Democratic Faction Unveils Plan to Retain 30-Year Mortgage Post-GSEs

The ""New Democratic Coalition"":http://ndc.crowley.house.gov/ says its goal is to ""modernize both the Democratic party and the country,"" and now they're adding the nation's housing finance system to the list.
[IMAGE] The New Dems says it is time to fix America's housing finance market to better serve American families who are looking to purchase a home and protect American taxpayers from risks taken in the housing market.

Their game plan for accomplishing this includes following through with the wind-down of ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com, while boosting private sector participation in the housing market.

In the New Dem plan, which has been endorsed by the full 43-member coalition, the federal government would maintain a limited role to provide oversight, protect taxpayers against losses, and ensure continued access to affordable mortgage products like traditional 30-year fixed home loans.

The group has released a ""framework paper"":http://ndc.crowley.house.gov/images/stories/Events/newdemhousingreformprinciples.pdf outlining eight principles that they believe should guide the debate on housing finance reform, including accurately pricing risk, ensuring borrowers are put into mortgages they can actually afford, and limiting government guarantees to the securities themselves rather than the companies that issue them.

Some pundits have suggested that along with the elimination of Fannie and Freddie will come the elimination of the bread-and-butter 30-year fixed-rate mortgage.

""The 30-year fixed mortgage is just about as American as apple pie, and these guidelines will roll back the role of the GSEs while helping ensure qualified middle-class families can continue to buy their own home,"" said ""Rep. Jim Himes of Connecticut"":http://himes.house.gov/, co-chair of the New Dem Financial Services Task Force.

The debate is intense over whether a largely privatized mortgage market would retain the 30-year fixed loan as a go-to choice for homebuyers, and even if it is a viable loan product, particularly in such turbulent times as now.

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In ""an op-ed piece"":http://www.aei.org/article/103396, Alex Pollock, resident fellow at the ""American Enterprise Institute"":http://www.aei.org (AEI) says we shouldn't mourn the passing of the 30-year fixed-rate mortgage.

""[I]t is a big reason U.S. mortgage markets are in such bad shape,"" Pollock wrote. ""For borrowers of 30-year FRMs [fixed-rate mortgages], the advantageous situation is when interest rates and house prices alike are rising. Then borrowers have the same mortgage payments despite rising interest rates, and get to keep the whole inflationary premium in the house price.""

But suppose interest rates and home prices begin to fall, which has been the reality of the last few years, Pollock says.

Then ""borrowers often cannot refinance because of the fall in house prices, so they are stuck with a very high nominal and even higher real interest rate, and their payments stay the same. The entire deflationary discount in the house price is imposed on them. Defaults rise; house prices are pushed further down. In this situation, it becomes quite difficult to modify the 30-year FRMs that cannot be refinanced, as the many government modification programs have demonstrated,"" Pollock explained.

Tim and Julie Harris of Harris Real Estate University ""note in a Web posting"":http://realestateinsidernews.com/breaking-real-estate-news/bye-bye-30-year-mortgages-home-financing-under-attack/ that the U.S. and Denmark are the only two countries that have a 30-year mortgage.

""[I]n every other country in the world other that the USA (and Denmark) when someone buys a home they have to put 20 percent down…and finance the home for usually 15 years,"" the two write.

With or without the 30-year mortgage, AEI says government guarantees on mortgages aren't necessary to entice institutional investors.

In a ""piece by Peter Wallison"":http://www.aei.org/press/100210 the research group says while many predict calamity for the housing markets without government guarantees, Federal Reserve data tell a different story.

Wallison cites the Fed's flow of funds data, which shows that nonbank institutional investors had assets of $28 trillion in the fourth quarter of 2010. About $13 trillion of this amount was invested in fixed-income or debt securities, but only $1.8 trillion was invested in U.S. government-backed securities issued by the GSEs, he explained.

""Thus, even at a time when private housing finance has not yet revived -- and most of the investment in housing is flowing through Fannie and Freddie or the Federal Housing Administration (FHA) -- less than one-seventh of the funds invested in debt securities by institutional investors were invested in government-backed mortgage securities,"" Wallison said.