Middle Class Americans Need a 30-Year Mortgage

Heritage Dismissal of Importance of the 30 Year Mortgage  for Modest Income  Americans is misguided

Author John H. Dalton joined FSR in 2005, having previously served as the 70th Secretary of the Navy during President Bill Clinton’s administration.

In theory, most Americans would like to pay off their home in 15, 10 or even 5 years. Most Americans would like their mortgage to remain at today’s historically low rates, or even see a lower rate. And in theory, most Americans would probably agree with the notion that buying a home should solely involve themselves and a lender.

The reality is most Americans probably don’t know that because of a lack of political consensus in Washington, the government currently backs 90% of all mortgages in this country.  Most Americans probably don’t realize that as taxpayers, they are on the hook for all of those mortgages if the economy turns south. And most Americans would balk at policy in action in Washington that would significantly raise the cost of buying a home in a still-recovering housing market and stagnant economy.

A paper released today by the Heritage Foundation regarding federal housing policy and the 30-year fixed rate mortgage is good theory, but the report’s dismissal of the importance of the 30 year fixed rate mortgage to modest income  Americans is misguided.

Right now, there is virtually no private label securities market.  We need a private label market to return through real GSE reform and other steps, but even if strong private demand returns, private label securities and bank balance sheets cannot support the size of the US mortgage market.    The latest Fed data shows that commercial banks in the U.S. have about $7.5 Trillion in assets and, of that, about $2 Trillion in mortgages. In 2013, there were about $1.75 Trillion in new originations and refinancing.  So, without a government backstop in the market, projecting out just a few years, mortgages could quickly become the only assets on bank balance sheets and that is neither safe nor sound, nor sustainable. With current and coming capital regulations, this becomes even more impossible.

Phillip Swagel, a former Bush Administration Economist, visiting scholar at AEI and professor at UMD said, “…the government guarantee is likely necessary to ensure the broad availability of the 30- and 15-year fixed rate mortgage products that are the overwhelming choice of American homebuyers.” He also said, “Moving away from a government backstop on housing finance would also reduce the availability of the 30-year and 15-year fixed rate mortgages that now make up the vast majority of home loans.”

Middle class Americans see their homes as an investment, not just debt.  Policymakers in Washington should not delay in enacting GSE reform that recognizes the realities of the private market, government policy and the market demands of millions of Americans who need access to a 30-year mortgage in order to afford a home.