The drive to reform the government-sponsored enterprises is raising two questions that could fundamentally reshape the way borrowers obtain mortgages: will a revamp effectively eliminate the 30-year fixed rate mortgage, and would that be a good thing?
For decades, it's been conventional wisdom that the 30-year fixed rate mortgage is the best option for most homeowners, and any attempt to restrain or supplant it has largely failed to take hold. But efforts to replace Fannie Mae and Freddie Mac are likely to — at the very least — make such mortgages more expensive. Depending on what approach Congress and the Obama administration take, the ultimate plan could eliminate such types of loans entirely.
While that prospect likely still disturbs many banks and lawmakers, some in the industry say it is time to reevaluate the benefits of the 30-year fixed mortgage.
"There is a lot of skepticism about whether it is quite the gold standard as some hold it up to be," said Bert Ely, an independent consultant based in Alexandria, Va. "Fannie and Freddie did a very effective job of convincing Americans that a 30-year fixed rate mortgages was the thing to get. But one of the things that is happening very slowly is some rethinking whether a 30-year fixed rate mortgage is the best thing to get."
The 30-year fixed-rate mortgage has evolved into the traditional home loan in the United States, although it has proven far less popular in other countries. Its advent mostly owes to implicit or explicit government backing, because banks generally are unwilling to hold such long-term maturities which are funded by short-term deposits.
But fixed rate mortgages with such long terms require some kind of securitization vehicle to buy them. If Fannie and Freddie are eliminated and the government's role reduced, it's not clear if any fully private market player would be willing to take up that mantle.
The Treasury Department has proposed three options for reforming the housing-finance sector. In all three, the government would provide significantly less support. Depending on how far Congress is willing to privatize the system, the costs of the 30-year mortgage are at least expected to rise, becoming potentially prohibitive under certain scenarios.
As a result, some observers said other options, such as adjustable rate mortgages - may become more attractive to borrowers.
"The discussion is shifting in that direction," said Glen Corso, managing director of the Community Mortgage Banking Project. "Proponents of a purely private mortgage market can't answer the question about whether investors will be there and are willing to invest money for 30 years without a government guarantee. Because of that uncertainty advocates of a purely private market are now trying to shift the terms of the discussion to, 'Maybe we don't really need a 30-year fixed rate mortgages? Maybe we can get by with a 5-, 7-, or 10-year fixed rate mortgage?'"
