New Housing Era Case Study

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Title: New Housing Era: 30-Year Mortgage May Fade. By: Appelbaum, Binyamin, New York Times, 03624331, 3/4/2011 Database: Academic Search Premier Section: National Desk WASHINGTON -- How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac? The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say. Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs. Lenders could charge fees for popular features now taken for granted, like the ability to ''lock in''…show more content…
Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide. The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government's support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup. The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans. Douglas J. Elliott, a financial policy fellow at the Brookings Institution, said Congress was being forced for the first time in decades to grapple with the cost of subsidizing middle-class mortgages. The collapse of Fannie and Freddie took with it the pretense that the government could do so at no risk to taxpayers, he…show more content…
Moreover, Mr. Pollock noted that over the last several years, borrowers with adjustable-rate loans paid less as interest rates fell, while those with fixed rates kept paying the same amount for devalued homes. ''One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage,'' he said, noting that such loans are not available in most countries. ''For many people, it's not at all clear that that's the best product.'' Fannie and Freddie also allow a wide swath of the American public to borrow money at the same interest rates and on the same terms. Borrowers who did not meet their standards were forced to pay higher interest rates to subprime lenders, but the companies essentially persuaded investors to treat a vast number American families as if they were interchangeable. They took messy bunches of loans, with risks as variable as snowflakes, and created securities of uniform quality, easy to buy and sell. The result was one of the most popular investment products ever created. And in its absence, experts on housing finance say that fewer borrowers would qualify for the best interest
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