The end of the 30 Year Mortgage? ARMs do have a bad reputation at this point, but if we are going to be able to extend financing to potential homebuyers without an explicit government guarantee, they may be one of the few options attractive to private investors.

The 30-year loan first became broadly available by an act of Congress in 1954 and, from then until now, the vast majority of such loans have been issued only with government support. Most investors are simply not willing to make such a long-term bet. They prefer loans with adjustable rates.

Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, said such loans would remain available in the absence of a federal guarantee, but they might be harder to find. And lenders might demand a larger down payment. Or a better credit score.

That would be a very good thing, said Mr. Pollock, now a fellow at the American Enterprise Institute.

Longer terms make ownership affordable only by increasing the total cost of the loan, because the borrower pays interest for a longer period. Moreover, Mr. Pollock noted that over the last several years, borrowers with adjustable-rate loans paid less as interest rates fell, while those with fixed rates kept paying the same amount for devalued homes.

“One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage,” he said, noting that such loans are not available in most countries. “For many people, it’s not at all clear that that’s the best product.”

via Freddie and Fannie Closing Could Change Face of Housing – NYTimes.com.