35 Comments

but why as a matter of public policy should we want 30 year fixed rate mortgages? they are virtually non existent in other countries.

Expand full comment

It's the US version of the welfare programs in other European states. It is also very challenging to foreclose on anyone who is mentally competent and does not want to lose the house. However, a lot of the people who wind up in foreclosure are too mentally and/or morally incompetent to handle the process.

Expand full comment

Because we have decided it is good for people to own their home and 30-year mortgages make that more likely.

Expand full comment

Variable rate loans are less risky: high interest rates are often the result of inflation, so normally it is ok to pass interest rate change to the borrower, that normally receive higher wage if interest rates are high.

Expand full comment

My thoughts exactly. Perhaps they don't exist in freer markets because they're just not a good idea.

Clearly lending to buy houses is a huge market. As Arnold and others have mentioned, there are a zillion other loan structures with different risk tradeoffs. For example, when we bought our first house, we took out a 7/23 loan: it had a fixed rate for seven years, then a rate adjustment, then 23 years at the new rate. I was anxious about the step up. Our agent, quite correctly, reassured me I wouldn't be living in that starter house seven years later so it didn't matter. He was right, we only lasted six.

While I know people still living in their first home, 30 years down the line, that's pretty rare. What I don't know is anyone still paying their original 30-year mortgage at year 29. Everyone refinances at some point.

Expand full comment

Arnold proposes that Freddie and Fannie be confined to a narrow purpose - subsidizing 30-year fixed-rate mortgages for first-time home buyers. That would be an improvement over the status quo, but it's still unclear to me what the market failure is, unless one shows that home ownership is a public good and, therefore, that first-time home buyers should be subsidized. (In full disclosure, I benefited from mortgage subsidies for a good fraction of my adult life.) Fixed-rate mortgages have interest rate and default risk, the former due to options implicit in mortgage contracts, i.e. zero or low prepayment costs, the latter due to the usual risks of default in consumer lending - job losses, moral hazard, and others. The market could cover these risks by building their costs into interest rates. Mortgages then would be more expensive and less attractive to potential borrowers, leaving some people out of the market for home ownership. But that is not a market failure, it's merely pricing in the full cost of lending. Again, unless we can demonstrate that home ownership is a public good, the government ought not to subsidize it. This comment is agnostic on the matter and merely draws a distinction between possible public benefits and market risks.

If subsidizing homeownership is desirable, then the question is whether the Fannie / Freddie approach is the best way to do so. An alternative that might be simpler and more efficient could be to spend an equivalent amount of public treasure on subsidizing down payments.

Expand full comment

"There is no need for a government enterprise to subsidize 15-year mortgages, adjustable-rate mortgages, second mortgages, home equity loans, or mortgage refinances."

I recently listened to an old Freakonomics podcast where James Choi of Yale argued everyone should get variable rate mortgages. He says on average they'd pay less. Maybe, but that ignores how longer fixed rate mortgages are more heavily subsidized so any premium paid is rather small compared to the benefits. As you say, it's unlikely a 30-year fixed rate mortgage would exist without government backing/subsidies. Certainly not at an attractive rate.

I suggest that you are wrong about subsidizing 15-year and variable mortgages for reasons akin to Choi's point. While maybe the typical person taking out a 15-year mortgages doesn't need a subsidy, we don't want to tilt the incentives towards them getting a 30. I'd argue it's better for everyone if they get the 15. The argument for variable is similar though maybe a little weaker. Either way, the risk subsidy provided to F&F to make those loans is smaller for 15 and negligible for variable. Allowing them to hold variable mortgages might even strengthen their portfolio.

Expand full comment
author

I think that most people are very naive about mortgage finance. They can be easily fooled. And variable-rate loans make it easy to fool consumers. It's really hard to do consumer protection in that context, so encouraging the 30-year fixed rate is actually friendly to the naive consumer.

Expand full comment

Absolutely. That's a very different argument than in your daily post but sure. Just a little unexpected to hear that from you.

I can't remember the source or context but I recently heard a similar argument that was surprisingly compelling regarding why the government should do more to protect people from some common behavioral weakness(es) even though it would restrict the freedom of the minority of us who are able to handle such things without harming ourselves.

Expand full comment

USA is an outlier (big, rich, diverse, semi-nationalized healthcare, etc.) yet again.

Australia is a good comparable on this one (versus crowded Europe and weird 99-year leases in UK). Oz has home ownership in the same range as US, no 30-year fixed, interest rates floating. Oz banks don't blow up; thanks, in part, to their limited scope of activities and smart immigration powering everything. No GSEs in sight, aside from the banks themselves, so Fannie and Freddie are not needed!

Yet, Oz has the same over-investment in "over-priced" housing. Across rich economies, zoning and building regulations on the supply-side, tax policy and conspicuous consumption on the demand-side. Five-bedroom houses with no children, thanks to keeping up with the Jones's and a tax policy that supports envy (as usual).

Expand full comment

I hate the 30 year mortgage. I get that its overnight elimination would impact prices enough to be politically unpalatable, but I wish we could slowly phase it out. Like offer 29 year mortgages next year, then 28 the year after that, etc.

Expand full comment

What's wrong with disrupting the ability of home buyers to get 30-year fixed-rate loans? If they can't repay in gold, they don't deserve a loan.

Expand full comment

Again - you are asserting that traditional, non-urban land uses are not economic activity.

We have a difference of values, yes, especially around the permanence of ill-advised changes around land use - and fragmentation - and about natural resources in the full, Rooseveltian meaning of that term - but it need not be more than that.

There can’t be anyone on the blog who knows more about conservation easements than I do, but anonymity is important to me. Environmentalists will be the first to get the axe, I assure you!

Expand full comment

Disagree, the gov should be totally out of the market of housing finance.

Expand full comment

Great idea, gov't support for 30 yr, fixed rate mortgages. Very practical, and politically plausible. Those politicians opposed will be supporting rich housing speculators -- NOT the single home owning couples raising kids on middle incomes.

Would be interesting to see how Dems articulate their opposition to this.

I'd also like to see 20 yr & 15 yr mortgages, as well as a lifetime limit on mortgage interest deduction (2 * avg median income, so about $120,000 now as max interest deduction).

Expand full comment

Much nanny regulation could be removed to lower housing costs and obviate subsidies.

Expand full comment

How about you privatize it and don't let customers refinance for free? In other economies, customers pay a large fee if interest rates fall and they refinance.

Expand full comment

Why is there a public interest in favoring 30-year fixed rate mortgages over variable rate? Does than not in fact make monetary policy a bit less sector neural than it ought to be?

Expand full comment
author

See my response to another comment. Consumers are easier to trick using alternative mortgage instruments, and that is hard to police.

Expand full comment

In that case, couldn't Fanny/Freddie deal only with non-tricky products/lenders?

Expand full comment
author

that would be a tiny minority in that industry

Expand full comment

But if F/F/G purchases were valuable, would that not incentivize a growing market share for the non-tricky?

Still, point taken. It is really much more the role of prudential regulators than F/F/G to discourage bank from speculation too heavily on the yield curve.

Expand full comment

Because we have decided it is good for people to own their home and 30-year mortgages make that more likely.

Expand full comment

But how big an obstacle/disincentive would a variable rate loan be? Probably a lot less than NIMBY land use restrictions.

Expand full comment

If you say it enough times it must be true, right? Honestly, I don't have that answer. But whatever obstacle/disincentive it is, the more obvious concern is disruption.

Also, note that land use restrictions reduce supply and the end of fixed rate mortgages would likely reduce demand so they are indeed very different.

Expand full comment

When you write, “our housing market” is dependent on them - I am not sure if you mean young homeowners are so dependent, or the home building industry.

Either way, I read it as subsidizing sprawl, which I realize was long ago shelved as a topic but unfortunately I’m not in a position to forget about it, where I live.

So maybe that sentence could use elaboration but this was an interesting piece.

Expand full comment

Sprawl, yes. Without mortgage subsidies, more people would be living in apartments which have a much small environmental footprint.

The deeper you go on the issue Kling raises, the more Sowell's suggestion there are no solutions, only trade-offs comes into play.

Expand full comment

Maybe in neighborhoods with aging homeowners, where the schools sometimes lose enrollment - a non-subsidy of new builds/sprawl would lead to more people moving in with their elders, inheriting their houses in advance.

This would be less wasteful, so not pleasing to an economist; but then again, AK often opines on the benefits of family being in close proximity.

Expand full comment

Escalating homes prices haven't seemed to make it happen and concern for climate change hasn't seemed to make that crowd do it so I'm not expecting reducing home ownership subsidies would do it either but who knows? Sometimes these things just need the right timing.

Expand full comment
deletedJun 27
Comment deleted
Expand full comment

I mean overall could America be more like China? Sure, I imagine it can be. I imagine it will be. I’m not sure why that should be a goal particularly especially given that America’s achievements with regard to land and water conservation are typically among its proudest. Among ordinary folk anyway. Admittedly, the younger generations are less likely to care about these things given that they are chiefly interested in the reflection of themselves on their screens. But there is time for them to yet be glad of what has been done in this way. Because what is done, in a real sense, cannot be undone. Because it never is undone. It goes only one way.

To me a good piece of legislation with real world results such as that which established our various national parks, for instance is far more important than any abstraction.

Not sure of the through line between VAT tax and hostility to conservation.

The interior department – though not in charge of all federal land, DOD and Ag being in there – does a lot with a little. It’s one of our more successful agencies despite being buffeted, occasionally abused, by the vagaries of the culture. To me that cultural quality is obviously at a low ebb. Someone who is hostile to federal land ownership and conservation, obviously takes the opposite view - they look around at Americans today and find them wiser and better than their forebears, who saw the frontier closing, realized there wouldn’t be any more of it, realized that overgrazing and timber harvesting were leaving it less than it had been, and creating some real practical problems around erosion, just for one; they felt some awe, some uniqueness to the place, that perhaps called forth in them a desire to do something New in this New World.

So as I say, maybe they were stupid and we are smart.

I obviously don’t agree with that but it’s certainly a valid and indeed popularity-making thing to argue, being much in the spirit of current ideology and the triumph of the extremes, at both ends.

Of course you can’t believe it and be a conservative, but who needs more conservatives, when they’re so damned ineffectual?

Hostility to conservation has been a solid GOP plank for a long time - what, since not long after the Nixon administration’s oversaw the first Earth Day? Since about the time the GOO stopped worrying and learned to love immigration.

Hmmm, do you think there might be a connection there lol.

I’ve noticed reformers always set their sites on things that are pretty good. I guess this is human nature. Hard things are hard for a reason.

it’s like in American cities, they often want to beautify the same street over and over. The rest of the city is just too much to contemplate. Thus: this looks good, it looks better than anything else, so yeah let’s do it over.

Expand full comment

Those whose incomes permit the taking of a deduction around their donation of an easement, may attract your ire if you want people to pay more taxes and you are certain there is absolutely no public interest in land use.

But of course many others do so without any such expectation or need, not being wealthy.

Still others are paid for the value of the easement.

Because all an easement is, is a property right. An interest in a property.

So to get rid of the concept - is extremely anti-private property rights, which is inherently statist.

Again, fine, but yours is the radical position.

As with any legal instrument a few cynical bad actors have tried to exploit it, much to the delight of the WaPo (not, I think we can at least agree, a conservative organ) which hates the concept of the environment as elitist, being rather out of touch will polling around open space. These represent such a tiny few that I think we can safely say this regime is more robust than just about anything else in our legal and tax system.

Expand full comment
deletedJun 29
Comment deleted
Expand full comment

I should add an interesting example that rather refutes the idea that ordinary people (as against politicians and ideologues) dislike conservation.

And kudos to Trump, because he did, if inadvertently*, something that has been held up for decades by Utah pols: he signed the Congressional bill designating a new Utah wilderness area (the most stringent designation). Actually one of the most significant pieces of permanent conservation in about 15 years, if you don't count Bears Ears which I don't suppose we can.

It's a chunk of the San Rafael Swell. I'm not familiar with it, but my understanding is this is how it went down: the Republicans made a little mistake. They said they would designate some wilderness only "if the locals wanted it".

Well, somebody called their bluff on that. The locals of one county did indeed sign off in it. And that is why their county, basically, is now a federal wilderness area.

*Of course, he undid protections for the Tongas and the Bears Ears, let's not kid ourselves. But whom to blame for the failures of conservation in recent years are the national environmental groups, who have fallen down on the job for woke reasons. Ronald Reagan hated wilderness, but was not such an ideologue that he didn't sign into law - in terms of number of bills - more wilderness areas than any other president (because of a process with a deadline, the RARE II process, that Carter put in motion). Clinton too did a lot of good things. Carter was a great president in this regard, but in general presidents will sign what is put before them.

Expand full comment

It’s telling though, that you take a look at the tax code and zero in on an exercise of government authority that is widely popular. It reminds me of at the beginning of each legislative session in my state, Somebody who couldn’t really say why he’s doing what he’s doing, but he thinks that he’s a libertarian, takes a look at everything the government does, all the checks that are written all the poor incentives, all the waste - and zeros in on the aspect of state government, that is arguably the most popular thing it does: state parks. And this guy proposes that all the state parks be sold. Mind you this is a state that is expected to add another 20 million people in 10 years and where the state parks are so popular that much of the time you have to make a reservation well in advance just to be able to get in them.

I am certain that if the states were in charge of the federal lands, there would be a whole lot more grifter opportunities than the current welfare cows.

The people most affected like their grazing leases and they’re hunting leases. What you probably really mean are: people in urban areas. What you are discussing is an aspect of the relentless drive to devolve all political power into the hands of urbanites. Yes I am sure there are some property developers at the urban/wildland interface who would love to be handed some federal open space, To build houses that can then be subject to wildfires and people can blame I don’t know wolves or whatever. And pick up the tab for that.

And the welfare cows have this on their side – that there is no better use for a grassland – than grass... This is an indisputable fact of reality, please understand. Not politics, which is or should be always a second order thing.

Finally, you have obviously not undertaken to do a conservation easement yourself, or you would realize that the tax Iimplications are much overstated, especially in the media mind.

And as regards charitable, giving generally, and taxes: what I guess will be my monthly reminder, environmental giving amounts to one or 2% of the whole. And that includes zoos that includes dogs, that includes animal rescue. Do the math.

ETA: apologies for sloppiness, I am driving while dictating.

Expand full comment

Why would you think that about conservation easements? Distinctly odd thing to say. Timber production and grazing are certainly often compatible with easements; Florida just placed thousands of acres of ag under conservation easement, for ag preservation as well as wildlife connectivity purposes.

I guess if we get to where we have the one industry, home building, your points about (helicoptering?) people into the national forests to live may make sense but then we may have other problems.

Expand full comment

Love the turn from several information-packed paragraphs to a truly awesome, succinct rant. Kudos!

Expand full comment