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Why the 30-year fixed-rate mortgage isn’t going away under Trump
A second Trump administration is likely to focus on lowering the government’s footprint in the mortgage market. Here’s what’s at stake for borrowers. - Scott Olson/Getty Images
The 30-year fixed-rate mortgage isn’t in danger of going away, despite plans for a shake-up in housing finance under a second Trump administration, according to Michael Bright, former manager of Ginnie Mae’s $2 trillion portfolio of mortgage-backed securities.
“No. It’s not going anywhere,” Bright told MarketWatch. “Absolutely not.”
The bulk of all new U.S. home loans from the past decade have been conventional 30-year fixed-rate loans. That means they come with a prepayment option and the “ability to repay” rule, a reform put in place after millions of borrowers lost homes during the national foreclosure crisis from 2007 to 2010.
“The 30-year part of the equation is important,” said Bright, now the chief executive officer of the Structured Finance Association, a trade group for the mortgage and consumer-debt industry. “What it brings to the table is a slightly lower monthly payment.”
Yet perhaps more crucially, these mortgages can be prepaid, a feature that allowed U.S. homeowners to refinance trillions of dollars in mortgage debt during the pandemic at near record-low rates.
“The prepayable nature of this long-term contract is something Americans have access to,” Bright said, adding that the U.S. has been the only place in the world to offer it.
Canada offers fixed and floating mortgages, but borrowers typically pay higher rates for the option of prepaying at any time. Sweden has relied heavily on variable-rate home loans, as do many other European countries. Sweden’s rate-sensitive economy has been in a recession, and its central bank, like others around the world, has been cutting interest rates to bolster the economy.
The U.S. economy, on the other hand, has been able to avoid a recession, despite its policy rate staying relatively restrictive, in part because many homeowners locked in ultralow pandemic-era mortgage rates.
Yet the current U.S. housing-finance system hinges on government guarantees, a domestic and international buyer base for this type of mortgage exposure, and a financing structure that stands on the shoulders of past mistakes — namely reforms in mortgage lending designed to prevent another 2008-style global financial crisis.
That’s why any renewed push to privatize housing giants Freddie Mac and Fannie Mae under a second Trump administration should take care not to “pull the rug out” from under the whole ecosystem, Bright said.
“I think there’s a lot of talk about this, with more talk likely under Trump,” Bright said. “I just think there are quite a lot of perils that have not even remotely been addressed in any plan I have seen.”
Risking another mortgage mess
Homeowners want the lowest possible mortgage rate, with flexible terms that allow them to refinance if a home appreciates in value or when interest rates fall.
For most lenders, the end goal isn’t to make loans and hold them on their books, but to underwrite to the relatively strict standards needed for sale to housing giants Freddie Mac FMCC, Fannie Mae FNMA and Ginnie Mae. Those agencies then typically package up and sell their loans to investors as mortgage-backed securities MBB with government backing.
A look at the numbers shows that out of the roughly $13.1 trillion in outstanding U.S. home loans, about $9.2 trillion was turned into agency mortgage-backed securities, with much smaller shares held as loans on bank portfolios and by other investors, according to the latest data from the Urban Institute.
Most U.S. home loans are turned into mortgage-backed securities with government backing. - Urban Institute
Mortgage rates fell to record lows after 2020 because the Federal Reserve slashed its short-term rate during the COVID-19 crisis and resumed its buying of Treasurys and agency mortgage-backed securities.
In doing so, it took a big chunk of the supply of new low-rate mortgages out of circulation, boosting liquidity and quickly growing its balance sheet to a pandemic peak of almost $9 trillion. The Fed’s agency mortgage-backed securities holdings reached about $2.7 trillion in 2022.
“The Fed isn’t buying today, but it bought up a majority of what was created in 2020 and 2021,” said Scott Buchta, head of fixed-income strategy at Brean Capital.
Buchta, a mortgage-bond veteran, said a partial revival of private lending already occurred in the past decade, mostly to homeowners with high credit scores in need of “jumbo” mortgages, as well as in other limited segments of the U.S. housing market.
“I don’t see the government-guaranteed 30-year fixed-rate mortgage going away,” Buchta said. “You’d disrupt the whole housing market and rates would go up.”
That’s unlikely to be a situation that any White House would favor, given how important housing has been to voters and the economy.
Some Fed officials have said they don’t want the central bank to own agency mortgage-backed securities, but also that there aren’t plans to conduct outright sales of their securities holdings, which could risk destabilizing markets.
The Fed’s agency mortgage-backed securities holdings were about $2.3 trillion as of November and are likely to keep falling slowly as the central bank moves carefully to reduce the size of its balance sheet. Its size has been shrinking as the Fed lets up to a set amount of mortgage and Treasury debt mature each month and roll off its balance sheet.
The government’s large footprint in U.S. housing finance has garnered no shortage of critics, especially among Republicans and figures from the first Trump administration, as the Wall Street Journal reported in September.
Mark Calabria, former head of the Federal Housing Finance Agency, pushed for privatizing Freddie and Fannie under the first Trump administration. He gave up on the effort in 2021 in a deal that allowed the housing giants to retain more of their own profits. He has remained an advocate of ending their federal conservatorship, which has been in place since 2008.
In a sign of optimism that progress on privatization could happen under a second Trump term, beaten-down shares of Freddie have already surged almost 150% in November to $3.43, while those of Fannie were up 150%, at $3.29, according to FactSet data.
Freddie and Fannie declined to comment.
BofA Global analysts expect talk of privatization and shrinking the government’s housing-finance footprint to be a focus of the second Trump administration, but any exit of Freddie and Fannie from government control would be “highly unlikely over the near term,” they said in a Nov. 8 client note.
Notably, post-financial-crisis mortgage reforms around lending, as well as the government’s response to COVID, including the pause in foreclosures through July 2021, helped limit shocks for many homeowners.
Unlike during the global financial crisis, having the ability-to-repay rule in force was likely a reason why the U.S. “made it through COVID without massive defaults,” Bright said.
Still, inflation was a major flashpoint in this month’s U.S. election. Homeowners emerged from the pandemic with a record pile of home equity, while property values continue to keep carving out fresh highs. The flip side has been hard-to-tame shelter costs following decades of underbuilding of new homes, which has made the affordability crisis worse for first-time home buyers and renters.
Fed policies in the wake of the global financial crisis have focused on bolstering asset prices, Bright said. “The downside is that not everyone is an asset-owner,” he said.
The stock market SPX DJIA COMP surged to fresh record highs in the wake of the U.S. election on optimism about potential deregulation and other “pro-growth” policies. Sharply higher long-term Treasury yields, however, have dampened some of the risk-on euphoria as investors look to gauge whether the Fed will need to take a slower approach to rate cuts going forward.
