There are many sources of instability in the U.S. mortgage finance system–most obviously, securitization and derivatives all juiced with extreme leverage. Edward Pinto wrote an interesting article last week in RealClearMarkets on a less appreciated source of risk: the rise to dominance of the 30-year mortgage. He included a 10-part list of important facts related to the 30-year mortgage market. Here are the most important points:
Fact 2: In 1953, the year before Congress authorized the FHA to insure 30-year loans on existing homes, FHA’s average loan term was 21 years and conventional loans had a term of 15 years
Fact 6: History has shown that the 30-year’s lower monthly payment does not make homes more affordable.
Fact 8: Since 2012, the DTIs [debt-to-income ratios] of first-time FHA buyers have increased by 13%, an unsurprising result since wages have increased by only about 16% over the same period, but the price of homes purchased went up by 31%.
Fact 10: Had the low segment risen at the same rate as the move-up segment over this period, the average entry-level buyer would be spending $24,800 or 15.5% less for a home today.
The growth of the 30-year mortgage has created two major problems. First, homeowners have been hit with a larger financial burden as easier credit leads to a deadly combination of rising housing costs and slower equity buildup. Second, it has led to a huge increase in government intervention in the market: Pinto tells us that 99% of government guaranteed housing loans (which make up 85% of all home purchase loans) are 30-year loans.
As Pinto himself notes, encouraging home ownership, especially among first time homeowners, isn’t necessarily a bad goal. For instance, research shows that increased wealth for entrepreneurs through homeownership leads to young-firm creation. Similarly, home ownership can be an important stepping stone towards self-employment.
However, there are targeted, more progressive ways to achieve these goals. Instead of subsidizing the mortgage market broadly, policies like a first-time homebuyer tax credit can better target those most in need of assistance in a straightforward, transparent, and progressive fashion.
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