Why the 30-Year Mortgage May Soon Become Extinct
NEW YORK -- The rumor mill is chugging along over the possibility the federal government could shutter Fannie Mae and Freddie Mac, albeit on a slow, gradual basis.
Earnings at both government-run enterprises have been anemic, and economists and mortgage industry professionals are talking openly about a future without them.
That could change the consumer mortgage landscape dramatically, says bank analyst Dick Bove, an analyst who tracks the mortgage market.
"Is the United States ready to take a shock to housing prices because we're getting rid of 30-year fixed rate mortgages?" Bove asks. He told CNBC that banking executives have told him privately they can't make money on 30-year fixed-rate home loans anymore due to new rules on capital reserves and securitizing mortgages, and he says the U.S. Treasury Department is aiming to phase out Fannie Mae and Freddie Mac by 2018.
That would take two of the biggest buyers of 30-year mortgages out of the equation. Bove says banks are eager to step in to offer consumer residential mortgages with significantly shorter durations -- between five and 10 years -- but lending experts (many of whom agree with Bove) say that would drive up the costs of buying a home, driving the American Dream even further out of reach of lower- and middle-class consumers.
Jeff Taylor, managing director at Digital Risk, an independent mortgage processor that handles more than $8 billion a month in mortgages, agrees with Bove and says the end of the GSEs would lead to shorter mortgages and more expensive mortgages.
That said, Taylor finds it hard to believe banks would want to be holding a note for 30 years in this rate environment. "Thirty-year mortgages are harder to hedge against," he says. "In a different rate environment, maybe the scenario would be different, but for now there would be no incentive to keep offering 30-years as an option."
Others take a more serious tone for mortgage consumers.
%VIRTUAL-pullquote-The loss of the 30-year fixed mortgage would put homeownership financing out of reach for millions of American families.%"Bove is correct that the current federal strategy being discussed is the restructuring and possibly the wind-down of Fannie and Freddie," says Victor Lund, a partner with WAV Group Consulting in Arroyo Grande, Calif. "There is also strategic discussion about the mortgage rate interest tax deduction. Let's face it, homeowners are rarely homeowners in America today. The banks own the property by virtue of their financing arrangement."
Consequently, shorter home loans would cause an economic disaster, Lund adds. "The loss of the 30-year fixed mortgage would put homeownership financing out of reach for millions of American families," he says. "For the market to correct, home prices would need to drop dramatically to become affordable. And another significant drop in housing values would create another financial crisis."
Some see Bove as basically pouring gasoline on an already roaring fire, with no good reason.
"There has been talk of the death of the 30-year fixed rate house loan for years, and the comments from Dick Bove simply fueled those flames," says David Bakke, a writer and analyst at MoneyCrashers.com, a personal financial website.
"Personally, I don't see that particular mortgage product going anywhere any time soon. I think what you would see instead is banks improving their underwriting procedures and possibly starting to requiring a larger down payment in order to decrease their risk on those mortgages."