Dear Mortgage Examiner,
I’ve seen articles saying that the 30-year fixed rate mortgage is going away soon. What does that mean? How are we supposed to buy homes if we can’t count on what our monthly payment will be? What will replace it?
The tone in your letter underscores the fear and uncertainty still pervasive in the real estate market right now and illustrates just how much more needs to happen before consumers are able to re-enter the marketplace with any degree of confidence.
The articles you are referring to have surfaced as a result of the Obama Administration’s recently revealed proposal to gradually wind down the role of FANNIE MAE and FREDDIE MAC, the two behemoth government sponsored entities that, essentially, control the mortgage marketplace.
To try to explain the proposal would far surpass the scope of this column. But the bottom line is that the government (i.e., taxpayer) bailout of these two financial giants made it painfully obvious that the US economy cannot afford to be in the mortgage business. The risks and losses of the past few years have proven to be too great to maintain a stable economy. To illustrate just how painfully obvious this has become you need only look to the fact that both many Democrats and many Republicans in Washington are in agreement on this.
But “soon” Elizabeth is a relative term. The administration estimates it will take several years to accomplish the goal of getting Americans to back down from their reliance on this stalwart of mortgage lending. And they most likely won’t go away entirely; they’ll just be more expensive to obtain. So, in the short term, say 5 to 7 years or so – maybe 10 – we should still have 30 year fixed rate mortgages available in the manner and form we are used to.
But the bottom line is that, yes, it will get harder to borrow money to buy a house, and, yes, we should therefore expect to see the American standard of living (read, ‘middle class’) erode further. Borrowers will have to be more focused on a budget as you should expect the adjustable rate mortgage to become the norm when this change eventually occurs.
And make no mistake, it WILL occur. The private banking and financial industry is just salivating to have this happen sooner rather than later. The 30-year fixed-rate mortgage is weighted decidedly in favor of the borrower with almost no redeeming benefit to the lender.
In fact, with the recent historic low rates that have facilitated a mini-boom for refinancing, it is very possible that they have simply sowed the seeds for another bank collapse crisis in the future when rates inevitably rise and banks are tethered to the miniscule returns these rates provide.