In their bid to revamp the U.S. housing system, Democrats and Republicans alike are considering the dismantling of Fannie Mae and Freddie Mac. But if the government guarantee on conventional, conforming loans goes the way of the dodo, the United States can most likely kiss the 30-year fixed-rate mortgage goodbye.
That’s according to Ted Tozer, president of Ginnie Mae, which backs loans made through the Federal Housing Administration, Veterans Administration and Rural Housing Service. In a conversation with National Association of Realtors Vice President Joe Ventrone, Tozer said 30-year FRMs would be too risky an investment for many without the government guarantee.
“The 30-year fixed-rate mortgage is only available because of the fact that investors are willing to invest in it knowing that if interest rates change or things happen, they can actually sell that loan very easily -- the same way, for example, if you owned Apple stock, and the stock performed in a way that you wanted to sell, you could sell it,” Tozer said. “If it has a government guarantee, they don’t care whether that loan is in Nevada, whether that loan is in Missouri – all they see it as is just an interest rate instrument, because all the credit risk is being covered by the government.”
Tozer told Ventrone that the savings and loan debacle of the 1980s demonstrated the risks 30-year FRMs posed with no government backstop.
“Prior to the 1980s the savings (and loan) industry tended to be the major investor for the 30-year fixed rate mortgage, and there was really not a robust securitization function, so they just put them on their balance sheet like any bank would put on car loans or whatever,” Tozer said. “Well, this basically did not work well. When interest rates climbed dramatically in the 1980s … the savings industry basically ceased to exist. At that point the government guarantee became dominant, because you had to replace the funding that was coming from the savings industry by some other instrument. And that came in the form of government guaranteed (mortgage-backed securities) -- either Fannie Mae, Freddie Mac or Ginnie Mae securities – that replaced the savings and loan industry. So we went from a situation in the 1970s where the government profile was probably 15 or 20% to jumping up to somewhere around 60% by the time we got to 1990, and we’ve been in the 60-65% area from the late 80s-early 90s to today.
“You cannot manage interest rate risk with a 30-year fixed-rate mortgage,” Tozer added. “The savings and loan industry showed that’s virtually impossible to do.”