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The PATH Act Sustains the 30-Year Fixed Rate Mortgage

Washington, July 15, 2013

Leaders of the Financial Services Committee have proposed the PATH Act – the Protecting American Taxpayers and Homeowners Act (.pdf) – to create a sustainable housing finance system for the 21st century. The proposal:

  • Ends the taxpayer-funded bailout of Fannie Mae and Freddie Mac that has cost taxpayers nearly $200 billion – the largest bailout in history;
  • Increases competition by ending the federal government’s domination and control of the housing finance market; and
  • Gives consumers more choices in determining which mortgage best suits their needs.

The biggest myth we are hearing about the PATH Act is that it will make the 30-year fixed rate mortgage disappear. The 30-year fixed rate mortgage will continue to exist. The PATH Act won’t change that. 

First of all, Fannie Mae and Freddie Mac have never made a 30-year fixed rate mortgage to a borrower. Or any mortgage for that matter. Fannie and Freddie were not lenders, they only bought loans made by others. The terms of a mortgage are up to the homebuyer and the lender, and phasing out these taxpayer-supported government giants will do nothing to limit financing options – in fact, the proposal is designed to create more opportunities for more choices, including the 30-year fixed rate loan.

Secondly, 30-year fixed rate mortgages existed before the financial crisis without a government guarantee and they are being made today without a government guarantee. As Peter Wallison, co-director of Financial Policy Studies at the American Enterprise Institute, has noted (.pdf): 


“Many people who don't follow the financial markets might assume that lending money for that long a period at a fixed rate would be too risky for the private sector… However, anyone can prove this assumption is wrong, simply by going to Google and typing in "30-year jumbo fixed rate mortgage." The word "jumbo" is mortgage market jargon for loans that are too large to be bought by Fannie or Freddie, or insured by the Federal Housing Administration. That means a jumbo mortgage is not backed in any way by the government. Still, a Google search will return many offers of jumbo fixed rate loans.”


Additionally, nothing in this proposal will change the ability of qualified borrowers to receive a 30-year fixed rate mortgage through the Federal Housing Administration.  

And finally, is it really in the homebuyers’ best interest for the government to steer them into long term loans for homes they can’t afford to keep? As the acting director of the agency that oversees Fannie and Freddie, Ed DeMarco, explained in congressional testimony:


“One thing I would say about 30-year mortgages, it is not necessarily the best mortgage product for a homebuyer, especially a first-time homebuyer.  If you look at statistics and see that the first-time homebuyers in this country tend to own their first home for 4 years or for 5 years, it may not be the best for their circumstance if they buy that house with that kind of timeline, you know, is what they expect, there may be a different mortgage product in which they can build equity at a faster rate than a 30-year fixed rate mortgage.”    
  

The 30-year fixed rate mortgage will continue. The PATH Act won’t change that. What will change is this: Washington won’t steer homebuyers into products that they do not want and that cost more than they want to spend, and all Americans will benefit from a sustainable housing finance system that offers more choices and opportunities.
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