The idea that U.S. home buyers should be taking out 30-year fixed-rate mortgages is “just bad financial advice for many Americans,” according to Ed DeMarco, the country’s former top housing-finance regulator.
U.S. policy is focused “too much on increasing debt,” and “there is too much defaulting to ‘everyone should get the 30 year mortgage’,” the former acting director of the Federal Housing Finance Agency said Thursday at the ABS East industry conference in Miami. Instead, more should be done to steer borrowers to loan products that they can pay down faster, he said.
The comments from DeMarco, who oversaw U.S.-backed Fannie Mae and Freddie Mac, reflect how some conservatives see the government’s dominance of the $9.4 trillion home-loan market as not worth the risk for taxpayers. Many on both sides of the debate view government guarantees as needed to allow 30-year mortgages to remain widely offered at affordable interest rates, especially loans that can be repaid early without penalties.
As a borrower “you are paying a tremendous amount for the option to refinance that mortgage,” said DeMarco, now a senior fellow at the Milken Institute. “Market mechanisms should be promoting other types of mortgage products that allow homeowners to build better equity.”
Not everyone agrees. Pershing Square Capital Management founder Bill Ackman praised 30-year loans — which are common in the U.S., but rare elsewhere — at a Columbia University event in New York this week.
“If Fannie Mae and Freddie Mac disappear tomorrow, so would the 30-year prepayable fixed-rate mortgage,” said Ackman, who’s betting on the shares of the companies. Taking the loans away would mean homeownership rates would drop and properties “are going to materially decrease in value,” he said.
During his tenure leading the FHFA, DeMarco attempted to reduce the footprint of Fannie Mae and Freddie Mac, which were seized by the U.S. during the financial crisis seven years ago.