Understanding GSEs and the 30-year Fixed Rate Mortgage

Fannie Mae and Freddie Mac helped contribute to an unsustainable increase in homeownership in the 2000s that led to the housing bubble and its subsequent collapse. By 2008, Fannie and Freddie held an astonishing amount of debt of nearly $8 trillion and eventually received a taxpayer bailout to the tune of $200 billion.

While government-sponsored enterprises (GSEs), like Fannie and Freddie, are not the only reason for the prevalence of 30-year fixed rate mortgages (FRM), they have and continue to help support their dominance.

But what most politicians won’t tell you is that the 30-year FRM is a more risky and more expensive way to purchase a house. First, a 30-year FRM carries a very high interest rate. By purchasing a $260,000 house with a 15-year loan as opposed to a 30-year loan, a homeowner would save over $91,000 during the life of that loan.

Second, a 30-year FRM significantly slows down the process of building home equity, which is essential for preventing mortgage defaults especially when home prices fall like they did during the housing collapse. Federal Reserve data shows that subprime mortgages (the ones Fannie and Freddie sell) with negative equity increases the likelihood of mortgage default by 60 times!

Instead of favoring one particular mortgage over another, Congress should remove federal intervention in the housing market altogether. Repealing GSEs would allow private actors to return to the housing market and expand the availability and diversity of mortgages. Consumers would then be able to decide what mortgage is best for them including a 30-year FRM option.

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