September 19, 2018

Is 30-Year Subsidized Mortgage In Imminent Danger?

The federal government is looking for ways to trim its outlay and subsidization of home mortgages has slipped onto the list of possible programs to delete. The possible demise of the subsidies might spell the end to home ownership for many

The history goes back more than 40 years to a time when promotion of home ownership led the feds to boost support for potential buyers who couldn’t meet financial guidelines.

Now the tentative talk in the Obama administration is to eliminate Fannie Mae and Freddie Mac, the huge government programs created to administer the program. That would not eliminate 30-year mortgages, but would leave the market to people with modest incomes who could afford to purchase from a private lender. At this point, the 30-year fixed-rate loan is the most popular in the United States. Some 80 percent of mortgages fall into this category, which means that Fannie and Freddie can guarantee them, as long as they’re below a maximum amount. Spreading payments over such a long span costs more in the long haul, but makes ownership affordable for many buyers.

Part of the conversation centers on massive default statistics, in which the government has been left holding the bag as subsidized homeowners opt out before completing payment. Throw in management and accounting scandals at Fannie and Freddie and there seems plenty of ammunition for those willing to scrap the program. The costs to the country’s taxpayers reach into the billions of dollars, they say. But the availability of government guarantees has given many lower-middle-class Americans entrée into home-ownership. How those two factors will balance out as the discussion goes forward remains to be seen.

Critics argue, on the other hand, that subsidization has created the highest-priced housing available in the world. Over-building and selling too-large homes have resulted, they contend. Because down payments are low, it appears that the homeowner is less reluctant to default on a whim. The loss is not great. The financial experts suggest that requiring a 20 percent – or more – payment up front would discourage people from walking away before the loan has been paid down.

Should the government bow out of the mortgage business, 30-year mortgages would not disappear, but they likely would be higher-priced and there would be fewer of them, experts predict. The percentage of buyers seeking these loans likely would drop to the 30 percentage neighborhood, they say.

History shows that the government’s involvement as a provider of subsidies significantly changed the housing market. In the 1920s, for instances, the more common scenario was for a buyer to put down 40 percent of the cost of the house and obtain a low-interest loan for 10 years. Refinancing was common.

Other countries have devised ways to help low-income citizens get into a home, some say, and have higher homeowner rates than the U.S. In some, subsidization is not an option.

As talk heats up in Congress, dozens of arguments will have their bearing. There is little expectation of a fast resolution of the question and when the dust clears, there could be little difference — or a huge revision in how Americans buy or don’t buy their homes.

About Twila Van Leer

Journalist/writer for more than 50 years. Pulitzer Prize nominee, 1983 for coverage of the first permanent artificial heart. More than 50 national, regional, local awards for news writing. Main writer for a memorial book for Deseret News' 150 th anniversary and for a book recounting the 1997 re-enactment of the pioneer trek from Omaha to Salt Lake City. Co-writer and editor of "True Valor," a book on the history of the artificial heart. Author of the book, Life Is Just A Bowl Of Kumquats, a wonderful story of a house wife and her trials with raising a large family.