But this product is about as stable as a nitroglycerine shot with a TNT chaser. The 30 year fixed rate mortgage was ultimately at the heart of the Savings and Loan crisis. Yes, yes, deregulation set the stage for the ultimate denouement--but the Savings and Loans were deregulated in such a haphazard fashion in part because they were being slowly driven into bankruptcy by their huge collection of low-interest, long-term real estate loans, in an environment where Paul Volcker had briefly driven short-term interest rates up to 20%. While fraud and abuse were certainly rampant, the enormous scope of the problem was not due to S&L officers suddenly becoming more thievish, or regulators more tolerant of thievery, but because everyone in the industry was flopping as wildly a a beached sturgeon in an attempt to keep their banks solvent atop large portfolios of low-interest loans. Meanwhile, whenever interest rates dropped, people would refinance, meaning that even the high-interest loans they did make didn't help much.
The answer to this, as you may recall, was . . . the creation of the massive private market in mortgage bonds. In an environment with a floating currency and considerable worrries about inflation, the only thing that can neutralize the risks of the 30-year mortgage is laying them off to as large a pool as possible. MIchael Lewis chronicles what happened next in the still-terrifyingly-relevant Liar's Poker.
Moreover, this product exists, as far as I can tell, only because of massive government intervention into the markets, a point that Reihan Salam and Chris Papagianis made in their recent, excellent piece. Until the Great Depression, the mortgage was a very, very different product. There was no amortization, and down-payments were often massive--half or more of a home's value. They lasted perhaps 3 or 5 years, and were rolled over if borrowers could not meet the balloon payment. The default crisis of the 1930s resulted from the inability to roll those loans, and so the government stepped in, causing the fifteen year self-amortizing loan to proliferate. This process was especially accelerated by the VA loans that were offered to returning veterans. Eventually, the payment terms stretched out to allow more and more people to buy homes.
This had some curious effects. As aforementioned, it was ultimately not good for banks that were restricted to the kind of boring business many commentators would like to see banks return to: loaning money to consumers and small businesses, and taking deposits. The mismatch between their short-term obligations and their long-term assets too easily becomes catastrophic.
It also--at least according to economists I've interviewed--contributed to the long, broad run-up in housing prices that took place in the latter half of the twentieth century. People price their homes by their monthly payment, and what the bank will lend them. As banks lent more, and longer terms lowered the monthly payment for a given loan amount, people bid up the price of housing. This created the expectation of steadily appreciating home values--something that had not been historically true. Over time, people began pricing expected appreciation into their purchase price as well, a phenomenon that again, tended to accelerate over time.