End of the Thirty Year Mortgage?

The thirty-year mortgage, long a bedrock element of how Americans buy homes, could soon be a thing of the past.

Investors, Congressional leaders, and policy makers have simultaneously floated the prospect of removing subsidies for residential mortgages. It is derived from faith in market forces. The idea is that private investors will buy the loans once they are priced for risk.

Government entities are buying or guaranteeing more than 90 percent of new loans right now. Even with delivery fees on conventional loans and mortgage insurance premiums on FHA-guaranteed loans, buyers and lenders are still dependent upon these implicit government subsidies.

• Peter Wallison believes that 30-year mortgages should be considered a high-risk proposition. Wallison might be a bit disingenuous when he asks why people believe that the 30-year mortgage is a good idea.
• Scott Garrett, (R-NJ) wants to draw down the GSEs.
• Bill Gross (PIMCO) remains neutral on the idea, but did say that without government backing, that he would expect at least 300 more basis points in return on a 30-year prime loan.

Housing markets would find a new trading point. Unfortunately, that new point would translate into higher interest rates. In turn, higher rates would reduce the ability of borrowers to pay as much. Housing prices would go down. More homeowners would be underwater. Some would sink to new depths.

I can see plenty of pushback. Big money isn’t going to like this idea at all. Anyone holding existing mortgage-backed securities that are paying 5 or 6 percent is going to take a significant loss on the value of their investment. Mortgage brokers will hate this idea.

Nonetheless, political pressure is not always driven by consequence.

Congress doesn’t have much time to act. QEII ends on June 30th, 2011. Somebody is going to have to buy MBS from then on. It won’t be Treasury.