August 17, 2013

Why Do We Need The Thirty Year Mortgage?

Readers suggested a topic on mortgages. “I think a discussion of the 30 year mortgage (and the government intervention that is necessary to keep it around) would be interesting. Here is an article arguing in favor of it. I’m sure there are plenty out there arguing against at least the government intervention portion and probably the idea of the 30 fixed mortgage entirely. Article is pretty short, so I will provide all the text, but click through to the article anyway. I’m sure I’ve mentioned here that the Fannie building looks like it wants to be an English country manor.”

A reply, “You are probably aware that Canadian terms tend to run only to five years, so hearing that the USA does 30 is a surprise.

My thoughts are why would a bank invest in these:
1. because they can be insured
2. because they can be securitized
3. because they have changing values; ie interest rates lower than contract then mortgage is worth more, etc

I agree that not all people probably have them for full term, having borrowed up, separated, etc and I also agree that knowing what percentage of these make it to term might be a surprise.

I think the Private label should not be insurable, require 25% down, along with all debt service numbers - including DTI.

I think these 30 year have a place though because they allow lesser incomes to purchase. I think these are the only mortgages that should be insurable by the government. However, at least 10% down should be required. The gov should also enforce the banks to have a percentage of their inventory in these types of mortgages, and representative of all social status and location.”

One said, “With the boomers retiring in droves will there not be a boom in move-up jobs? The existing under 50 folk get promoted and so on until they need new 20 somethings to the do the menial work?”

“Currently, almost all the boomers in STEM, especially the TE fields, are all directors, VPs and above - a sort of inverted pyramid. There ought to be a chance that these high paying jobs would be passed on to at least a few in their 40s and so on. People should be feeling richer and out they go to buy 2 to 3 of the ever increasing- in price houses!”

And another, “I think there will be move-up jobs, but I don’t think there will be a ‘boom.’ Many places — including the US government — are already banking on attrition rather than layoffs to reduce the workforce. Example: Six people will retire. Two jobs will be eliminated, leaving four openings. Three of the openings will be filled by patient Gen Xers, the last opening will be filled by a go-getter Millenial. As for the rest of the Millenials… I don’t know.”

One had this, “What percentage of people with 30-year mortgages actually pay them off on schedule? If that percentage happens to be minuscule (my guess!), why do we need them?”

“More guesses: 1) The false pretense that the loan will be amortized over 30 years enables the buyer purchase the same home with lower monthly payments than for a shorter amortization period and the banks to charge more interest.”

“2) Cross subsidies in the form of mortgage guarantees and interest rate suppression (aka taking away retirees’ ability to survive on fixed-income investments) provide a wealth transfer to 30-year mortgagees.”

A reply, “You are hitting it close here. Government subsidy is always a wealth transfer.”

One said, “Government subsidy of long term mortgages keeps the prices of rental units high, just like it keeps the price of all houses high. Commercial rents fell during the crisis, dramatically. That is one area not subsidized (that I am aware of) by the FedGov.”

And finally, “Families raising children cannot afford a mortgage with terms longer than ten years because their children eventually cost more in their teen and college years. The story above was very narrow and short sighted in that it didn’t examine other countries or our post-WWII single income housing experience. The thirty year mortgage and the working-mom are a by product of LBJ’s Great Society; how else to afford 30% of the population spending their lives on the porch sipping cheap wine? Like Dubya, Obama is nothing more a corporate shill pimping life-long debt. He should be ashamed of himself and considered an enemy of the productive family.”