Financing the American Home
May 18, 2021·3 comments·In Brief
America treats home ownership as a near-sacred ideal. To sustain it, the government built a mortgage market that by any rational standard shouldn't exist: a 30-year fixed loan that's catastrophically risky for lenders. For 80 years, this has required escalating government intervention. Yet the apparatus grew so entangled that when it nearly collapsed in 2008, the government couldn't unwind it. Today it remains unresolved, locked in a structure that serves almost nobody's interests cleanly.
• The 30-year fixed mortgage is economically nonsensical. It offers borrowers a free option to refinance if rates drop and complete protection if rates rise. For a lender, it's the inverse of win-win. This product only exists because the government removed the risk.
• Private capital repeatedly refused to backstop this market. In the 1930s, the New Deal had to create Fannie Mae because investors wouldn't touch long-term mortgages. Seventy years later, private lenders still lack the appetite. The government's presence makes competition impossible.
• Fannie Mae was sold to private shareholders to hide government debt. In 1968, the government privatized Fannie to get its balance sheet off the federal ledger. By exploiting their implicit guarantee, the companies extracted profits while the government kept all the risk.
• The 2008 bailout created a catch-22 that nobody knows how to exit. The Treasury seized nearly all profits in a "net worth sweep" to recoup losses. This prevented the companies from rebuilding capital, making conservatorship permanent and the entire structure unsustainable.
• Unwinding this now requires raising $240 billion in private capital and settling years of litigation. Even if that succeeds, the fundamental question remains unanswered: why does America still need this apparatus at all?
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Comments
The fixed 30 year mortgage most likely makes housing more expensive on a cash purchase basis. People do not buy the cost of the house they buy the cost of the payment and therefore lower rates means higher prices. We also subsidize housing with a mortgage interest deduction although the large standard deduction probably has reduced that somewhat. I am not sure what the answer is since I definitely believe that owning a home is a wise choice for many people.
Yay Home Ownership.
what is the percentage of homeowners actually holding their mortgage for 30 years?
I must have owned 3-4 houses as I relocated for work and finally realized i would be better off with a 15 year mortgage with a lower rate and paid off my mortgage after 7 years or so…
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