Paul McMorrow

The end of 30-year fixed- rate mortgage?

By Paul McMorrow
March 4, 2011

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FANNIE MAE and Freddie Mac are wretched, toxic organizations that have soaked good working people for $134 billion, and counting. They will be put down as quickly as Congress and the US Treasury can manage. That, we know. What happens once they disappear is largely an unanswered question.

The biggest uncertainty surrounds the fate of the 30-year fixed-rate mortgage. It’s the preferred home-financing option of federal regulators burned in the financial crisis by exotic adjustable-rate vehicles, and also the dominant means of financing homes in the United States. It’s also a financing arrangement that was largely enabled by Fannie Mae and Freddie Mac’s economic clout.

In testimony before Congress this week, Treasury Secretary Timothy Geithner said that lowering the government’s involvement in the mortgage markets would almost certainly restrict the supply of 30-year fixed-rate mortgages, while increasing their costs. But it’s no sure thing that the mortgages will even continue to exist in the way most Americans know them.

Geithner’s Treasury is flying without a net on this one. The stakes are especially high for cities, on grounds of both economic diversity and environmental well-being.

The difference between a 15- and 30-year mortgage amounts to well over $600 per month on a $300,000 loan, a substantial amount that may prevent wide swaths of the middle class from buying homes. This may also threaten the economic health of cities.

Cities have enjoyed a renaissance over the past decades because they have retained young professionals and attracted families that previously fled to the suburbs. These residents are particularly invested in the urban civic space around them. They eat and drink in local restaurants, and they sustain small businesses on the neighborhood level. They’re active users of civic infrastructure like parks and schools. Homeownership gives them a financial stake in their municipality’s well-being.

But these homebuyers will be at the greatest mercy of mortgage pricing. Since they’re younger, they have a smaller savings cushions built up. A 20-percent down payment is laughably out of reach for these buyers, to say nothing of the horrors of a 15-year amortization table. If the private markets can’t sustain the 30-year mortgage after the demise of Fannie and Freddie, the consequence would likely be a drastic widening of cities’ class divisions.

With the vibrant middle priced out of homeownership, cities become deeply divided places, playgrounds for the privileged surrounded by neighborhoods full of the working, landless poor. Current city and state policies already recognize this as an intolerable outcome. Inclusionary zoning policies and affordable housing development regulations only reach so far, though. Ultimately, the greatest tool in promoting economic diversity in cities is the reliable flow of affordable, long-term housing debt. If that debt dries up, so too will the homebuyers who invest in vibrant urban spaces.

So where will they go, and what are the consequences? That’s an environmental question, as well as an urban policy concern.

If middle-class buyers are priced out of cities, they’ll be forced to move to somewhere they can afford to live. High mortgage prices raise the real cost of housing, and high housing costs incentivize suburban and exurban sprawl. And sprawl, frankly, hates the environment. It creates greenhouse gases by pushing people far away from their jobs, and from reliable mass transit. Sprawling spaces are also temples to environmental waste because they force residents to use cars, and burn oil, to access the sorts of basic goods that are reachable by foot or bus or subway in urban settings. Global climate change has allowed urban thinkers to show that the types of buildings we choose to inhabit have real and lasting consequences. Urban areas have grown as a result. But the discussion is moot if whole chunks of the population have no choice in the matter.

Financial players will do what’s in their own economic self interest. For decades, Fannie Mae and Freddie Mac bore the sorts of risks that made 30-year mortgages palatable to banks. There’s really no telling what will happen once banks have to bear that risk on their own. And in putting down Fannie and Freddie while also pledging to slash other government mortgage programs, federal policymakers are greeting uncertainty without any sort of hedge.

Paul McMorrow is an associate editor at CommonWealth magazine. His column appears regularly in the Globe.