President Obama, Defender of the 30-Year, Fixed-Rate Mortgage

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Matt York / AP

President Obama is availing himself of the bully pulpit again this week, with a speech in Phoenix on Tuesday and an online question-and-answer session hosted by real estate website Zillow, both of which focused on the real estate market and Administration plans to further encourage the housing recovery.

During these events, the President focused on a variety of issues, from proposals aimed at helping underwater homeowners refinance their mortgages to how he believes immigration reform will help bolster the housing market. But of all the topics the President touched on, Congress currently seems most interested in addressing housing-finance reform — which means deciding what to do with Fannie Mae and Freddie Mac, the mortgage giants that the government took over during the height of the financial crisis.

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Two separate pieces of legislation are presently being debated in Congress: one put forward by House Republicans and another, the bipartisan Corker-Warner bill in the Senate. In short, the House bill would wind down the federal conservatorship of Fannie and Freddie within five years, replace it with a system of private finance, while maintaining a scaled-back version of the Federal Housing Administration to help first-time and moderate-income borrowers get mortgages. The Senate bill, on the other hand, would replace Fannie and Freddie with a new government entity called the Federal Mortgage Insurance Corp., which would provide insurance for mortgage issuers and investors, for a fee, on the condition that these private participants bear the first 10% of any losses.

The President hasn’t publicly discussed the details of either of these bills, probably because they can get very boring very quickly. But he has consistently signaled his desire to protect the 30-year, fixed-rate mortgage and has argued that some sort of government role is necessary to maintain the availability of that product for most Americans.

Indeed, there’s reason to believe he’s right. Any government role in the housing-finance system, after all — be it the current system or the Corker-Warner scheme — is effectively a subsidy for homeowners. House Republicans want to eliminate such subsidies. And lenders in turn would be less willing to offer low fixed rates on long-term loans, or refuse to finance some borrowers altogether.

But here’s the thing: for some home buyers, this wouldn’t necessarily be bad. After all, the widespread availability of 30-year-fixed mortgages probably drives up home prices because they enable buyers to spend more. And all else being equal, home buyers spend more in interest over longer loans and pay a premium for fixed rates. Seen in that light, President Obama’s implicit support of the 30-year mortgage isn’t the unambiguous good that many believe it to be.

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But that doesn’t mean the House proposal is a great idea, either. The House Republicans want to craft a housing-finance system that would never need to be bailed out by the government. But is such a system even possible? In the case of another 2008-style real estate crisis, the federal government would probably have to intervene whether or not it promised to do so in advance. Furthermore, there is no example of a developed real-estate-finance system that doesn’t involve some sort of government guarantee. It’s quite possible that there isn’t enough private capital out there to support the kind of mortgage market that most Americans are used to.

In the end this debate, like so many others that are going on now in Congress, may be entirely academic. There really is no middle ground between the Senate and House proposals given that one side is dead set against a government guarantee and the other thinks it’s necessary.

What’s more, Fannie and Freddie are now throwing off huge profits for the federal government these days. Freddie Mac announced just yesterday that it earned $5 billion in the second quarter alone. Given the budget pressures the federal government is now facing, it’d be hard to forgo the billions Fannie and Freddie are set to send to the Treasury in the coming years — no matter what the President and congressional Republicans think about our mortgage-finance system.

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