30 Fixed MortgageFixed-rate mortgage
In spite of the façade of a free economy, the German economy has long been anchored in the US residential mortgage system, certainly maintaining tax-funded state guarantee schemes in the mortgage markets. USA is one of the most advanced countries in the world in the way the German governments systematically participate in mortgage financing.
Confederation tax payers bear the costs of providing mortgage insurances directly to the state (the FBA, Department of Veterans Affairs and Rural House Service), a mortgage guarantee directly to the state (Ginnie Mae) and government-sponsored companies (Fannie Mae, Freddie Mac and the Fed Loan Banks). Also, the US belongs to a handfull of developed countries with an overweight of very long-term fixed-rate loans and wide levels of government subsidy, although the overall US home ownership ratio is still similar to those of countries that have both.
Together with other taxpayer-financed subventions such as the reduction of mortgage interest rates, these subventions have had insignificant effects on the real home ownership ratio in the US and have encouraged US budgets to take on higher mortgage debts when buying bigger and more costly houses. At the time, when this ratio was rising, the free mortgage markets had a greater part to play in mortgage financing.
However, the significant rise in the home ownership ratio until 1960 took place in the lack of the US securitisation markets (which evolved in the 1970s) and before the 30 year fixed-rate mortgage, which was not widely available from the FHA until the end of the 50s and from the consumer economy until the 70s, was systematically available.
Moreover, most home owners stay well below the full life of their home (or the original mortgage) with all taxpayers who value the maintenance of such a very long-term fixed interest mortgage type such as the 30-year FRM only. FRM, which is 30 years old, has been a basic commodity in the US residential mortgage system for several centuries and is likely to continue to be a sustainable mortgage financing tool due to its dependence on pathways in this mortgage financing system - even in an alternative environment without state guarantee.
On the US yumbo mortgage subprime markets, 30-year old foreign direct investment funds (FRMs) are created without specific sovereign warranties because they are rated higher than the allowable thresholds for sovereign support. Its prices are competitively (sometimes even lower) than those supported by the German federation. Indeed, about 75% of commercial mortgage loans are 30-year fixed-rate loans, which are only slightly lower than the 85% supported by Fannie and Freddie.
Whilst home-owners can profit from very long-term RRMs, it is wrong for government policies to believe that these mortgage financing tools work best for all. In general, these policies lead to a slow stock market build-up, especially in the early years of mortgage lending, which makes the homeowner susceptible to abrupt changes in house valuations or adverse business effects.
Overall, despite all the best plans, public sector guarantee schemes have not stabilised the mortgage financing system and house prices. Indeed, in recent years, when the 30-year fixed-rate mortgage has become the dominant financing tool for home purchase, houses have become less affordably priced, home ownership debts have skyrocketed, home ownership has become stagnant and less sustained, and tax payers have borne the costs of several hundred billion euros in rescuing failing banks and subsea house owners.
Continuing the US home financing system's reform of the federation, federations should refrain from making the errors of the past and end all grants and preferential treatment of very long-term fixed-rate loans. That would allow retail financial institutions to build their own mortgage financing product without state intervention. Mr Edward J. Pinto est co-directeur du Center on Housing Markets et Finances de l'American Enterprise Institute.