Suppose that mortgages were bundled into securities, intermediated by mutual funds whose values float, just like those of equity mutual funds, and held around the world in retirement accounts, pension funds, and our endowments’ portfolios, without government guarantees at every step. This would be a terrific financial structure
I think that this would be an improvement. However, the household demand for risk-free assets might lead banks or money-market funds to offer fixed-rate instruments backed by these floating-rate securities. Add enough leverage and you have a very shaky financial structure. In any case, I continue to believe that if there were no government actions distorting the price differential between a thirty-year mortgage with an interest rate fixed for just five years and a thirty-year fixed-rate mortgage, the latter would cease to dominate the housing finance system in the U.S.
If the claim for supporting the 30-year fixed rate mortgage is to hedge interest rate risk, then why not keep the 30-year fixed rate and scrap the option to refinance?
The real estate market can work just fine with shorter-term fixed rates. In Canada, the typical home buyer gets a 5-year fixed rate (and pays off the house over a period up to 40 years, though recently this has been reduced to 30, I believe). The sky has not fallen. However, it is not a panacea. Recent market trends are worrisome (google Vancouver real estate market).
Add enough leverage to ANYTHING and you have a very shaky financial structure.