Is the 30 year fixed rate mortgage an endangered species?

Discussion about mortgage rates normally focuses on the 30 year fixed rate mortgage (FRM). As the table below shows, the US is unique in developed countries in having FRMs as the dominant product:

Only Denmark and France have significant FRM markets and their products differ from the US in certain ways.

There is a debate currently about the future of Fannie Mae (FNM) and Freddie Mac (FRE), the Government Sponsored Entreprises (GSEs), which the Government bailed out during the great recession. The GSEs provide liquidity to the mortgage market by buying loans from banks and selling them on to financial institutions.

Both political parties have the stated aim of forcing FNM/FRE out of the mortgage business and returning it to private lenders, although I can see little chance of that happening while the Treasury is able to appropriate the net income of FNM/FRE. And, of course, at some point one or two members of Congress may actually figure out that ending 30 year mortgages, or reducing their availability and increasing their price, is not going to be popular with voters.

I wrote about FNM, the most profitable company in the world last August and how the Government had changed the terms of the preferred stock it owns to drain virtually all the net income from FNM/FRE without reducing the debt owed. Further, by 2018 both FNM/FRE will have zero capital – that’s right, zero.

Here’s a table showing how much FNM/FRE borrowed, how much they have repaid, and how much debt they still have outstanding.

Let me be clear: FNM/FRE borrowed $187.4 billion and have repaid $185.1 billion (including interest), but they still owe the Treasury $189.4 billion.It is no surprise that owners of preferred stock in FNM/FRE are suing the Treasury.

The terms were changed in the summer of 2012, around the time it became clear that apart from substantial ordinary profits FNM/FRE were going to be able to book huge profits from an accounting change. Note that in 2013 FNM/FRE paid a total of $130 billion to the Treasury and that this sum reduced the budget deficit for the country.

While many borrowers use a 30 year fixed mortgage to buy their homes, in practice the average life of these loans is 6-7 years.

The benchmark used for the 30 year mortgage is the yield on the 10 year Treasury. That rate has increased from around 1.6% in the summer of 2013 to   +/- 3% by year end, and the 30 year mortgage rate has moved from under 3.5% to  4.75%.

ARMs, however, are based off a different benchmarks,  such as LIBOR (London InterBank Offered Rate), and that rate has not moved to the same extent.

What is certain is that in the coming weeks and months there will be both publicity about declining mortgage activity (because in recent years 70% of mortgages have been refinancings) and commentary about the dire effects were the 30 year FRM to end. Experience in the rest of the world suggests that such fears are overblown.

If you are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 781.631.1223 or [email protected].

Andrew Oliver is a Realtor with Harborside Realty in Marblehead