Could 30 Year Mortgages Cause a New Bubble?

In case you missed it: in a recent piece, mortgage finance and housing expert Edward Pinto writes that the 30-years mortgage could well be the cause of a new housing bubble.

  • Federally insured banks, thrifts and credit unions hold $1.7 trillion in Fannie Mae-, Freddie Mac- and Ginnie Mae-guaranteed securities, while an additional $2.2 trillion are held by local, state and federal governments and agencies. Both categories have increased by about 30 percent since 2007. As a result the government, banks and other financial institutions backed by the Federal Deposit Insurance Corp. now hold 52 percent of outstanding agency securities. Most are backed by 30-year fixed-rate mortgages.
  • Federal policy has, in effect, created a closed system whereby the government subsidizes the rate on 30-year mortgages, guarantees the credit risk and then puts itself on the hook for most of the interest-rate risk
  • Because these securities are backed by the government, they are considered highly liquid. But being highly liquid doesn’t protect against wide price swings, and securities tied to 30-year mortgages are notorious for price volatility. If mortgage-loan rates went up only by a moderate amount, say from 4 percent to 5.5 percent, the value of the securities held by banks and other financial institutions would go down by about 6 percent, or $100 billion based on the size of their holdings. A larger increase in mortgage rates -- to say 9 percent -- may put us on the verge of another financial meltdown.


Edward Pinto was a an executive vice president and chief credit officer for Fannie Mae. He has done groundbreaking research on the role of government housing policies in the lead-up to the financial crisis. Pinto is available for interviews and can be reached at edward.pinto@aei.org.

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About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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