Is the 30-Year Fixed Mortgage Going Extinct?

It’s that time again when we fret about the viability of the 30-year fixed mortgage.

This last occurred in 2014 when Dick Bove warned that the Fed’s tapering of mortgage purchases would mean curtains for the popular loan program.

Say Goodbye to the 30-Year Fixed?

It seems to happen every few years as folks start speculating about the future of Fannie Mae and Freddie Mac.

The pair have been under government control since 2008 after the mortgage crisis basically tore them to shreds.

Today, the Senate Banking Committee is going to hear from Mark Calabria, who has been nominated to become the next Federal Housing Finance Agency (FHFA) director.

Assuming he replaces current director Mel Watt, some worry the very well-liked and widely used 30-year fixed mortgage may cease to exist.

The basis for that argument is he might unwind Fannie and Freddie, which back the majority of 30-year mortgages out there.

They’re able to play “middleman” as the WSJ puts it, by linking the loans with outside investors who are willing to take on the risks associated with a three-decade long fixed-rate loan.

But if Calabria gets elected and decides that he doesn’t want the government to purchase 30-year fixed mortgages anymore, he could direct Fannie and Freddie to stop buying or backing such loans.

This could make the mortgage market a lot less liquid for home loans with 30-year fixed terms, thereby pushing them to extinction or greatly increasing their price.

If fewer investors are willing to buy them from originating lenders, they might only be offered by portfolio lenders that hold onto them until payoff or maturity.

A Shift to ARMs?

As a result, these few lenders could demand a higher interest rate in return, which could make 30-year fixed mortgages a lot less competitive.

It could also lower home prices in the process if financing got more expensive across the board.

The spread between the 30-year fixed and 5/1 ARM has ranged from just 0.27% to as much as 1.30% since Freddie Mac began tracking it in 2005.

In other words, there was a time when you could lock in an interest rate for a full three decades that was a mere quarter-percent higher than a loan with an interest rate fixed for just five years.

This really illustrates the investor appetite for long-term fixed-rate mortgages thanks to that government backing.

Nowadays, the spread is closer to a half-percent, per Freddie, though it’s possible to get a larger discount with certain lenders.

But if confirmed, and Calabria decided that the government should curtail support for the 30-year fixed, it could send associated interest rates markedly higher.

At the same time, alternative loan products like the 5/1 ARM or 7/1 ARM would probably become comparatively attractive.

The spread could really widen if lenders were no longer able to find a home for their 30-year fixed products.

At worst, individual banks and lenders could decide to throw in the towel on them entirely, really driving up the price for the few willing to still deal in such products.

The fear is kind of real because during Calabria’s stint at think tank Cato Institute he indicated a willingness to lessen government support for the 30-year fixed.

For the record, long-term fixed mortgages accounted for just 1% of home loans in Spain, 2% in Korea, 10% in Canada, 19% in the Netherlands, and 22% in Japan per a 2013 study. ARMs were also dominant in the UK and Ireland.

But Calabria Has a 30-Year Fixed on His Own House

Now for the best part. Per that WSJ article, Calabria apparently has a 30-year fixed on his own residence that was purchased back in 2010.

At the time, 30-year mortgage rates ranged anywhere from 4.23% to 5.10%, per average monthly data from Freddie Mac.

Mortgage rates dropped about a full percentage point in subsequent years, and it’s unclear if he took advantage with a rate and term refinance.

Anyway, as former Obama administration housing adviser Jim Parrott aptly points out in the article, “the fact that Mr. Calabria has such a loan demonstrates its value.”

You can already read Calabria’s testimony here and there’s no mention of the word “30” or “fixed” throughout his prepared remarks.

What he does say is “that if confirmed, my role as Director of FHFA is to carry out the clear intent of Congress, not to impose my own vision.”

He mentions this after citing his “extensive record of writings in the area of mortgage finance” where at times he has “expressed strong opinions.”

It’s All Probably Just Noise

In other words, he’ll likely make it a point not to ruffle any feathers, as is the modus operandi these days for one looking to get confirmed.

So it’s probably all just another case of mindless fear mongering to think that a loan program that commands something like 90% of the home purchase market and nearly 80% of all mortgages including refinances could just disappear overnight.

Chances are that wouldn’t please a lot of people, even if the product isn’t in their best interest.

I’ve made the argument before that an adjustable-rate mortgage could save a homeowner a ton of money, especially given the relatively short tenures we see these days.

Many homeowners only stick around for 5-10 years before moving onto to another property, so why pay more for an interest rate you may not keep for anywhere close to 30 years?

(photo: Kristin Ausk)