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Are We Already Pumping Up the Next Housing Bubble?

Ed Pinto thinks so.  Ed Pinto is a scholar at the American Enterprise Institute, a conservative think tank in Washington, DC, who writes on housing issues.  In a recent op-ed published by Bloomberg, Mr. Pinto observes that:

Twice in the last 20 years we have seen spectacular failures of U.S. housing finance, each at enormous cost to taxpayers. Both the savings and loan crisis, and the Fannie-Freddie bailouts can be traced to congressional support for, and subsidization of, the 30-year fixed-rate mortgage.

But is it clear that the pattern of 30-year, fixed-rate mortgages is unsustainable?  In light of the changes in the world’s financial markets without government subsidy and intervention, Mr. Pinto calls into question the whole underlying concept behind the home mortgage system in the U.S.  He notes that:

The 30-year mortgage has a place in the U.S. housing market, but all things in moderation.  Congress needs to ask the housing industry why we should continue subsidizing a product with this kind of track record.

Most other industrial nations have lower default and foreclosure rates than the U.S.  And they also have significant differences in their home mortgage products.  Most of the world finances housing purchase with variable rate loans (what most people call ARMs–adjustable rate mortgages), or short-term loans with long amortization periods (e.g., a 5/30, which is due and payable in 5 years, but has payments calculated as if it were a 30-year loan).  These kinds of loans are available here in the U.S., but the emphasis here has always been on the fixed-rate, 30-year mortgage.  That is the primary loan product offered and guaranteed by public and quasi-public agencies (i.e., Fannie Mae, Freddie Mac, Ginnie Mae, FHA, and the members of the Federal Reserve and Federal Home Loan Banks).

Many other advanced economies have home ownership rates rivaling or exceeding that of the U.S., without government mortgage insurers, security guarantees or GSEs like Fannie and Freddie.  How do they do it, and why does their approach work as well or better than ours?

A 2010 research paper written by Dr. Michael Lea, of San Diego State University’s business school, compared the mortgage finance systems in 12 major developed nations, including the U.S. to see how their mortgage markets differed.  (With the exception of Australia, Japan and Korea, all were European or North American.)  In only two other nations were long-term fixed rate mortgages more than minor portions of the overall market.  The U.S. also depends on mortgage backed securities to fund its mortgage market to a greater extent than others. This is made feasible by the GSEs, and government guarantees.

And it just those features of the U.S. mortgage finance system that worries Ed Pinto.

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