Arnold Kling  

30-Year Fixed-Rate Mortgage Debate

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The Company of Strangers... Idiocracy...

Richard Green likes them. Nick Rowe does not. I can understand Green's antipathy toward the most common forms of adjustable-rate mortgages in the United States. However, I think that a mortgage that amortizes over 30 years, with an interest-rate adjustment every five years, and no teaser rate would be better than any of the common mortgages here. The five-year fixed term would suit many people, since many people move in less than ten years.

In any case, regardless of what Green or Rowe or I believe is the right mortgage, I think that the market ought to decide. It is my hypothesis that, in the absence of government support (including loading the tail risk onto taxpayers), the thirty-year fixed-rate mortgage with no penalty for either prepayment or default would be priced too expensively to attract borrowers.


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COMMENTS (8 to date)
Nick Rowe writes:

Arnold: Thanks for the link!

"However, I think that a mortgage that amortizes over 30 years, with an interest-rate adjustment every five years, and no teaser rate would be better than any of the common mortgages here."

That's basically the mainstream Canadian mortgage you are describing there. It's the one aimed at the more risk-averse borrowers. Those of us who can handle more risk sometimes go for shorter periods of fixed rates, or variable rates.

I was very surprised to learn (from comments) that US mortgages are typically not portable (you can't take them with you to a new house if you move) and not assumable (you can't let the new buyer, even if he's got OK credit, assume your mortgage when you sell your house). Is that right?? Because that's weird too. And it would certainly explain why US borrowers insist on an open mortgage, that you can pay off any time. Otherwise you can't move for 30 years. But why aren't they portable or assumable? Does it have something to do with the fact that US mortgages in most states (unlike Canadian) are non-recourse (you can only repossess the house, and can't go after the borrower if he defaults)? If so, maybe that's the government "intervention" (failing to enforce recourse contracts) that is at the root of the problem?

Arnold Kling writes:

The mortgage has never been portable. That is because it is a non-recourse loan.

So, if I get a $200,000 loan on a $250,000 property, then sell the property and buy a $50,000 house while keeping the $200,000 loan, I could then walk away and leave the bank with a $150,000 loss. If the bank has recourse i.e., can come after me for the $150,000), then you can have portability.

Thirty years ago, mortgages were assumable. I thought they were still assumable. But maybe I am wrong.

GA writes:

"In any case, regardless of what Green or Rowe or I believe is the right mortgage, I think that the market ought to decide. It is my hypothesis that, in the absence of government support (including loading the tail risk onto taxpayers), the thirty-year fixed-rate mortgage with no penalty for either prepayment or default would be priced too expensively to attract borrowers."

In many markets worldwide, effectively does not exist. The risk to borrowers does not appear to be objectively worse than U.S. market overall (although direct comparisons not feasible). And the question arises, could it exist at all without government support?

q writes:

> The mortgage has never been portable. That is because it is a non-recourse loan.


Even if it were a recourse loan, your logic doesn't pan out. If I got a $200,000 loan on a $250,000 property and then bought a $50,000 house while keeping the $200,000 loan, I've turned the loan from a secured to an unsecured loan. That makes the loan much more risky for the bank -- sure, the bank can go after other assets but I'm not required to have them and even if I do I can mortgage them -- so I can't imagine the lender is going to go along with this.

mattmc writes:

"with no penalty for either prepayment"
How much would a penalty for prepayment be? It seems quite unfair, on the face of it, particularly if rates have risen, rather than fallen.

Mike Rulle writes:

Most states permit recourse loans. I believe about 45 states do. In these states mortgages are recourse loans. California, Nevada, Florida require non-recourse mortgages. Interestingly, so does Texas.

I think this is correct.

Dave writes:

In 2004 (when I bought my first house) E-trade bank was marketing a portable mortgage. It was about 25 basis points above market, and it had terms related to the nature of replacement securities they would accept when you took your loan with you to your next property. I took a look at it, but decided against it. The rate differential and complexity of the portability terms made it not worth it. I am something of a rate miser, so I am in a 5/1 arm at 3.625% now. I have reasons to believe I'll have a substantial portion of it repaid at the end of the 5 year term.

Dan Weber writes:

How much would a penalty for prepayment be? It seems quite unfair, on the face of it, particularly if rates have risen, rather than fallen.

Is it fair that the bank needs to keep on paying me for the CDs I bought back when rates are high?

Having a loan without a prepayment option requires a different way of thinking, but there is nothing fundamentally unfair about it. It sounds as weird to you as non-portable mortgages sounds to Nick.

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