Senate Banking Committee Discusses Precarious Future of the 30-year Fixed-Rate Mortgage

by Benjamin Fendler on Oct 31, 2011

The Senate Banking Committee on October 20 held a hearing to discuss the possibility of, and the need for, the continuation of the 30-year fixed-rate mortgage as the primary financial structure to back the future U.S. housing finance market.

Committee Chairman Tim Johnson (D-SD) began the hearing with a statement in which he explained that a full overhaul of the nation’s housing finance system will not occur in the near future. Specifically, Senator Johnson said he expected the Committee’s schedule and work-flow will prevent it from introducing a comprehensive piece of housing finance legislation for at least a year.

The panel of witnesses at the hearing included industry stakeholder and President and CEO of  Affinity Federal Credit Union John Fenton, testifying on behalf of the National Association of Federal Credit Unions;  housing policy expert and Senior Policy Analyst at the National Council of La Raza Janis Bowdler; Professor of Finance at the George Mason School of Management Dr. Anthony Sanders; and economic policy gurus Dr. Paul Willen, Senior Economist and Policy Advisor at the Federal Reserve Bank of Boston, and Dr. Susan Woodward, President of Sand Hill Econometrics.

Senate Democrats on the Committee offered strong support for the 30-year loan during the hearing, while Republicans expressed concern over the product’s increased costs to taxpayers as well as its potential to reduce private industry participation in a housing market that is already heavily influenced by federal intervention.

Janis Bowdler and John Fenton offered strong support for the financial product:  “The 30-year fixed-rate mortgage remains the most popular. The ability of credit unions to write these loans and hedge the interest rate risk through the capital markets is crucial to a competitive mortgage finance system,” Fenton said.

Other witnesses, however, highlighted some weaknesses in the 30-year fixed-rate mortgage.  In response to the generally accepted belief that adjustable rate mortgages are riskier than fixed rate mortgages, Paul Willen said that of the $2.6 billion worth of foreclosures he studied during the crisis, 88% suffered no payment shock: “The mortgage they made when they defaulted was exactly the same as the initial payment. Of those 59% of them had a fixed-rate mortgage. That alone should diffuse us of thinking the FRM is the safest of all mortgages.”

Willen went on to say that “people who had fixed-rate mortgages from 2005 and 2006 and 2007, most of them are paying 5.5% or more on those mortgages… [While] 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.”  Anthony Sanders agreed with Willen, saying volatile interest rates threaten fixed rate mortgages more than they do adjustable-rate loans because of increased levels of refinances.

Ranking Member Richard Shelby (R-AL), said of the issue, “For many Americans, the 30-year fixed mortgage has made homeownership possible… Yet, the failure of Fannie and Freddie and the $169 billion dollar bailout of those institutions demonstrate that the Federal government’s support for the 30-year mortgage comes with a cost. Accordingly, if this Committee ever decides to undertake housing finance reform, it will need to determine whether the benefits of the government’s support for the 30-year, fixed mortgage outweigh the costs… 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.”

 Shelby’s statement exemplifies many in Congress’ view of housing finance reform as a repugnant, caustic issue that is too important to ignore, but too dynamic and unstable to address with a static, comprehensive solution.  While members of both parties realize the importance of allowing private capital to return to the mortgage finance arena, they also worry that too a hasty departure by the federal government could have a detrimental impact on the housing recovery by preventing large numbers of borrowers from obtaining homes.

This debate – between the rate with which the government should remove itself from the mortgage market without reducing borrowers’ access to popular mortgages options, and the speed with which the private market should begin to accommodate the mortgage financing needs of an increased supply of borrowers without drastically driving up their costs of borrowing – is likely to be one of the most highly contested financial issues for the next half-decade.


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