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Why the 30-year mortgage is here to stay

(MoneyWatch) With all the talk this year about housing finance reform, doomsayers have started to predict the demise of the 30-year fixed-rate mortgage.

Theoretically, two housing finance reform bills circulating through Congress could end it. The extinction of Fannie Mae and Freddie Mac could end it. The introduction and popularity of other loan sizes -- the 15-year or the 20-year -- could doom it to irrelevance.

Housing industry experts and analysts are worried because the 30-year mortgage has been a staple of homeownership since World War II, particularly for low- to middle-income Americans who could not afford to pay for a home otherwise.

The homeownership rate before the 30-year was popularized was in 40-percent range, according to the U.S. Census Bureau. As it became more popular in the 1950s and 60s, that rate was pushed into the 60-percent range, where it remains today.

"And that was all because of the widespread availability of the 30-year fixed-rate mortgage," said Walter Molony, economic issues media manager for the National Association of Realtors. "If you wanted to do away with the 30-year fixed-rate mortgage, that would be a good way to turn the nation back in the direction of a renter nation where the bank held all the cards, and people's financial freedom was severely restricted."

Today, the government-sponsored Fannie Mae and Freddie Mac are a key part of the 30-year mortgage, because they provide a guarantee to the investors who buy homes loans that if the housing market tanks, they won't get completely wiped out by the losses caused by borrowers' inability to pay back the loans.

Without that government guarantee, it's likely that those investors would suddenly get very nervous about taking on such a long-term loan, particularly when the loan is rate sensitive.

So as Congress moves toward shutting them down, there's some possibility that the 30-year mortgage will fall as collateral damage.

There are two bills that could do this. The Protecting American Taxpayers and Homeowners, otherwise known as the PATH Act, calls for the winding down of Fannie and Freddie over the next five years, as well as limiting the role of the Federal Housing Administration in financing home loans, restricting it to financing mortgages for first-time homebuyers and those with lower incomes.

However, the legislation's sponsor, Rep. Jeb Hensarling, R-Texas, has insisted that his bill wouldn't spell the end of the 30-year. In fact, the most recent version would require the FHA to continue offering the 30-year mortgage--a requirement that doesn't exist today.

He has said there would also still be room for 30-year fixed-rate mortgages on the open market, if buyers still found themselves wanting that type of mortgage in a free market situation -- which could mean much higher interest rates on those loans.

The second bill, the Housing Finance Reform and Taxpayer Protection Act put forth by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would also draw down Fannie and Freddie but would establish the Federal Mortgage Insurance Corporation, modeled after the long-standing FDIC that backs banks. The FMIC would provide backstop insurance that would kick in only after a substantial amount of private capital is lost.

While these two bills are causing some hand-wringing in the housing industry, less government intervention wouldn't be a bad thing, said Bob Davis, executive vice president of the American Bankers Association.

In fact, most housing industry and advocacy organizations support the idea of moving away from a system dependent on the government, but don't support eliminating the government's role entirely.

"We expect there will be a continuing role for the government, but we think the government footprint will be reduced," Davis said.

That's, of course, assuming either of these bills pass anyway. There hasn't been much movement on either. It's possible the PATH Act could pass in the Republican-led House, but it's much more likely to fail in the Democrat-controlled Senate.

On the other hand, President Barack Obama, in recent speeches about housing, threw some support behind the Corker-Warner bill, which has a higher chance of making it through Congress thanks to its bipartisan sponsors. But it too hasn't moved any closer to passage.

Congress has been quite busy squabbling over budget terms and if they don't reach an agreement, they could effectively shut down the government -- further shoving these bills into the background.

And although there has been a rise in 15-year fixed-rate mortgages and adjustable-rate mortgages, that's really attributable to extremely low interest rates making those mortgages more attractive to homebuyers, Davis said.

Plus most of those mortgages are refinances, not fresh mortgages.

"I think the 30-year mortgage will continue because the public will demand it," Davis said. "We're not concerned the 30-year mortgage will disappear. It will be available in some manner in whatever legislation passes."

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