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Mortgaging Our Future

The case against 30-year loans.

Dec 26, 2011, Vol. 17, No. 15 • By ELI LEHRER and IKE BRANNON
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The logical conclusion is that factors related to culture and geography, not mortgage finance, determine homeownership rates. And, even if homeownership did decline without 30-year mortgages, that wouldn’t be a disaster: A 40 percent homeownership rate has not turned Switzerland into a basket case, and a 74 percent rate in Alabama hasn’t made that state’s economy the envy of the world. In fact, high homeownership rates in places like Ohio and Michigan have exacerbated those states’ woes, by trapping unemployed workers in “upside-down” houses that they can’t sell for a price high enough to pay off the mortgage and seek jobs elsewhere.

Likewise, an increase in the use of adjustable-rate mortgages didn’t contribute to the financial crisis and might have ameliorated its impact. While it is true that adjustable-rate mortgages had higher default rates than fixed-rate ones, this happened largely because the most gimmicky products of the last decade, such as the infamous “no doc/low doc” loans with zero down payments, happened to be combined with adjustable-rate mortgages. 

Australia and Canada, where foreclosures have barely increased during the recent morass, have many more adjustable-rate mortgages than the United States. In fact, some economists have identified such loans as a source of macroeconomic stability, because they help banks keep their heads above water in bad economies. The countries with big foreclosure surges—the United States, Spain, and Great Britain—were all places where gimmicky mortgages became far more common than regulators should have allowed. 

Furthermore, many of the supposedly consumer-friendly features of today’s mortgages aren’t as “friendly” as they appear. Were prepayment penalties more widespread, interest rates would fall by about half a percentage point, economists estimate. And with Fannie Mae and Freddie Mac stripped of any implicit promise of a government guarantee, other enterprises could enter the mortgage securitization business, likely figuring out less risky ways to do it—or at least more efficient ways. 

Americans’ financial lives have changed in myriad ways in the last several decades: The types of deposit accounts, savings instruments, consumer credit products, and investments that middle-class Americans purchase today are vastly different from those among which their parents chose. But mortgages, for the most part, haven’t changed at all. Changing them now—and implementing policies that do away with the implicit guarantees behind the 30-year mortgage—could cut back a hugely expensive bureaucracy and stabilize the financial system, and with little consequence for homeownership rates. Congress shouldn’t be afraid of killing the 30-year mortgage.

Eli Lehrer is vice president of the Heartland Institute. Ike Brannon is director of economic policy at the American Action Forum.

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