The Risky Mortgage Business: The Problem with the 30-Year Fixed-Rate Mortgage

One would not be troubled by the 30-year fixed-rate mortgage if it were an emergent property of free markets. But it is not.

Editor’s note: this is part three in a series of essays about housing policy.
The United States is unusual in that the standard mortgage product has a fixed interest rate for 30 years, with prepayment allowed at any time with no penalty. This structure creates many opportunities for the borrower to gain at the lender's expense.
The firms that supply funds for this mortgage product are faced with a choice. Either they must find a way to offload risk, ultimately to the taxpayers, or they must charge a sufficiently high interest rate so that, on average, the profits in a relatively stable interest-rate environment offset the losses that are incurred when rates go through periods of volatility.
Policymakers should be concerned about the risk borne by taxpayers. One would not be troubled by the 30-year fixed-rate mortgage if it were an emergent property of free markets.

Read more: http://www.american.com/archive/2012/december/the-risky-mortgage-business-the-problem-with-the-30-year-fixed-rate-mortgage