Senate support of 30-year mortgage eroding?

Interesting piece in National Mortgage News about some of the plans Congress is tossing around for the future of Fannie and Freddie (and thus of the housing market in general). Some Senate Republicans are questioning the value of the 30-year mortgage — more specifically, the government’s backing of it.

Congressional Democrats remain strongly committed to the 30-year fixed-rate loan, which protects homeowners against a rise in interest rates. But some Republicans, who want to scale back the government’s role in the housing market, have growing doubts about the taxpayer-subsidized loan product.

“What unintended consequences have been created by subsidizing the 30-year fixed-rate mortgage? And what has the subsidy of this product already cost the American taxpayer?” [Senate Banking Committee top Republican, Sen. Richard] Shelby asked. “We need to take a hard look at this product and determine if the preferential pricing resulting from these subsidies truly creates a public good.”

The general argument is that the low risk of a 30-year fixed loan (compared to an ARM) is borne by taxpayers — and shouldn’t be.

Anthony Sanders, a finance professor at George Mason University, testified that he doesn’t think the government should be encouraging 30-year, fixed-rate mortgages because they usually have higher interest rates than ARMs.

And Paul Willen of the Federal Reserve Bank of Boston said he believes ARMs are better than fixed-rate loans anyway because they have lower rates:

“So people who had fixed-rate mortgages from 2005 and 2006 and 2007, most of them are paying 5.5% or more on those mortgages These are the people with negative equity,” Willen responded. “The people who had adjustable rate mortgages, their rates are under 4.5, and a third of them are paying less than 3.5% on their mortgages. They do that without any assistance whatever from anyone.”

(He did not explain the relationship between the higher, fixed interest rate and the negative equity.)

It’s an interesting read — click here to check it out.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
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