Fixed-rate mortgage changes face of real estate

In the emerging public debate over what type of mortgage products are best for American consumers, the Homeownership Alliance on Thursday reiterated the extraordinary value that 30-year, fixed-rate, prepayable mortgages provide homeowners and the U.S. economy as a whole.

The Alliance – a coalition of trade and professional associations, consumer advocacy groups and housing industry organizations – praised the 30-year fixed mortgage for offering borrowers certainty on the size of their payment for up to three decades, providing peace of mind and the ability to plan to a financial future. The Alliance said this type of mortgage gives borrowers the ability to refinance and put money back into the economy, increases home ownership and remains more affordable.

“With the many financing alternatives available to consumers, Americans still choose the fixed-rate mortgage. Fixed-rate financing provides long-term financial security to homeowners and it allows more Americans to own homes,” said Rick Davis, president of the Homeownership Alliance.

In a white paper released by the Alliance last year, Stuart Gabriel wrote, “The fixed-rate mortgage is the cornerstone of the U.S. housing finance system, putting millions on the path to wealth.” Gabriel, director of the University of Southern California Lusk Center for Real Estate, explained in the Alliance white paper entitled “Mortgage Finance Innovation and the Achievement of Homeownership: The Role of the Fixed-Rate Mortgage” how the fixed-rate mortgage continues to hold sway over adjustable-rate mortgages.

“Arguably among the most profound of U.S. mortgage innovations came long ago with the introduction of the level-payment fixed-rate mortgage in the 1930s. That instrument has become a cornerstone of the highly articulated U.S. housing finance system. Further, the introduction of the long-term, level-payment mortgages, together with standardization in underwriting and active secondary market trading thereof, has resulted in substantial home ownership gains among U.S. households,” Gabriel said.

“The substantially longer term of the fixed-rate mortgage enabled a lower monthly payment, in turn facilitating lower payments-to-income ratios and hence higher levels of housing affordability among moderate-income homebuyers,” Gabriel concluded.

At an International Housing Forum sponsored by the Alliance last year, a panel of experts agreed that the U.S. housing finance system is unique with its fixed-rate mortgage and the ability for consumers to refinance mortgage loans without significant prepayment penalties or administrative costs. At the forum, Susan Woodward, founder of Sand Hill Econometrics, said, “The fixed-rate mortgage that is prepayable is very important to consumers. No other country gives a fixed rate of mortgage and homeowners so much flexibility.”

James Shilling, Ph.D., another panelist and the Professor of Real Estate and Urban Land Economics at the University of Wisconsin-Madison said “The ability to refinance for lower interest rates is an important element of the U.S. system as it allows consumers to take equity out of their home and put it back into the economy.” 

In a recent Homeownership Alliance study, “Safe at Home: The New Role of Housing in the U.S. Economy,” Todd Buchholz wrote, “Homeowners locking into cheaper, fixed-rate mortgages perceived a long-term benefit to their finances. Long-term changes have a far greater impact on consumer spending than short-term changes such as temporary tax rebates.” In this study Buchholz, a former White House economic advisory and author, observed “Housing has been a bulwark during the economy’s current downturn and will be key to its recovery. This is a very different role than the housing sector played in previous downturns and recessions.”

Buchholz concluded, “A sophisticated, flexible and liquid mortgage market inspired millions of Americans to refinance their mortgages at lower rates, injecting billions of dollars into the pockets of consumers.”

In “The Importance of the Secondary Mortgage Market to Homeowners and Lenders,” a staff paper published by the Alliance, the benefits of the fixed-rate mortgage are clear:

Without the secondary mortgage market, the home ownership landscape would be a much different place. The only financial institutions originating mortgage loans would be so-called portfolio lenders, those with the capacity to hold them permanently. Mortgage interest rates would be higher, as would down-payment requirements. And, low-down payment, 30-year, fixed-rate mortgages – a fixture in today’s U.S. housing market – would likely be considered a relic of the past.

Washington, D.C.-based Homeownership Alliance is a coalition of some 15 organizations committed to ensuring support for the American housing system. Members include Consumer Federation of America, The Council of Insurance Agents & Brokers, The Enterprise Foundation, Fannie Mae, Freddie Mac, Habitat for Humanity International, Independent Community Bankers of America, Independent Insurance Agents & Brokers of America, Local Initiatives Support Corporation, National Association of Federal Credit Unions, National Association of Hispanic Real Estate Professionals, National Association of Home Builders, National Association of Mortgage Brokers, National Association of Real Estate Brokers, National Association of Realtors(r), World Floor Covering Association, National Bankers Association, National Council of La Raza and National Urban League.