Time to scuttle the 30-year, fixed mortgage?
Cato’s Mark Calabria makes a powerful case for doing so:
First, we should recognize that the 30-year fixed isn’t going anywhere. The “jumbo” mortgage market offers a 30-year fixed without a government guarantee. In fact, fixed-rate mortgages have historically been around half of the jumbo market.
Of course it is more expensive — but more expensive to the borrower does not mean more expensive to society. After all, someone has to pay for a subsidy. In all likelihood, it is that same homeowner who will pay for the subsidy in their role as taxpayer.
The difference between 30-year jumbo and conforming loans has been about 30 to 40 basis points. There are lots of reasons for this spread; the existence of a federal guarantee is only one of them.
In the absence of a federal guarantee, rates would likely go up somewhere between 10 and 30 basis points. That smallish jump would not have any impact on homeownership rates and is hardly an amount worth putting our entire financial system at risk.