30-year, fixed-rate mortgages reportedly may become rarer

The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say and without Fannie Mae and Freddie Mac it may "fade away," according to an article by Binyamin Appelbaum in today's edition of The New York Times.

"Interest rates would rise for most borrowers," the article continued, "but urban and rural residents could see sharper increases than the coveted customers in the suburbs. Lenders could charge fees for popular features now taken for granted, like the ability to 'lock in' an interest rate weeks or months before taking out a loan."

"Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans," the article said, "although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide."

Douglas J. Elliott, a financial policy fellow at the Brookings Institution, said Congress was being forced for the first time in decades to grapple with the cost of subsidizing middle-class mortgages, the article said, adding that Representative Scott Garrett, the New Jersey Republican who oversees the subcommittee that oversees Fannie and Freddie, said at a hearing this week that "a purely private mortgage finance market is a very serious and very achievable goal," and that "no one serious in this debate believes our housing market will return to the 1930s."

"The kind of backstop that we have now, if it didn't exist, we would have had a much more severe recession and a much sharper fall in home values," said Michael D. Berman, chairman of the Mortgage Bankers Association, which represents the lending industry, the article said.

Fannie, Freddie and other federal programs now support roughly 90 percent of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees.

One prominent investor, William H. Gross, the co-head of Pimco, the major bond investment firm, has estimated that he would demand a premium of three percentage points to buy such loans - a cost that would be passed on to the borrower, the article said.

Proponents of a private market, it continued, "want the government gradually to withdraw its support, allowing investors to regain confidence. They argue that interest rates would eventually settle into roughly the same patterns that held before the financial crisis. Some supporters of government backing also like the idea, believing that it will demonstrate the need for a backstop. 'I myself am eager to see whether there needs to be a guarantee,' said Representative Barney Frank of Massachusetts, a crucial Democratic voice on housing issues."

The 30-year loan first became broadly available by an act of Congress in 1954 and, from then until now, the vast majority of such loans have been issued only with government support. "Most investors," the article noted, "are simply not willing to make such a long-term bet. They prefer loans with adjustable rates."

Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, said such loans would remain available in the absence of a federal guarantee, but they might be harder to find. "And lenders might demand a larger down payment. Or a better credit score. That would be a very good thing, said Mr. Pollock, now a fellow at the American Enterprise Institute."

Fannie and Freddie slashed the requirements for down payments in recent years, saying that they were helping people with minimal savings become homeowners. Two-thirds of the borrowers whose loans were guaranteed by the companies from 1997 to 2005 made a down payment of less than 10 percent. But borrowers who invest less default more often. The Obama administration has said that it wants the companies to demand a minimum down payment of 10 percent.