February 28, 2013
The report states that “it is highly unlikely that private financial institutions would be willing to assume both interest rate and credit risk, making long-term, fixed-rate financing considerably less available than it is today or only available at higher mortgage rates.” (42) This statement is far from uncontroversial. First, the jumbo private label-market had originated 30 year fixed rate mortgages. There is at least some tolerance for a product in which the private sector bears both credit and interest rate risk. Second, the fixation on the 30 year fixed mortgage product is counter-productive. The typical American household moves every seven years. In an invisible way, pushing people into 30 year fixed mortgages can harm them. Think, for instance, of a young couple moving into a one bedroom condominium unit. The odds that they will be there for 30 years without ever even refinancing to get a lower interest rate or to access the equity they built up is miniscule. But that couple will be paying an interest rate premium to have their interest rate fixed for that whole thirty years. That couple would likely be better served by a 5/1 or 7/1 ARM which would balance a low interest rate in the near term with the risk that they stay longer than expected and pay a higher interest rate in the long term.
The reports fixation on put-back risk (46) is a canard. There is no need to regulate in this area. Now that private parties are aware that it is a serious issue, they will negotiate accordingly.
The report’s concern with “uncertainty related to pending regulations and implementation of new rules” also seems misguided. (47) The housing finance system just went through a near death experience. Of course there is some uncertainty as we plan to take it off of life support.
The report’s position that any “government support for the housing finance system should be explicit and appropriately priced to reflect actual risk” is right on, but the devil will be in the details. (48) How can we set up a system in which political interference won’t distort the pricing of risk? The government does not have a good track record in this regard.
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