Save What Works: Making the Case for Long-term, Fixed-rate Home Loans
Posted by Janis Bowdler on October 28, 2011
Last week I testified before the Senate Banking Committee on the virtues of the 30-year fixed-rate mortgage. For eight decades running, this type of mortgage has made homeownership affordable and stable for working and middle-class families and has allowed millions to obtain the only leveraged asset most will ever own. This is particularly true for Latino and Black households, for whom home equity makes up 65 percent and 59 percent of household wealth.
Not everyone is a fan of this home loan mainstay. During the hearing, critics argued that families would be better off with adjustable-rate mortgages, that fixed-rate financing is expensive, and that the 30-year mortgage is an anomaly on which Americans have become too reliant. The first two criticisms assume that families are well positioned to play the interest-rate markets. However, this runs contrary to how most families view their home. Buying a home is so much more than a purely financial transaction. For most, it is a long-term nest egg; the true payoff is in benefitting the next generation.
The third criticism gets at the heart of the debate — the role of Fannie Mae and Freddie Mac. Fannie and Freddie naysayers are pushing for a fully private system. However, lenders, especially small community lenders, say that under a private system they would not be able to offer fully amortizing 30-year fixed-rate mortgages. There is no question that the failure of Fannie and Freddie is costing taxpayers dearly. However, it was these agencies’ mission creep that allowed them to chase high profits by buying toxic mortgage bundles on the secondary market. Had they stuck to good old-fashioned 30-year fixed-rate mortgages, they would be in much better shape.
Many of those toxic mortgages purchased by Fannie and Freddie were the byproducts of predatory lending practices in Hispanic and Black neighborhoods. Abundant research indicates that Latino and Black homeowners were steered to toxic subprime loans, even when they had solid credit that warranted prime loans. Thanks to this phenomenon, the wealth of the White population now exceeds that of Latinos by a staggering 18:1 ratio and by 20:1 for Blacks. This wealth gap is largely attributable to differences in home equity and the loss of homes through foreclosure. Had responsible lenders offering 30-year fixed-loans pursued communities of color with as much vigor as did the subprime sharks, Black and Hispanic homeowners would be in much better shape as well.
Of course, families should enter homeownership prepared with sound financial knowledge and the assurance that they can make their mortgage payments. Fortunately, several decades of innovative affordable lending have taught us how to mitigate the risk of extending credit to first-time homebuyers, low-wealth borrowers, and underserved communities. When families receive the right loan with the right support, they can be sustainable homeowners while building wealth — even with modest incomes and low downpayments.
Rather than dismiss a proven financial tool and affordability features, advocates and policymakers should work together to preserve those aspects of our housing finance system that work well. As policymakers begin to grapple with the future of lending, their first priority should be to maintain liquidity for affordable 30-year fixed-rate loans that are made equally available to all qualified families throughout the country. This is not to say that a single type of home loan will suit everyone’s needs. However, without securing this basic type of mortgage, homeownership will be reserved for those privileged enough to have inherited the wealth necessary for sizeable downpayments or incomes high enough to withstand fluctuating interest rates.