Lawmaker Questions the 30-Year Fixed-Rate Mortgage

Lawmakers called into doubt the role of the historic 30-year fixed-rate mortgage Thursday, with ""Senate committee"":http://banking.senate.gov/public/index.cfm?FuseAction=Home.Home witnesses alternately arguing for and against it.

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At issue: whether the benchmark loan, available since the presidency of ""Franklin Roosevelt"":http://www.whitehouse.gov/about/presidents/franklindroosevelt, stabilizes the housing finance system or weakens it.

Ranking committee member ""Sen. Richard Shelby"":http://shelby.senate.gov/public/ (R-Alabama) helped open the hearing with questions about whether the mortgage product creates a ""public good"" for U.S. homeowners.

""Is a 30-year fixed-rate mortgage the best option to consume?"" he asked. ""Is the pre-payment option included these 30-year fixed-rate mortgages truly free? And what has the subsidy of this product already cost the American taxpayer?""

He credited the mortgage with helping make homeownership more possible for Americans, adding that the ""bailouts demonstrate that subsidization comes with a cost.""

""A new system that eliminates the most popular and available mortgage product in the country would be a step backwards... for the housing market,"" ""Sen. Tim Johnson"":http://johnson.senate.gov/public/ (D-Colorado), committee chairman, countered early in his introductory remarks.

Witnesses alternately upheld and criticized the 30-year fixed-rate mortgage.

""Janis Bowdler"":http://www.nclr.org/index.php/about_us/press_room/media_contacts/janis_bowdler/, director of the wealth-building policy project with the ""National Council of La Raza"":http://www.nclr.org/, ""framed"":http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=3c4a42be-18a1-4d4f-96a1-b92fe3f00099

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the loan as one that has allowed two out of three Americans to secure their own homes today.

""Building wealth through home equity can fuel retirements, business ownership, and the advancement of one's children,"" she told lawmakers.

""Paul Willen"":http://www.bos.frb.org/economic/econbios/willen.htm, senior economist and policy advisor with the ""Federal Reserve Bank of Boston"":http://www.bos.frb.org/index.htm, ""portrayed"":http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=d7648c10-93bd-47a2-8313-d0e58c7082fe the 30-year fixed-rate mortgage as one that advocates falsely said helped prevent fallout for homeowners during the financial crisis.

He said that proponents argue that 30-year loans ""eliminate the possibility of ├â┬ó├óÔÇÜ┬¼├ï┼ôpayment shocks' and thus would have prevented many of the foreclosures we have seen in the last five years,"" adding that these ""played little role in the crisis and, in fact, most borrowers who lost their homes in the last five years had long-term fixed-rate mortgages.""

Bowdler cast any decision to fundamentally restructure the 30-year fixed-rate mortgage as one that would undermine household wealth for black and Hispanic families, for whom home equity accounts for 65 percent and 59 percent of their household wealth, respectively.

""Without this flexible financing tool, homeownership will become a luxury reserved for the affluent, and the majority of families will be left without the appreciable asset that has long been the cornerstone of middle class wealth,"" she said.

Speaking with _MReport_, ""Mark Calabria"":http://www.cato.org/people/mark-calabria, director of financial regulation studies with the conservative-leaning ""Cato Institute"":http://www.cato.org/ and a former Senate Banking Committee staffer under Shelby, responds to Bowdler's testimony by saying that ""somebody has to take an interest-rate risk.""

He says subsidizing the 30-year fixed-rate mortgage ""means the homeowner is asking someone else to take the risk. You can get the 30-year mortgage elsewhere without a government guarantee behind it.

""We're essentially limiting consumer choice in the world"" by requiring the 30-year loan as a product offering from government entities, he adds. ""It should ultimately be consumer choice that determines these products.""

Should lenders jettison the benchmark loan altogether?

""I wouldn't get rid of it,"" he tells _MReport_.