Argument For Government To Drop The 30-Year Mortgage

This past week in an article written for Real Clear Markets, Edward Pinto outlined a solid argument for discontinuing the government's 30-year mortgage.

The following is a digest of his points:
Fact - A private 30-year fixed-rate mortgage is a bit more expensive than a government-backed 30-year.
Why? The lender is taking a longer-term risk on interest rates.

Who is taking the risk on the government loan? The lower cost of the government mortgage is subsidized by taxpayers in the form of government guarantees and eventual taxpayer bailouts.

Why should the government get out of the 30-year mortgage business?
30-year fixed mortgages have caused radical swings in origination volumes. When are down and equities are high it encourages homeowners to treat their homes as ATM. When rates go up lenders try to increase volume with looser underwriting [creating a volatile market].

30-year fixed mortgages amortizes slowly, keeping the borrower's equity low and debt level high in the early years [creating a high default environment].

Widespread refinancing resets the mortgage at the then current 'normal' market values. As a result mortgage origination grew from $1 trillion in 2000 to $4 trillion in 2004. Had these homeowners had to sell their homes to free cash equity it would have caused a collapse in prices. When values fell millions of homeowners discovered their homes had negative equity, not unlike a margin call when owing stock on margin [eventually creating an equity bubble].
Wall Street traders stuffed their pockets with millions churning each trade [mixing bad loans and good loans in securities].

Delinquency rates were kept deceptively low as seasoned loans were constantly being replaced with unseasoned loans [creating a false sense of confidence in investors].
Mortgage servicing rights experienced wild fluctuations [creating market instability].

This led to the two largest taxpayer bailouts ever [guess who got left holding the bag?].

"No proponent of government guarantees has ever explained why the taxpayers and other mortgage borrowers should be subsidizing this type of mortgage. For homeowners who want a thirty-year fixed-rate loan, it is available at a slightly higher cost without the risk of a taxpayer bailout," says Edward Pinto.
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