30-Year Fixed Mortgage At Root of Housing Instability; Should Be Nixed - Pinto

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The authors' reform plan, like virtually all the others before it, fails to acknowledge the government's role in past housing finance failures. Failures include the savings and loan (S&L) debacle of the 1980s, Fannie and Freddie's collapse into conservatorship, and the Federal Housing Administration's (FHA's) 3.4 million foreclosures (almost all with 30-year fixed rate loan terms). These crashes did not come about in spite of government support for housing finance, but because of government backing.

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Guaranteeing access to loans independently of market conditions creates an economics free zone, one where the FHA neither prices nor underwrites for risk, where the taxpayer-backed GSEs compete with the FHA for "affordable loans," and where government-backed lending is provided in both good times and bad... It is impossible to simultaneously keep the 30-year fixed rate mortgage at the system's core, protect taxpayers and provide broad access to meet the needs of underserved communities.

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This latest proposal is a policy cul-de-sac, repeating many of the same policy mistakes of the past decades. It is time to substitute shorter term loans of 15 and 20 years, designed to reliably build wealth and maintain buying power, while protecting borrowers and neighborhoods from high levels of foreclosure risk. Such a loan, developed by AEI's International Center for Housing Risk, is already being offered in different versions by a number of banks, credit unions and at least one non-profit. Several state housing finance agencies have also signed on.