Policymakers should reform the mortgage finance market by first recognizing that no single type of loan will be best for all borrowers at all times.
What You Will Hear
- Several groups have argued that eliminating the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac is a terrible idea because it would imperil the 30-year fixed-rate mortgage (FRM).
- These organizations point out that the 30-year FRM provides borrowers long-term security, but they ignore the risks associated with 30-year FRMs. Historically, government policies have tended to shift these risks from financial markets to taxpayers.
30-Year Mortgages Exist Without Government Guarantees
- The 30-year FRM is now the dominant mortgage product in the U.S., but it did not become so pervasive simply because of the GSEs. Furthermore, 30-year FRMs with no form of government backing do exist in the U.S.
- The 30-year fixed-rate mortgage predates the GSE system in the U.S. and its highly developed secondary mortgage market by at least 20 years.
People Should Decide
- Neither adjustable rate mortgages (ARMs) nor FRMs, in and of themselves, caused the financial crisis in 2008. Historically, though, government policies have caused financial turmoil by pushing the market toward one type of loan.
- It is misguided to justify broad government intervention and taxpayer guarantees to preserve any particular type of mortgage product. Policies should focus instead on allowing the private market to develop a variety of mortgage products.
- With more government involvement than in other industrialized countries, the U.S. homeownership rate is about average among developed nations, and its citizens pay interest rates among the highest in the industrialized world.
- Low down-payment, 30-year FRMs amount to debt ownership, not home ownership. Government policies should not encourage people to get into debt.