Fannie, Freddie may fade away, but will the 30-year mortgage?by Tim Manni
There was a really interesting article written by Binyamin Appelbaum in the New York Times yesterday titled “Without Loan Giants, 30-Year Mortgage May Fade Away.” There has certainly been a lot of chatter about the possible disappearance of the 30-year mortgage given the pending Fannie, Freddie reform. Appelbaum not only delved into why the long-term loan may disappear, but also the impact to our mortgage market.
What would a non-GSE mortgage market be like?
For starters, explains Appelbaum:
Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.
Lenders could charge fees for popular features now taken for granted, like the ability to “lock in” an interest rate weeks or months before taking out a loan.
Also, the idea that borrowers nationwide could apply for similar loans with similar costs and standards wouldn’t likely exist. The mortgage-lending landscape would be comprised of far more localized lending with varying terms and qualification standards.
What’s not to like about the 30-year mortgage?
For starters, the loan term is too long. Consider this, would you want to lend money to someone with the agreement that they won’t have to pay you back in full for 30 years? If it wasn’t for entities like Fannie and Freddie who provided an implicit guarantee against loss, would lenders really be interested?
Another reason is the lack of prepayment penalties. The obvious draw of lending someone money over such a long period of time is that you’ll be collecting interest over the entire term of the loan. Presently, borrowers can prepay or repay these loans at anytime with little to no consequences. If the 30-year loan remains outside the present Fannie, Freddie arrangement, you can be sure that interest rates will spike as a result.
But will the 30-year mortgage ever really “fade away”?
I guess that all depend on Fannie and/or Freddie or some entity similar to it. If that piece of the puzzle isn’t there to buy these loans off the books of lenders so they can go out and lend more money elsewhere, if there isn’t some form of backstop against loss, then hey, yeah, maybe 30-year loans will fade away. But the thing is, Americans still love the affordability and, perhaps more importantly, the security that comes with a 30-year fixed mortgage.
All this makes me think that even if Fannie Mae and/or Freddie Mac are no longer around by name, there will still be some entity, whatever the name, to replace at least part of their function so that the 30-year loan remains the staple of American mortgage lending.