Not Fade Away: Could The 30-Year Fixed Rate Mortgage Survive In A World Without Fannie and Freddie?

by:  Peter J. Gallagher

Imagine a world without 30-year fixed rate mortgages.  The New York Times ran an article last week, "Without Loan Giants, 30-Year Mortgage Might Fade Away," discussing the demise of this popular product as one potential consequence of eliminating Fannie Mae and Freddie Mac, something Republicans and the White House actually agree upon.  The article notes that without the backing of Fannie and Freddie, such loans might become a "luxory product," and might be available to borrowers — particularly those in urban and rural areas as opposed to the "coveted customers in the suburbs" – only at higher rates and more restrictive terms. 

Although now an industry standard, the 30-year conventional mortgage only became broadly available in 1954, and only became popular with lenders because they are generally issued with government support through Fannie and Freddie.  Without this backing, and the corresponding guarantee of repayment, most  lenders would not make such a "long-term bet," preferring instead to offer consumers adjustable rate mortgages for shorter periods of time.  As the article notes, 30-year fixed-rate mortgages might still exist even if Fannie and Freddie no longer do, but they might be harder to find, and lenders might demand larger down payments and better credit scores from borrowers.

The article offers differing views on whether the demise of Fannie and Freddie — and the corresponding demise of the 30-year fixed rate mortgage — would be good or bad for borrowers.  Nonetheless, the fact that people are even debating the issue is yet another sign of how deeply the crash of the housing market impacted the markets and society in general.

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