The long-term mortgage, which began as a Depression-era remedy to keep Americans in their homes, may be out of step, given the current housing crisis.
Could it be time to say good-bye to the popular 30-year mortgage?
“The 30-year mortgage is outdated, the standard fixed-rate mortgage is outdated, and it has to be improved,” housing expert Robert J. Shiller told CNBC. Shiller is Yale University professor and author, who is best known for co-creating the S&P/Case-Shiller Housing Indices, which track home prices in the United States. “People want a more modern vehicle, and that’s something we need to think about next,” Schiller said.
With the sweeping financial regulations bill nearly finished, the next big job of Congress may be to revamp the broken housing market and scrutinize all its key elements, even the vanilla 30-year mortgage.
Once Americans look more closely at this country’s housing situation, they may realize, and maybe even be surprised by, the fact that even though the US leads the world in 30-year mortgages, it doesn’t in home ownership.
“We spend a whole lot on housing in the US and don’t necessarily get a very big bang for the buck,” said Mark A. Calabria of the Cato Institute.
American homeowners, it turns out, have a very sweet deal to buy their home sweet homes, with the government being their candy man. For instance, America is nearly alone in not charging a fee for paying off mortgages early. And it’s one of the most liberal countries in allowing interest to be tax-deductible.
“If America wants the government out of housing, it has to get used to a number of things,” said Raghuram G. Rajan former IMF economist, author of ‘Fault Lines: How Hidden Fractures Still Threaten the World Economy’ and professor at the University of Chicago’s Booth School of Business.
“For example, shorter mortgage durations, higher interest rates [and] potentially lower housing prices, because the cost of financing has gone up. Is it ready for that? I don’t know.”
What higher interest rates? How about lower interest rates? They are currently at record lows and probably won’t be raised until the economy fully recovers, which might be awhile.
In any case, 15-year fixed mortgages have always been available, and short term ARMs still do exist. Plus, as mentioned in the article, there is typically no prepayment penalty in all fixed mortgages.
I don’t see why the 30-year mortgage needs to go away. Also, the government is always going to be involved in one way or another.
Nice in theory, but will never happen.
Easy money makes prices go up. Taking away easy money makes prices go down. If you get rid of long-term mortgages and subsidized interest, you’d have massive price declines. Those price declines would destroy household, bank, and government balance sheets. You want an instant super-Depression, that would do it.
I agree with the theory that we should try to revisit the concept of the mortgage and see if there is a better system. However, a long term mtg with a good down payment works pretty good until people started getting tricky with it.
They key is to look at it NOT from the homeowner’s view, but you need to look at it from the capital provider/investor’s viewpoint. What new structures would entice private capital into the marketplace? That is the questions.
One of the benefits of the meltdown is that people finally have a glimpse of where mgt $$$ actually came from….I bet before the meltdown most folks just thought mtg money just magically appeared and never gave it any thought as to how it got into the system from pension funds, and investors (which means it trickles back to individuals either personally or via their pension plans).
There is always a counterparty to the mtg trade who needs to be willing to tie up their capital for an extended period of time for somewhat low rates of return.
Would you take a 30 CD at 3.5% (5% net of fees for servicing etc???).
One thought I always had was to make the mortgage ‘portable’ and more of a personal credit facility secured by a primary residence. Thus you could move, and take your mtg with you and not have the cost of a new mtg. Just have to evaluate the collateral/house and record it. After all, they already committed to lending you funds for 30 years and would not re-underwrite your income/job if you stayed put.
My guess is that mtg brokers/banks would miss the fees from churnig new mtgs to the same person several times.
“For example, shorter mortgage durations, higher interest rates [and] potentially lower housing prices, because the cost of financing has gone up. Is it ready for that? I don’t know.”
Well duh… But that would mean brokers won’t make their recurring refi commission checks, government won’t be able to buy votes with the houseing carrot, old people won’t be able to retire off the work of the young when they sell at a profit, and banks won’t be able to dump all the garbage loans on the government through Fannie + Freddie.
Oh, that’s right, this is the part of the process where we fix the shit that isn’t broken and ignore the shit that is.
Let’s let this Canadian “not a bubble” burst before rushing into their model, eh?
Let’s face it–The Govt wants people to stay in debt, and provides incintives for people to do so. Mortgages, and re-financing those mortgages, help drive the economy. Escrow fees, lender fees, title fees, etc… create A LOT of jobs!!!
This all boils down to the beliefs of the role of government.
The rest of the world lets private citizens duke it out on their own for the most part and doesn’t rush to support asset prices. Can we survive the adjustment to this, even if we wanted to? Eventually, yes.
The question is really whether we want to do that. We used to be the bastion of free-market capitalism. We’re now the premier socialists of the world, propping up nearly every failed institution with vast government intervention. My, how the mighty have fallen.
One fundamental truth that seems to avoid the conversation is that risk is joined at the hip with opportunity. You take one away, and they other disappears. Why, again, would someone want to invest their money in the US? Certainly not because it make business sense, right?
Chuck
Clearfund’s suggestion has some similarites to Denmark’s mortgage system. I have read that certain PTB in the govt are looking at features of Denmark’s system going forward, which is based on bond issuance/securitization, not based on Banks taking and lending deposits.
http://en.wikipedia.org/wiki/Danish_mortgage_market
The debate going forward will not be based so much on the 30 year mortgage per se, but on what to do about Fannie and Freddie.
Under the Canadian system I have what I consider to be an overly lax arrangement with my bank.
I can borrow up to 80% of the value of my home without additional charges/insurance. The way the bank has it set up I can split the 80% into 5 categories (different lengths of mortgages).
I currently only borrow about 30%, split as 25% on a 5 year fixed rate mortgage and 5% on a line of credit component (at prime). On the 5 year I can make up to a 10% prepayment per year and can double up monthly payments without penalty.
Theoretically you could have the 5 parts split into different terms (1 year, 2 year, 5 year, 10 year plus a LOC component).
The flexibility is nice and allows you to stagger maturities without having to have multiple mortgages.
Because it’s the 30 year fixed that started this mess.
I’m sorry, but the ire at the 30 year mortgage seems misplaced. Shouldn’t we be really looking at these 5/1 ARMs, pick-a-pay, interest only and other modern vehicles? A standard, fixed rate mortgage of a given length (15, 20, 30 years) is not really the problem. If the argument is that we should go back to only 20 year loans, then I would ask why? It isn’t like the default rate in the last 10 years of a morgage is especially high…
Agreed.
Shiller’s comment, “People want a more modern vehicle”, sounds more like “People want to get rich quick”.
How modern can it get? I like the “portable” idea, but I think people are going to be moving less and less, so it’s impact might not be much.
Jim, I couldn’t agree more with your comment about “modern vehicles.” After what’s just happened, it seems foolish to say such a thing.
On a side note, I’m tired of hearing how wonderful this nebulous Case-Shiller index is, and that comment by its founder doesn’t help its credibility. I’m still waiting for someone to explain how median home prices to income being 7:1 in SDNCC equals a healthy market.
It seems to me that if wall street can invent swaps CDO’s and CDS’s perhaps it can invent a 30 year swap. I pay a fee and swap a 30 year adjustable mortgage for a 30 year fixed. So we divide it into 2 pieces. In addition I would go back to allowing 10% prepayment per year, cumulative to 5 years when the penalty goes away. Of course this would decrease the size of the mortgage vampire business in terms of re-fi. Actually today no one would want a pre-payment penalty as interest rates are about as low as they can go, so that instead it should be no assumability.
My mom and dad bought the family home in 1954. Their fixed-rate mortgage (20 years back then, rather than 30) was 4.5%, the bank paid them 3% annually on their passbook savings account, and according to historical tables the prime rate when they took out their loan was 3%. What has changed since then, to require near-zero prime and savings rates to get fixed-rate mortgages down to “the lowest rates since the 50’s?”
Just what we need, more innovative financial products.
The private mortgage market is virtually nonexistent, you can still buy a home with essentially zero down payment, you can walk away from your mortgage with total impunity, and we are focusing on the 30 yr frm?
You’re shitting me, right?
What higher interest rates? How about lower interest rates? They are currently at record lows and probably won’t be raised until the economy fully recovers, which might be awhile.
I’m sure there were more than a few Greeks thinking the same thing earlier this year.
Re # 16 the big boys do this all the time, its just that wall street in particular fixed income refuses to let “little folks” into the game. But if companies can do it why not individuals? If the concern is investors perhaps the next securitization can come with a swap attached to take the interest rate risk and send it to someone who wants to gamble on it. For a while at least a prepayment penalty at todays low interest rates would not be in the lenders interest, I doubt rates can get much lower.
GeneK
If I remember correctly, those mortgages back then were not amortized over the life of the loan, right? They were almost all balloon payments that had to be paid off or rolled into a new loan. Amortizing was a “modern vehicle” when it was introduced, with an attempt at “fixing” the refinance shock. Balloon loans were all the rage way back when.
Chuck
No, Chuck. My mom and dad made the same, fixed payment every month for 20 years, and at the end of that time had a party where they burned their mortgage (actually, my dad was a packrat and he actually burned a photostat of their mortgage). $12,500 purchase price mortgaged in 1954-55 and fully paid off 20 years later in 1975. It was at least a few years after that when mortgage rates went into double digits and I was looking for my first home that I first heard about “balloon payments” under the category of “creative financing.”
Thanks for clarifying. No matter how you slice it, a 20 year mortgage seems quaint, and it hasn’t really helped people as much as they think it has.