Friday, October 21, 2011

The value of 30-year fixed-rate mortgages

by Clare Duncan, National Housing Conference

Yesterday, the Senate Banking Committee held a hearing on the continuation of the 30-year fixed-rate mortgage as part of their series of hearings on housing finance reform. Chairman Johnson (D-SD) started the hearing stating that he believed that the 30-year fixed-rate mortgage should continue to be widely available to qualified borrowers across the country, while not necessary being the only product available. Witnesses included Janis Bowdler, Senior Policy Analyst at the National Council of La Raza; Mr. John Fenton, President and CEO of the Affinity Federal Credit Union; Dr. Anthony Sanders, Professor of Finance at the George Mason School of Management; Dr. Paul Willen, Senior Economic and Policy Advisor of the Federal Reserve Bank of Boston and Dr. Susan Woodward, President of Sand Hill Econometrics.

Ms. Bowdler, Mr. Fenton and Dr. Woodward focused their testimony on the need and the benefits of the 30 year fixed rate mortgage, including the fact that these mortgages are easy to understand, predictable and affordable for consumers. They also argued for the need of government involvement in the secondary mortgage market, stating that the availability of the 30-year fixed-rate mortgage would cost more to consumers and would not be as widely available, particularly to low-and moderate income families.

However Dr. Sanders and Dr. Willen took a different stance. While they did not necessary argue against the availability of a 30-year fixed-rate mortgage, they questioned the prevalence of these mortgages in the market and their security for consumers. They argued that adjustable rate mortgages aren’t as risky and confusing to consumers as generally assumed or the fundamental reason for the housing crisis and therefore should not be excluded from the conversation.

I believe Mr. Fenton summed up the issue well: “You have to have a choice. There are members in every life segment and every lifestyle and so depending on where you are in those, there are options for you. Pre-payment may be one of them, adjusted rates may be one of them. We can’t just have one product …Risk should be spread balanced over all of the segments.”

The hearing webcast and testimony can be found on the Senate Banking Committee website.

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