Is the 30-year mortgage safe?

By: J. David Chapman/January 26, 2017

Is the U.S. home loan process facing large-scale change? Rumblings amongst President Trump’s Cabinet picks and congressional Republican leadership indicate support for curbing governmental backing of the traditional 30-year, fixed-rate mortgage that Americans have become accustomed to receiving.

This move would be an attempt to protect taxpayers from being on the hook for billions of dollars of defaults in the event of a market collapse, as in the 2008 financial crisis. Housing industry proponents are concerned that without government support, 30-year mortgages would become scarce, leaving home ownership out of reach of many typical Americans.

Over 70 percent of all home purchases and refinances in 2016 utilized a 30-year, fixed-rate mortgage, but the Trump administration believes the private market could assume the responsibility if it were done in a gradual, responsible manner.

The foundation of the 30-year, fixed-rate mortgage has been Fannie Mae and Freddie Mac, which were created by the government and spun off as shareholder-owned corporations. They are referred to as quasi-governmental agencies, but in reality, the government and taxpayers are responsible for any bailout due to a catastrophic failure.

Fannie and Freddie purchase mortgages and package them into bonds, absorbing much of the risk, making it easier for homebuyers to obtain loans and freeing up money for banks to increase loan volume. The U.S. government was forced to bail out these organizations after the 2008 financial meltdown to the tune of $187.5 billion; however, since then they have paid the government more than $250 billion in dividends.

The good news for taxpayers is that in the housing boom of the 2000s, the private market was more competitive than Fannie and Freddie, taking over half of the mortgages without any government backstop, thus limiting the taxpayers’ exposure during the financial crisis.

The private market’s appetite for these loans dropped significantly after the crisis and the government now backs about two-thirds of the market again. The Trump administration’s idea for the private mortgage market to take on the risk is a valid concept; however, for them to take on that risk after the 2008 crisis will certainly come with higher mortgage rates and lower home ownership. I’m not sure the new administration is prepared to take on that political risk.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).