Government Encouragement of 30-year Mortgages Should End

I don’t think that those who disagree with me are dumb.  It is often that the person in question is bright, but has presuppositions that disagree with mine.  I am for the most part a libertarian.  Thus I don’t often agree with liberals, or the pro-big-business wing of the Republican party.  Most of the time, I also favor regulation of financial companies, because when too many of them borrow short and lend long, something horrible happens to the economy as a whole.

That is the main reason why I think government encouragement of 30-year mortgages should end.  It increases leverage in the economy, and makes it more susceptible to crises.  Societies that have a lot of debt tend to be more fragile.  We forget how certain we were that Fannie and Freddie could never fail.  I was one of the few people that argued the opposite at  (Sadly, those posts are lost.)  F&F assumed that there would never be a sustained period where housing prices would fall across the US as a whole.  When prices began to fall, their business model was destroyed, because they were levered very high.

30-year mortgages allow some to buy houses that they should not buy.  If you have to have a 30-year mortgage instead of a 15-year mortgage, you are buying too much house for your income.  We spend too much money as a society on housing, and we take on too much debt as a result, leading to fragile financial systems.  Debt-based systems are fragile relative to equity-based systems.

If there are to be 30-year mortgages, let them be purely private, like Alt-A, Jumbo, and Subprime loans.  Don’t let the government place any guarantee on them.  If we have to guarantee mortgages, do it from 15 years and shorter.  Reduce the amount of leverage in the economy as a whole.  Make the system stronger, against those who think that encouraging borrowing is a free lunch.

What is the cost to my proposal?  Fewer people buy houses, and fewer houses get built.  Good.  We are over-housed already.  Far better that investment should go to production rather than consumption in the US (opposite in China).  We already subsidize mortgage lending through the tax code, which we should eliminate.  Why should we favor one class of borrowing over another?

Let the apartment REITs house people.  They borrow over a wide maturity spectrum, and do not rely on long-term finance.  Loss of government guarantees on 30-year mortgages will not affect them.

Now, I am responding to this article of Mike Konczal.  Here is one thing that he said:

The second [reason] is that providing macroeconomic stability is a legitimate and important function of the government. After the crash, the government had to step in, prevent a banking crisis and run the entire mortgage market after private capital disappeared. As such, the government holds the tail risk of the mortgage market imploding already; why not make this insurance explicit, while also regulating and pricing it?

Sorry, that’s not the way it works.  The Fed provided too much liquidity, and F&F provided too much lending up to 2007.  Now we suffer the bust from having over-stimulated housing demand.  The government rarely makes things more stable; they are pro-cyclical, and make things less stable.  That’s the way politicians are, because no one will oppose a boom.

We need to move to a less-levered system, where debt is discouraged, to create a system that is not fragile.  After two failures due to high debt levels (current and the 1930s), we should learn that high levels of debt lead to economic failure, and move to a system where interest in not tax-deductible, but dividends are.  This will lower debt levels, and our economy will become more stable.

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About David Merkel 145 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website ( Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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