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I don't know. The question is whether subsidizing 30Y mortgages (fannie mae/freddie mac/FHA/QE/standard terms enforced by law to enable refinancing, etc.) is th

by ak217 4y ago

I don't know. The question is whether subsidizing 30Y mortgages (fannie mae/freddie mac/FHA/QE/standard terms enforced by law to enable refinancing, etc.) is the right policy in an open system where it has many major side effects, compared to other ways to adjust housing policy. For reference, Canada has no 30Y fixed mortgages - instead they have 5-10Y fixed terms and distinguish between prepayment for refinancing (exploiting the rate environment) vs. moving (the mortgage can be rolled into the new property). As a policy, this seems less likely to have destabilizing effects than what happens in the US (concentrating volatility by loading up the banks' balance sheets with trillions of refinanced debt at times of low interest rates for folks who happened to have the means and cash flow to refinance at the right time).

kelnos 4y ago
Rolling the mortgage into the new property seems interesting. From what I understand, this is very rare in US mortgages, right? I do wonder, if we just had 10Y mortgages, would home prices just crash? People won't buy what they can't afford (I mean, sure, they do to some extent, but not if their monthly payment would double), so sellers might just be forced to sell for less. The first "generation" of 10Y-only mortgages would be disastrous for current owners, as their existing 30Y mortgages would be underwater. Or maybe people just would stop moving... I just glanced at the article you linked, and realized I'd read it back when it was posted, and agreed with its conclusions. I just don't know what the solution is.
- ak217 4y ago
  Right, US mortgages are not portable. Going back to the Canadian mortgages, they have terms of 5-10 years but they can be amortized over up to 25 years. So their standard practice is effectively a balloon payment of up to 80% that is expected to be refinanced at rates in effect at the end of the term. This still financializes housing over up to 25 years (similar to the US) but without subsidizing the interest rate optionality. In the US, balloon payments are heavily discouraged by federal regulation on what kinds of mortgages can be financially supported by the government.
  - kelnos 4y ago
    Ah, that makes a lot of sense. So the monthly payments are still affordable, and people mostly avoid the balloon-like payments by refinancing. The downside (for the borrower, anyway), of course, is that if you do live in the same house long-term, you'll have more-frequent forced refinancing events that might result in an unfavorable interest rate. But that otherwise seems pretty reasonable, and arguably (as the article you linked points out), the ability to "lock" your interest rate for such a long time isn't great for the market.
- sangnoir 4y ago
  > I do wonder, if we just had 10Y mortgages, would home prices just crash? I suspect home prices won't fall by as much as you think they will. I suspect institutional investors will become major buyers and lease out those units; which would crash homeownership - at least in the popular metros

by ak217 4y ago

kelnos 4y ago

Rolling the mortgage into the new property seems interesting. From what I understand, this is very rare in US mortgages, right? I do wonder, if we just had 10Y mortgages, would home prices just crash? People won't buy what they can't afford (I mean, sure, they do to some extent, but not if their monthly payment would double), so sellers might just be forced to sell for less. The first "generation" of 10Y-only mortgages would be disastrous for current owners, as their existing 30Y mortgages would be underwater. Or maybe people just would stop moving... I just glanced at the article you linked, and realized I'd read it back when it was posted, and agreed with its conclusions. I just don't know what the solution is.

ak217 4y ago
Right, US mortgages are not portable. Going back to the Canadian mortgages, they have terms of 5-10 years but they can be amortized over up to 25 years. So their standard practice is effectively a balloon payment of up to 80% that is expected to be refinanced at rates in effect at the end of the term. This still financializes housing over up to 25 years (similar to the US) but without subsidizing the interest rate optionality. In the US, balloon payments are heavily discouraged by federal regulation on what kinds of mortgages can be financially supported by the government.
- kelnos 4y ago
  Ah, that makes a lot of sense. So the monthly payments are still affordable, and people mostly avoid the balloon-like payments by refinancing. The downside (for the borrower, anyway), of course, is that if you do live in the same house long-term, you'll have more-frequent forced refinancing events that might result in an unfavorable interest rate. But that otherwise seems pretty reasonable, and arguably (as the article you linked points out), the ability to "lock" your interest rate for such a long time isn't great for the market.
sangnoir 4y ago
> I do wonder, if we just had 10Y mortgages, would home prices just crash? I suspect home prices won't fall by as much as you think they will. I suspect institutional investors will become major buyers and lease out those units; which would crash homeownership - at least in the popular metros