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Pinto: Lose the 30-Year Fixed-Rate Mortgage

Phil Hall
Apr 26, 2016
The Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey for the week ending June 3 offered a mixed data picture, with vibrant seasonally adjusted indices and dreary unadjusted indices

One of the most prominent thought leaders in the housing industry is calling for the discontinuation of the 30-year fixed-rate mortgage (FRM).

In a column published on Forbes.com, Edward Pinto, the co-director of the Internal Center on Housing Risk at the American Enterprise Institute, stated that this mortgage product “fails to build up wealth for the most disadvantaged Americans,” adding that the 30-year aspect of the loan results in a debt burden carried by homeowners well into their 50s and 60s.

Pinto also observed that the product seems inappropriate for many would-be homeowners flummoxed by today’s home prices.

“It should come as no surprise that home prices are rising much faster than both inflation and incomes,” Pinto wrote. “More troubling, entry-level home prices are rising the fastest and moderate household income growth is lagging behind income growth generally. These moderate and low-income borrowers, many of whom are minority, face a dilemma: Buy now and take on more debt, or delay and see the price of your dream home rise to a level beyond your reach.”

Furthermore, Pinto blamed the product for being at the core of the two great housing-related catastrophes of modern times. “The United States’ two biggest taxpayer bailouts, the savings and loan industry in the early 1990s and the GSEs in 2008, were the result of the government’s fixation with slowly amortizing terms like the 30-year loan,” he said.

Pinto also warned against a proposal raised by well-respected economists including Gene Sperling and Mark Zandi that would reanimate Fannie Mae and Freddie Mac in a configuration built on the prominence of 30-year fixed rate mortgages.

“The authors’ reform plan, like virtually all the others before it, fails to acknowledge the government’s role in past housing finance failures,” Pinto wrote. “Failures include the savings and loan debacle of the 1980s, Fannie and Freddie’s collapse into conservatorship, and the Federal Housing Administration’s 3.4 million foreclosures (almost all with 30-year fixed rate loan terms). These crashes did not come about in spite of government support for housing finance, but because of government backing.”

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