMs that are paying low interest rates now, those are only the people who didn’t default when rates when up. The high rates in 2008-10 kind of filtered out the least credit-worthy borrowers from 2005-07.

Posted by KenG_CA | Report as abusive

“The real reason this product should be abolished is that it simply doesn’t exist in any free-market system” – Say what?!

I’m pretty sure it exist in lots of free market systems. At least it definitely exist in Denmark – in the mortgage system that has not been propped up by the government and hasn’t seen a default in 200+ years.

Also of course there aren’t any private companies offering 30 year mortgages, when they have to compete with a government supported competitor.

Posted by Harthacnut | Report as abusive

File this under: Felix goes down the mortgage rabbit hole.

Posted by Mbuna | Report as abusive

Felix,

Even if you drop the mortgage interest deduction to level the playing field between buying and renting, don’t you still get a significant social benefit from insulating people from interest rate spikes?

At least if your mortgage interest rate (and therefore payment) is fixed, you’d be more able to keep paying that same payment as long as you’re employed even if the refi interest rates jump. If everyone was on ARMs, then when the interest rate jumps more people would be unable to afford the payments and would lose their homes, which makes house prices fall further, reduces social cohesion, damages neighbourhoods …

*If* the lending process were properly supervised (i.e. if we learn from the present disaster) so that the failure rate is kept low, then it sounds like a net win to me.

Posted by voodoobunny | Report as abusive

Echoing the point of Basho213, the existence of callable corporate bonds also indicates the presence of private market investors willing to take on long-term interest rate risk.

I agree with Felix’s narrow point that banks don’t want to hold 30-year fixed rate mortgages on their books, but banks also don’t want to hold 30-year fixed rate corporate bonds on their books and a market for those securities still exists.

Posted by realist50 | Report as abusive

“It’s true that homeowners are taxpayers. But it’s also true that renters are taxpayers.”

Not so much. Renters (and even more so, people who spend most of their lives renting) are grossly disproportionately among the roughly half of all taxpayers who do not pay net federal income taxes, and most of the federal taxes that they do pay (FICA, FUTA, gasoline taxes) do not subsidize mortgages in any way.

Moreover, outside of a handful of quirky markets like New York City, people who pay significant amounts of federal income taxes who are renters are only relatively short term renters (as young adults or newly relocating individuals) and over most of their lifetimes will be home owners, much of that time with mortgages.

The disconnect between mortgage payers and federal income taxpayers is mostly between free and clear homeowners and mortgage paying homeowners, not between long term renters and homeowners. But, most of the free and clear homeowners, over their lifetimes, have benefitted the federal mortgage subsidies prior to becoming free and clear homeowners. Only the very well off buy their first homes without a mortgage.

The inequities of federal subsidies of mortgages are more regional than issues of renters-owners, because housing prices (and hence mortgage amounts and hence mortgage subsidy benefits) vary greatly from market to market (with metro areas roughly matching housing markets). But, even this subsidy inequality is muted by the dollar cap on the mortgage interest deduction and the even more reestrictive conventional v. jumbo loan cutoff amount for Fannie/Freddie subsidized mortgages.

Posted by ohwilleke | Report as abusive

“The simple truth is that without Frannie, you can’t have 30-year fixed-rate mortgages.”

That is not that absolutely true if you look at different models of financing.

As an example, in Germany building societies (“Bausparkassen”) are extremely popular when someone wants to build his own house.

The basic idea is that in the first 6-10 years you pay a monthly rate on which you get interest, and after you have accumulated like half of the amount you will get 100% paid out for building/buying a house, and the money that was missing for the 100% is the mortgage you will pay off during the following 10-20 years.

The money from the people who are still in the accumulation phase is the money that is given out as mortgages.

Such a model allows fixed interest rates over decades, or having a variable rate with a maximum of 6% (sic) for decades – without any involvement of the government.

Giving mortgages to people who have not roughly half of the price in cash when they buy the house is a different story, but such mortgages are anyway not a good idea (unless you want to make a bubble bigger).

Posted by AdrianBunk | Report as abusive

The problem is that adjustable-rate mortgages offer no cost-certainty. It is fine to have an adjustable rate on credit cards, since you can pay them off in a year or two if you really work at it. Paying off a $300k mortgage when interest rates shoot up is MUCH harder to accomplish.

I’d rather be stuck with a bad deal than stuck with an unaffordable deal. Those people with 5.5% fixed-rate mortgages may be underwater, they may be paying more than the present market rate, BUT THEIR PAYMENTS DID NOT INCREASE!!! Reverse that interest rate swing, watch interest rates increase from 3.5% to 10.5%, and your mortgage payments will almost TRIPLE.

Remember the concern in 2007-2008 about how rate-resets on ARMs would destroy household finances and cause a wave of defaults? Maybe that didn’t turn out to be as much of a problem as feared (because the Fed was able to rapidly push interest rates downward), but I could easily imagine it happening the next time around the cycle.

Posted by TFF | Report as abusive

ohwilleke, the problem is that Felix believes that NYC is the world, despite all evidence to the contrary.

It’s been a while since I paid a mortgage, but I would prefer the predictability of a fixed rate mortgage, even if the rate were higher than current market. I think that’s what TFF is saying. However, I’m willing to be convinced otherwise. Felix, think this through and get back to us.

Posted by Curmudgeon | Report as abusive

wondering if we got rid got the rid of the 30 year fixed mortgage, if the prices of houses would collapse. after all you would have to pay it a lot sooner. seems like that is what kept house prices down pre 30 year mortgage.
and who would want an ARM any more? they just saw how bad that would work out

Posted by willid3 | Report as abusive

We could simply get rid of ALL mortgages. Home prices would fall substantially.

That might make long-term sense, but in the short run would be bad for the economic recovery.

Posted by TFF | Report as abusive

Ken, I believe – and have no hard to back up this belief – that one of the reasons for low default rates in the uk is because variable rate mortgages are more popular and the rate is tracking the near zero BoE rate. Unusual in uk to see fixes for more than 5 years. Of course Gordon brown backed 25 year fixes which is reason enough for me to dismiss it as idiotic

Posted by Danny_Black | Report as abusive

It probably would make more sense to follow Canada in offering 5 year mortgages, but this requires lenders to refinance when due regardless of valuation. Yes, rates have fallen (or not considering most of them were in the teaser period in the first years), but that hasn’t stopped home values from falling which would still prevent most of these from refinancing. Given they are then underwater, do rates fall due to the economy or rise due to the risk? Nothing can prevent the loss when forced to move.

How many hold on for 30 years? Quite a few as they approach retirement. Many insurers and pension plans would also like to match their obligations with their assets. Reducing the term would also reduce the effectiveness of monetary policy because the duration of low rates would diminish though it would increase the responsiveness since adjustment would be continuous.

Posted by MyLord | Report as abusive

Danny, if interest rates weren’t held artificially low by the fed, they would be much higher (especially in light of all of the defaults), and then nobody would be wanting ARMs, as defaults would be skyrocketing.

Also, i want to comment on something that one of Shelby’s witness’s said: that people who had fixed rate mortgages had negative equity, while those with ARMs had no problem paying their mortgage. The two points are meaningless. The people with ARMs are also under water.

Posted by KenG_CA | Report as abusive

At least in Australia, it is not the case that banks would never offer fixed rate mortgages, because they actually do. I’m not sure they offer the borrower the option of just leaving the rate in place for 30 years, and adjustable rates are more common, but the product does survive the market test.

Posted by Andy_McLennan | Report as abusive

No free market system has banks with deposit insurance worth a damn. As we have seen, the insurers go under when the business turns south. Maybe we should get rid of the FDIC as it too is opposed to nature.

The 30 year mortgage is designed to allow individuals buying homes to make long term plans by locking in interest rates. Yes, we could make them deal with that risk, along with all the others that we’ve been piling on the middle class over the last 30 years, but what exactly does this buy us?

Posted by Kaleberg | Report as abusive

keng_ca, dont know about the US but in the UK low interests stopping defaults is a feature not a bug. Also they are recourse here.

Posted by Danny_Black | Report as abusive

Danny, I’m not saying that is bad, just that ARMs aren’t the reason for reduced defaults, artificially low interest rates are. I’m ok with keeping rates low for that purpose (at least for a while), but let’s not give credit where it’s not due – to ARMs.

Posted by KenG_CA | Report as abusive

@KidDynamite
How are mortgages done in Europe? In France and Switzerland you get a variable rate based on margin over LIBOR, with LIBOR rate set every quarter. They are currently saving a lot of my clients loads of money – you get a margin of, say, 0.8 added to the current LIBOR 3 month rate of 0.04% and you get a really great deal.

Banks in these countries also offer Fixed Rates for longer periods of course, and some even split the sum borrowed into a large number (I’ve seen 20) of separate loans, all on Fixed Rate deals, each one for a different period of time. These are anti-competiive IMO though and can ruin any chance a borrower has to swap to a better rate when one of his fixed rate tranches needs renewing.

In the UK, LIBOR mortgages are less common, but the Variable Rate mortgage is still very common, although it is based on an internally fixed rate for each lender, but based more loosely on the Bank of England Base Rate. Margins here are probably more like 2% though.

Of course you can get fixed rates too… from less than a year to 10 years and sometimes longer (I have seen 20 years once, but the rate was much higher than for the 0-5 year term rates). As well as Fixed Rates, you get Discounted variable rates, and a whole host of other types.

I would say the most popular are the 3 to 5 year deals. At the end of one of these if they do nothing it usually reverts to the then standard variable rate. Having said that, most borrowers would then go back to their mortgage broker and ask him to source a new deal from the 80 to 100 lenders operating in the market. In this way borrowers optimise not just their interest rates, but the form they take based on expectations of economic trends and personal circumstances. Because a trend can be seen developing, and huge rate changes do not happen overnight, the mortgage rates are manageable and nobody suffers for having no long term tie in (except, perhaps, the banks).

There is no tax relief of any kind on mortgage interest in the UK, but in Switzerland all of it is deductible. In Switzerland however, homeowners are taxed extra for owning a house – the fictitious rental that they would have to pay to a landlord if they rented.

@ Harthacnut
In the UK a mortgage has two components – how long the lender wants the money paid back to them (typically 25 years – in Switzerland though there is usually no end point due to tax reasons) as well as the length of time the borrower arranges a special deal for (eg 5 year Fixed @ 3.29%).

Posted by FifthDecade | Report as abusive

“The simple truth is that without Frannie, you can’t have 30-year fixed-rate mortgages.”

The elephant in the room is that long term rates are so distorted by FED intervention (including operation twist) that there would be no market at current rates. If the cost of credit would be resolved in a free market, of course there would be a 30-year fixed-rate mortgage. It might not be desirable to take it though at the resulting free market rates.

The question of tax deductability and subsidizing of the house market is an entirely separate question and should be addressed by itself.

Posted by Finster | Report as abusive

I’m kinda curious, why it’s bad to average your housing costs over 30 years, but averaging out your retirement by contributing monthly into retirement accounts while ignoring market conditions, is acceptable.

Posted by GRRR | Report as abusive

Because if a 30 year fixed rate mortgage is fixed it isn’t an average over those 30 years, it’s the rate you get on the date you take the mortgage which could lock you into always high or always low interest rates; Dollar Cost Averaging does average the purchase price because of the 360 separate purchase dates.

Posted by FifthDecade | Report as abusive

FifthDecade, a better analogy would be buying a lifetime annuity. In both cases your cost/benefit is fixed at the time of purchase. In both cases the purpose is to manage cash flow.

In fact, annuities/pensions are the natural market counter-party to mortgages, which leads me to wonder why Felix thinks fixed-rate mortgages wouldn’t exist without Fannie and Freddie?

And yes, I realize that mortgages have historically been held for much less than 30 years. We refinanced three times in four years, between 2000 to 2004. The high level of refinancing activity was driven by a spiraling housing market and falling interest rates.

Going forward, refinancing will be much less common. Once interest rates rise, homeowners will be reluctant to give up a 30-year below-market loan. Even if they are under water a bit, the locked-in favorable terms will be tough to give up.

Posted by TFF | Report as abusive

I just started reading this blog again, and Mr. Salmon’s ignorance has apparently remained intact- especially on this subject.

Genius: why not take a look at the correlation of the housing market to Greenspan’s tightening of interest rates.

Note the FULLY INDEXED one year rate on this chart, starting from 2004:

http://mortgage-x.com/general/historical _rates.asp

Then ask yourself a simple question: WTF happened to the housing market after that?

Now there WERE a host of factors involved in the housing crisis. But one thing that put the hook on rising prices was the rise in ARM rates, which Mr. Greenspan was a cheerleader for.

Let me tell you something: if you START with a 4.00% rate on an ARM, and the Fed tightens to the point where you’re paying 8%, as in this chart, you’re gonna foreclose pal.

There is enough ignorance on the web on this subject to make anti-Semitism look respectable by comparison.

Posted by Flocktard | Report as abusive

Huh?

ARMs are fine when interest rates are going down, which is not the usual state of affairs outside of liquidity traps. They are vehicles for suckering people into buying houses they can’t afford and foreclosing on them when the interest balloons, they can’t make their payments, and the value of their property in the meantime has gone up. Sleazebag real estate agents love them. Consumers should avoid them like the plague. See also: interest-only mortgages. What soulless grifter cooked those up?

Posted by Fishrl | Report as abusive

Do I hear interest rate swap bubble?

Posted by NewsAddict | Report as abusive

Do away with Glass-Steagall. Do away with the mortgage deduction. Support Mexican construction workers through the EB2/EB3 work visa program. And now, do away with the 30-yr. mortgage.

I realize the GOP is working hard to afford deductions for yachts and planes, but will they at least give a tax credit for a shopping cart?

Posted by SanPa | Report as abusive

Felix, I actually agree with a large part of your reasoning but note: these loans can provide a source of stable investments IF due diligence is made (it wasn’t), and not all loans subsidized by government are bad. For example: 90+% of STUDENT loans are government subsidized. The private sector is not accustomed to looking so far forward. Indeed, one of the reasons china is so successful is because they look far ahead. I don’t believe subsidized student loans are bad for the country, in fact I think its good. If left to the private sector most students would not be able to go to college.

Posted by mgunn | Report as abusive

I think its so interesting to read this super “PRO free Market” piece.
Only thing I do not get is why did we let the Govt bailout any of these “too large to fail” banks that screwed themselves with these securitized commodities and WHY has not anybody in these banks desks ever find themselves in Jail.
How are they different than Mardock.
Did they finance Obama or Bill o Riley

Posted by bokababu | Report as abusive

What everyone seems to miss is that when one buys a house, they are usually really straining, financially at that time. Back in the mid-sixties I bought a modest home using nothing down VA financing and “locked in a 6-1/4% rate. Had to buy fridge, couches, furniture on time (three-year loan, as I recall). Interest rates went up and up the whole time I owned it, selling in 1988.

Because of ever-increasing local taxes and increasing maintenance as the house and stuff in it aged, it would have been impossible for me to have kept that house without the 30-year fixed rate mortgage. But, because I bought in a good area that STAYED a good area, the house I “bought” for under $22,000 was sold for $177,000 cash.

Out of that sale, I still, after 23 years of payments, owed over $10,000 “payoff”. Needless to say the $10,000 “payoff” would not buy in 1988 what it would have bought back in 1965. While I was a “winner” in “the system”, many of my neighbors, who pulled up roots every five years to buy something “bigger and better” eventually came to grief financially.

What seems most offensive in a day when “every player gets a trophy” in school is finding out that in a capitalistic society there are REAL winners and those who loose. I guess they think that’s OK in Vegas but not in real life? NO! Welcome to reality!

Posted by OneOfTheSheep | Report as abusive

Felix is bought and sold by Wallstreet. I am a senior loan officer. Felix is joke and he is dangerous! I can’t believe anyone would take this idiot seriously. Has anyone looked at the indexs that are tied to ARM’s? it was less than three years ago that ARMS were about 5%…locking in low rates…PREVENT foreclosures. Wake up America! don’t let this slick politician give you some snow job. This man should be defeated in his next election. People like him are the reason why people are protesting on Wallstreet.

Posted by greywolfsd | Report as abusive

I meant Shelby the politiican.
Felix is an idiot! don’t listen to his rhetoric. Again this idiot is owned by Wallstreet!

Posted by greywolfsd | Report as abusive

“What everyone seems to miss is that when one buys a house, they are usually really straining, financially at that time.”

Excellent point. For such households, absorbing an ARM reset to a higher rate may be impossible.

This also points out why so many new mortgages wash out. If you are already straining when you take on the loan, then you need everything to go right for the next few years. If your income falls, you quickly begin to flounder.

Posted by TFF | Report as abusive

Those touting ARMs are looking for suckers! Interest will never again be as low as it is.

Anyone signing up for an ARM today will face upward ARM resets likely every other year due to the Fed’s previous and future debasement of our currency. More and more dollars with no change in what backs them up makes each worth less!

Can you imagine what a $1500-$2000/mo. mortgage PLUS rising local taxes would be in ten years? Twenty?
Think your earnings can keep up with that? No one could afford to remain in homes thus financed!

I can’t think of anything as likely to turn this into a country of renters.

Posted by OneOfTheSheep | Report as abusive

@CarlOmunificent

You wrote “Borrowers are required to put up a large (20% say) down payment”.

20% is actually pretty low – don’t try to get a mortgage for a house in Germany when you have only 20% of the price yourself, you won’t get it.

The reasonable average long-term expectation for housing prices is that they are increasing by the inflation rate, and that every few decades you have to pay a larger amount for renovation of the house.

If the basic assumption throughout a country is that housing prices will go up much faster than inflation then you are likely inside a bubble.

Posted by AdrianBunk | Report as abusive

My wife and I purchased a modest home last year with 5.375% interest rate. We just refinance for 4%. So, I can say I love the 30-year fixed mortgage. While I do see and agree the points made in this article, the government is now making money off these loans not only on the interest, but also on the MMI. I will pay close to 10K on insurance alone in during the next 9 years because of the new rules that were enacted last year. The system is not perfect, but what system ever will be. The way I see it if the government can make a profit by helping people fulfill a dream, all you are during is prolonging the current problems by getting rid of it due to the abundance of housing available. There may be a time to get rid of it, but now would not be it.

Posted by ChicagoJoe | Report as abusive

@CarlOmunificent

Your link doesn’t work, but I get your point.

My point is that such a setup is part of the problem, and each time economy and housing market go down the US tax payer will have to pay a few hundred Billion or even a few Trillion Dollars.

How much in mortgages are open on the USA? I remember numbers in the $12 Trillion range. Let 20% of the owners go underwater, and there are so many “too big to fail” triggered that Uncle Sam has to open his pockets widely (e.g. the US government cannot let any of Frannie go bankrupt).

Posted by AdrianBunk | Report as abusive