As the debate begins to unfold concerning the future of housing finance, panelists at the Mortgage Bankers Association's (MBA) Secondary Market Conference were unanimous in their endorsement of the 30-year fixed-rate mortgage.
The long-term fixed rate product has been the backbone of the American housing market since its inception in the mid-1930s.
However, detractors point out that other industrialized countries have gotten along just fine without it and so can the U.S.
But Ginnie Mae president Theodore Tozer indicated the naysayers haven't been talking to the foreign investors he has. "It's interesting that we're talking about phasing out the 30-year mortgage when other countries wish they had it," Tozer told the opening session of the three-day conference held in New York last week. "Other countries are envious of our 30-year mortgage."
Ginnie Mae has been instrumental in leveraging its government guarantee to keep funds from foreign investors flowing into the domestic housing market. At a press conference the following day, the MBA's Michael Fratantoni also spoke up on behalf of the 30-year loan, saying that homebuyers’ favorite mortgage is simply "not a product" for depository institutions.
According to the MBA's monthly tabulation of mortgage applications, nearly 87% of borrowers who intended to occupy the homes they were buying choose a 30-year fixed-rate loan.
During the sparsely attended opening session, Tozer said that considering the fragile nature of the current market, now is not the time to eliminate the 30-year loan from lenders' mortgage menus. "This is the worst time to do it," he said.
"To shift risk to the consumer in today's world would exacerbate delinquencies. In today's interest rate environment, things can only go up." Kevin Neylan, a senior vice president at the Federal Home Loan Bank of New York, said the future of the housing market would be "very uncertain" without the 30-year loan.
Although "you could make a case that some borrowers would be better off" with a less expensive adjustable-rate product, Neylan said, "most consumers seem to be risk averse." He also said that while some of the smaller lenders served by the Federal Home Loan Bank System might opt to retain their fixed-rate products on their balance sheets, it wouldn't be enough to support the demand. "Consumers should have a choice," added Fannie Mae's Zach Oppenheimer. "The confidence and certainty (of a fixed-rate loan) can't be beat."
Oppenheimer got to choose between a FRM and an ARM when he bought his first house. Even though the fixed loan came with a rate of 13.25%, he opted for the FRM over the lower-cost ARM because he "wasn't sure he would have the income over time" to cover the possibility that the rate on the adjustable loan would move higher. "ARMs have benefits, but they are a much riskier product," the Fannie Mae executive said, noting that FRMs have never accounted for less than 75% of mortgage originations.
He also pointed out that ARMs have a "very different performance level" than fixed-rate loans, which have a delinquency rate of just a quarter of that of ARMs. In the same vein, Paul Mullings, senior vice president for single-family sourcing at Freddie Mac, told the session that fixed-rate loans "act as an economic shock absorber" for borrowers when house prices are falling. "In markets with a higher percentage of FRMs, prices declined much, much less" than in locations where ARMs were the dominant loan, he said.