WASHINGTON IS in dire need of blunt debate about the future of housing finance, and there was a flash of it during — of all things — Ben Carson’s confirmation hearing before the Senate Banking, Housing and Urban Affairs Committee, which is considering his nomination as housing secretary.
Sen. Jon Tester (D-Mont.) asked Mr. Carson if the mainstay product of the American mortgage market — the 30-year, fixed-rate loan — would still be widely available without some form of government backing. “Yes, I think it is possible,” Mr. Carson said, thus questioning the entire raison d’etre of the government-sponsored mortgage-guarantee duopoly known as Fannie Mae and Freddie Mac. “Truthfully, I don’t see how it can happen,” Mr. Tester countered. “I can tell you it’s going to be difficult.”
Decades of conventional wisdom and, to be sure, a fair interpretation of economic and political reality favor Mr. Tester’s view. The relevant economic theory is that lenders are loath to extend families credit at fixed, moderate interest rates for 30 years, for the simple reason that financial institutions don’t want to tie up money that long in low-rate loans, lest they lose out when interest rates rise. The relevant political theory is that households, which contain voters, also don’t want to shoulder this “interest rate risk,” in the form of higher rates and shorter loan terms.
Washington’s response was to have Fannie Mae and Freddie Mac assume the interest rate risk, by buying loans from originators and bundling them into what were understood to be government-guaranteed securities for sale to investors. This went on for so long, and at so little visible cost to taxpayers — until the 2008 financial crisis — that people came to accept the 30-year mortgage as practically a God-given right, despite the fact that it hardly exists in the industrialized world outside the United States.
On the other hand, experience since the crisis supports Mr. Carson’s hypothesis that “the private sector” could provide 30-year loans — or at least recent history doesn’t refute it. First, there’s the question of whether guaranteeing mass access to 30-year, fixed-rate mortgages is still a worthy federal priority, given competing needs. It didn’t come up at the hearing, but it is a fact that other Western countries, next-door Canada among them, offer mortgage products with terms much shorter than 30 years and require homebuyers to share interest rate risk with lenders. And those countries have homeownership rates comparable to the United States’. Second, there is the fact that the spread between interest rates on government-guaranteed 30-year loans and purely private “jumbo” loans for expensive houses has not always been very large. At certain points in the past few years, jumbo loans actually carried lower rates than government-backed ones.
We were, and are, skeptical of Mr. Carson’s credentials to run the Department of Housing and Urban Development, whose key responsibilities in the coming years should be to serve low-income families and fight housing discrimination. However, to the extent the nominee is willing to rethink programs such as Fannie Mae and Freddie Mac, which channel vast resources not only to the middle class as advertised but also, less transparently, to the real estate and construction industries, we’ll give him credit for being a fast learner.
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