Experts Predict End of 30-Year Mortgage

The New York Times recently published an article discussing what might happen to the lending market if the government formally elects to shut down Fannie Mae and Freddie Mac in the coming years. The loss of these two government-run lending powerhouses, the article supposes, could signal the end of borrower luxuries like low interest rates, rate locks and the 30-year mortgage.

It's an interesting thought, and a debate worth examining today since it appears likely that the end is near for Fannie Mae and Freddie Mac. Even Treasury Secretary Timothy Geithner has openly recognized the need for reform, despite the political ramifications normally associated with any type of government reform.

It's been suggested that both Fannie and Freddie are eased out of existence for the betterment of the financial market. The exact term Geithner used was "elegant funeral"  although others have suggested a more immediate exit. In either case, one thing is clear: it will become more challenging to obtain a mortgage.

Particularly if the 30-year mortgage becomes a rare "luxury item" there will be fewer candidates for a loan, thus severely hampering the number of people who can obtain financing. Research also indicates that the departure of Fannie and Freddie would hinder minorities the most.

The path to closing Fannie and Freddie should be a careful one. Although fully privatizing the  lending marketplace is inevitable, strong consideration must be given to the likelihood of qualifying for a loan given today's economic climate, not a future ideal. The goal should be to create a system whereby individuals and families can qualify for reasonable loans that they can pay for. Eliminating a standby like the 30-year mortgage is not going to help that goal.

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  • You've been spammed.

    However, as the spammer implied, if anyone still has a mortgage over 6%, and qualify for a refi, they have been brain dead for about two years.

    I can't see people taking 5 year balloons or the like, and if it is fully amortized 15 year loans, the monthly payment will be too high, even though, at 4% interest, it is not as bad as a few years ago, when it was twice as much.

    Some random observation:

    1. The real problem in the early 00s seemed to be fraudulent appraisals and loose qualifying standards. Those should be tightened first.

    2. There was a time when banks kept their mortgage loans. Then it was that they were selling them to pension funds, but kept responsibility for them. Now they are being securitized to the point that a relative (who works in an industry enabling this mess) said around 2007 that there were ways of breaking up the paper so that one could get a 10% return. Apparently, afterward, that buyer got a 100% loss. As Judge Milan says, "so sad, too bad." Hence, any restructuring would have to regulate what is put into the secondary market. Like savings deposits over $100,000, or caveat emptor on hedge funds because the investor is supposed to be sophisticated, there are ramifications on the general economy for activities like this that fail. Even Judge Posner recognized it recently.

    3. Getting back to mortgage brokers, who also seem to be in it for the commission, I wonder if the guy who advertised before the crash that he'll automatically refi you if the rates go down actually did, since that ad disappeared. I wonder how many of his people got stuck underwater.

    4. Darn few people actually have a mortgage for 30 years. I think previously someone printed that the average was 7. With the current one, I'll have to be 89 to pay it off. While, on the refi, the bank went into fits about verifying self employment income, even though I was supposedly "timesaver approved," they sure didn't care about my income in my 80s, even if I'll be around then, before they gave the loan and immediately sold it to Freddie. But, I guess that's business.

  • In reply to jack:

    All good points, Jack! With appraisals in particular, there has already been much regulation in this area that has also tied up mortgages that would have easily avoided scrutiny in the good ol' days. The biggest challenge is reforming lending requirements so that they're effective, yet not so stringent that it's impossible for most to buy a home. It's quite the dilemma.

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