Attention conservation notice. This jeremiad is all about financial policy, which I know is not a topic all of my readers are interested in. This piec

The 30-Year Mortgage is an Intrinsically Toxic Product

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2022-09-23 10:30:49

Attention conservation notice. This jeremiad is all about financial policy, which I know is not a topic all of my readers are interested in. This piece is only relevant to you if you own a home in the US (because mortgage rates matter) if you rent in the US (because market rents are set in comparison to the cost of owning), or if you save and/or borrow money anywhere in the world (because of the US mortgage system’s effect on long-term interest rates. Readers who live in monasteries, survivalist compounds, or the Sentinel Islands can safely skip this one.

The thirty-year fixed-rate prepayment-option mortgage is an economic disaster. It encourages mass malinvestment. Policies designed to help low-income people build wealth actually trap them at the worst possible time. It presents macroeconomic risks (as we learned in 2008), but those risks are artificially understated due to the behaviors of lenders. And it artificially raises the volatility of one of the most important economic indicators in the world, leading to excess volatility and worse investments globally.

I’ve always suspected that our mortgage system had bad effects, but it wasn’t until recently that I dug in and realized how truly bizarre the system was. A realistic summary of the American housing finance ecosystem is that most of it has been socialized: while we spend some money on public housing for the poor, we invest vastly more in hybrid public-private housing for the middle class; the capitalist part is what happens if your house goes up in price, and the socialist part is what happens if it doesn’t.

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