It wouldn't take much of an increase in inflation and short-term interest rates before many banks/thrifts could see their interest margins squeezed, and short-term rates could conceivably even rise above 5% sometime in the next 30 years, which could put the banks "upside down" again and lead to failures.
Mark, like me, remembers the way the 30-year killed off the thrift industry. Today, though, banks and thrifts are not the ones holding mortgages. The main holders now are Freddie, Fannie, and the Fed. This means that when interest rates rise, the taxpayers will lose automatically, without even having to bail out banks or thrifts.
When I gave my rant last week, it was Michael Lea, an economist in the audience, who said that no other country uses 30-year fixed-rate mortgages. That view has been disputed in various comments. Fine. But I would still bet that the vast majority of other countries rely on something other than 30-year fixed-rate loans for the majority of their mortgages. And I am 100 percent sure that there is lots of foreign experience that proves that you can have a viable housing market with little or no use of the thirty-year fixed-rate mortgage. And that is the main point--that there are plenty of examples demonstrating that we could get along without that mortgage.
My guess is that it would take a while for Americans to become comfortable with different mortgages. But if the government were not subsidizing the 30-year with a prepayment option, my guess is that eventually the market would converge on something else.