The 30-year mortgage without a prepayment penalty has long been standard in the U.S., but the latest round of GSE reform has some former officials questioning it.
The debate has new relevance given that two influential GSE loan buyers that have been in government conservatorship are now exploring potential restructuring with industry input.
Many housing groups back the 30-year but Ed Pinto, a former Fannie Mae chief credit officer and senior fellow at the American Enterprise Institute, said at a Cato Institute event that reform talks are a reason to rethink it.
“You have this convexity risk, and it’s that convexity risk that nobody wants to hold,” Pinto said, noting that the 2023 difficulties Silicon Valley Bank had with low-rate mortgage bonds exemplifies this.
Typically, a higher rate, long-term bond is worth more when rates fall because the investor has an asset that’s more valuable than what’s available on the market.
However, because the 30-year single-family mortgages GSEs Fannie Mae and Freddie Mac buy and securitize can be refinanced into a lower rate without penalty when rates fall, the opposite is generally true for those loans.
This presents a contrast with the private commercial mortgage market where it’s more common to pay a penalty for prepayment.
That means the prepayable 30-year puts the government in a disadvantageous position relative to the way the market typically works, Pinto said.
Prepayment penalties “would shift the risk back to the consumer, where it should be, from the taxpayers,” he said, noting that these fees also could put downward pressure on lenders’ financing costs.
David Dworkin, a former Treasury official who is now president and CEO of the bipartisan National Housing Conference, debated Pinto’s position on the current 30-year home mortgage.
“It’s the investor in the mortgage that has to manage the interest rate risk, which a sound investor is capable of doing, as opposed to saying the consumer should manage their own interest rate risk,” said Dworkin. “If we didn’t have a fixed rate mortgage and interest rates had gone up 200 basis points, like they have, we would have a real foreclosure crisis.”
The debate over the 30-year loan took place as part of a larger discussion about what the scope of government involvement in housing should be, in line with the conference’s larger theme of “right-sizing federal regulation.”
In addition to analyzing the roles of Fannie and Freddie Mac, who were overseen at one point by a current Trump administration official, Mark Calabria, who previously had ties to Cato, the panel debated the Federal Housing Administration’s role.
“I think if you believe there is a role of government, potentially, it could be in supporting first time homebuyers,” said Dana Wade, a former FHA commissioner who is currently a vice president at the Peter G. Peterson Foundation.
However, Wade said she has some concern about the “low credit-quality loans” on the FHA’s books.
“I think we should be keeping an eye on that. You want to obviously preserve FHA. I think there’s a great team at HUD. Secretary [Scott] Turner, I know, is very well aware of this.”
Norbert Michel, vice president and director of Cato’s Center for Monetary and Financial Alternatives, indicated that’s one of the reasons he questions whether the type of long-term loans the government supports are always helpful to consumers.
