[bradleyjg]

The standard US mortgage is a 30 year fixed rate loan, with no prepayment penalty, as low as 15% down, a narrow spread over treasuries, and in some states no recourse beyond the security. Foreclosure is expensive and selling a seized home is expensive.

This is not a loan any sane person would ever write out of his own pocket. It is available because of a web of government programs and incentives, above all Fannie and Freddie.

[robertlagrant]

Thanks for clarifying. I'm in the UK and it doesn't sound that different, except we don't to my understanding have the Fannie/Freddie situation. I don't see why it's such a bad deal for the loaner, unless defaulting is high?

[bradleyjg]

My understanding from some friends in London is that there are not 30 year fixed rate mortgages. The interest rate on your mortgages get fixed for a few years and then float.

Is that incorrect?

[robertlagrant]

Ah - yes. I see the difference now. I don't really understand why the US does it that way, then. Why not do shorter-term mortgages that price in risk? Or is it doing that in a way I don't understand? (But then why is the government involved?)

[bradleyjg]

Well that’s exactly it. For the homeowner 30 year fixed is great. You know that your mortgage payment is never going to go up, regardless of what happens with the interest rate. On the flip side, if interest rates fall since we have no prepayment penalties you can just refinance and pay less.

It’s great for the borrower, which means it’s bad for the lender. There’s some spread of interest over treasuries that might make it worth it for them anyway—like if it was the 30 year bond rate plus 10% or something, but the spreads are narrow.

That’s why I said I don’t think it would exist accept for extensive government intervention, because it’s such a good deal.

As for why the government decided to get so involved, it goes way back to before my time. Now they’d have a hard time extracting themselves without making a lot of homeowners very mad.