In my testimony, I introduced the fact that this week Wells Fargo (the largest mortgage lender in the US) was offering a 30 year fixed rate non-government mortgage for 4.5%, while the government form of the same mortgage was 15 basis points higher at 4.65%. Apparently, Wells had found a way — previously said by the Left to be impossible — to hedge a 30 year fixed rate loan.
Some remarks:
1. Government-guaranteed rates will not automatically be lower. These days, for various reasons, Freddie, Fannie, and FHA are under pressure to boost margins, which means charging high rates.
2. As a too-big-to-fail bank, Wells is in a position to compete against Freddie and Fannie. Investors can treat Wells Fargo debt as if it were government guaranteed. (I imagine Wallison would agree with me on this.) Wells’ disadvantage vis-a-vis Freddie and Fannie–if there is one–is more subtle. That is, Freddie and Fannie may have to hold less capital than Wells. But I would say that we don’t really know where the interest rate on a 30-year mortgage would settle in a world where no mortgage lender enjoys a government guarantee.
3. On the larger issue, Wallison is of course correct. There is no public-policy reason to steer the market toward a 30-year fixed-rate mortgage. As he points out, a 20-year fixed-rate mortgage would be just fine. So would a 30-year mortgage where the interest rate adjusts every five years.
What is the origin of bundling a 30-year amortization period (reasonable for most people) with a 30-year fixed rate (unreasonable, and even bizarre to Westerners from other countries)?
Could one make a convincing pitch that the loss of welfare for homeowners will be very small from moving to a 30-year amortization/5-year fixed rate program? Or are real estate, GSE and banking lobbies too strong?
What’s so unreasonable about a 30-year fixed rate? These are extraordinary times, but I think the fact that Wells is now able to ask for less than the guaranteed rate is strong evidence that the market rate in the absence of guarantees would be fairly close to the guaranteed rate in normal economic conditions. For example, the jumbo rate spread is generally 0.25% to 0.5%.
I refinanced a few months ago and found there was zero difference between the 20-year and 30-year rate. I wonder if that was a function of a flat yield curve or some kind of market distortion.
If there is an asset like real estate attached to the loan, as is the case with a home mortgage, then I think it is far less risky to have a 30 year fixed rate. Imagine that inflation creeps higher, pushing up interest rates. Isn’t it likely that in this scenario the market value of the house would also have increased or be set to appreciate? This would, in turn, make the loan less risky.
I actually find the Wallison quote kind of exasperating. We have this elaborate system of subsidizing mortgage credit so as to, in theory, help more people achieve The American Dream of Home Ownership. In practice, that means taxpayers are guarantors of hundreds of billions, maybe trillions of dollars in mortgage debt, thanks to the machinations of Fannie, Freddie, FHA, GNMA, and whomever else, but these government guaranteed mortgages no longer even have the small virtue of being cheaper than those offered by private sector entities? AAAARGGGGHHH!
If you’re going to extend TBTF status to half a dozen or more large privately held institutions like Wells Fargo, fine. Then get rid of Fannie, Freddie, GNMA, and the rest, because they’re now completely redundant.
Does Wells Fargo require private mortgage insurance on the 90% LTV?